By Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, third-year students at NLUO, Orissa.

Introduction

In the case of NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (‘NN Global’), a division bench of the Apex Court recently pronounced that an arbitration agreement would not be deemed ineffective just because stamp duty on a commercial transaction was not paid. It would be safe to see the pronouncement as a source of impetus towards creating an impartial process of arbitration in India. It pronounced that the view has become obsolete, and has to be done away with. With the onset of the particular judgment, Indian legislation has now come in similar lines with a lot of jurisdictions in the world of arbitration.

To comprehend the legal issue at hand, the article intends to evaluate (a) the coherence of the Stamp Act 1899 (‘the Act’) vis-à-vis the doctrine of separability; (b) application of the doctrine of separability; (c) cross-jurisdictional analysis with the legislations of the USA, the UK and Singapore; and lastly, (d) conclude with suggestions on the basis of the discussion on the aforementioned elements.

Factual Matrix of the Case

The case raises pertinent issues with regards to the future of arbitration proceedings in India, and the importance of getting the arbitration agreement stamped as per the relevant Act. Indo Unique was a company put in for a grant for work of washing of coal to the Karnataka Power Corporation Ltd. (‘KPCL’) in an open tender, which, later awarded the Work Order to Indo Unique. Later, Indo Unique furnished Bank Guarantees in favor of KPCL. Subsequently, Indo Unique entered into a sub-contract with Global Mercantile for the process of transportation. As per the contract, Global Mercantile also furnished a bank guarantee in favor of Indo Unique to secure the stocks. Later, KPCL invoked the bank guarantee furnished by Indo Unique owing to certain disputes between the two, due to which, Indo Unique also invoked the bank guarantee furnished by Global Mercantile under the sub-contract.  

Stamp Act- Coherent with Doctrine of Separability?

Anyone with legal authority is required by Section 33 of the Act, “to scrutinize the instrument in front of them and determine whether it is properly stamped; if it is not, the relevant authority may appropriate the instrument and command the parties to bill the adequate stamp duty with the added penalty of five or ten times the amount of the inadequate portion”. Under Section 35 of the Act, “an unstamped instrument cannot be used as evidence or acted upon”. Section 40 of the Act entails the procedure for instruments which have been impounded. It is necessary for the instrument to be endorsed within one month of the date of impounding as per Section 42(1) of the Act. Section 42(2) states that a document that has been lawfully stamped is admissible as evidence and can be acted upon. However, the Apex Court, in SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd. (‘SMS Tea’) failed to consider Section 3 read with Schedule I of the Act which states that only an arbitration award needs to be stamped and not an arbitration agreement. The court misinterpreted the basis behind the fiction of separability and erroneously linked the arbitration agreement to that of the fundamental substantive contract.

Finally, the court took a shift in its approach in N.N Global. The Apex Court concluded that there should be no legal hinderance in the enforcement of an arbitration agreement. This hinderance can be considered as the “outstanding payment of stamp duty” on the substantial contract. This is the reason for which the Court held that the arbitration agreement is not included as a stamp duty-chargeable instrument under the Maharashtra Stamp Act 1958.

Inconsistent and Indeterminate Approach Finally Settled?

The doctrine of separability was pronounced in the case of Heyman v Darwins Ltd. by the House of Lords. It held that, “an arbitration agreement is collateral to the substantial stipulations to the contract”. The application of the theory of separability of an arbitration agreement from the fundamental substantive contract into which it is incorporated presents severe issues. The Apex Court examined the rationale on an agreement of arbitration in an unstamped contract in SMS Tea.  Due to the lack of stamp duty payment, the arbitration agreement would remain void until the contract was seized and the tax and penalty were paid.

Following the 2015 Amendment, the Apex Court revisited the issue of stamp duty and arbitration agreements under Section 11 of the Arbitration and Conciliation Act (‘Arb. Act’) in Garware Wall Ropers Ltd v Coastal Marine Constructions (‘Garware Ropers’).  When a court determines that a contract is unstamped as a result of an application under Section 11 of the Arb. Act, the Stamp Act requires the court to impound the contract and ensure that stamp duty and penalty are paid until the agreement as a whole, can be acted on. The phrase “in a contract” of Section 7(2) of the Arb. Act was provided due weightage while analysing the fundamental meaning of an arbitration agreement in the Garware Ropers case. As a result, the arbitration clause in such a contract is incompatible with separation. This particular stand was upheld in Dharmaratnakara Rai v M/s Bhaskar Raju and was also affirmed in Vidya Drolia v Durga Trading Corporation, by a division bench.

However, the Apex Court in NN Global reverted from their previous stand and overruled the judgment in the previous cases. On the aspect of separability, it held that “an arbitration agreement is separate and different from the underlying commercial contract”. It is a contract that specifies the method for resolving disputes and can stand alone from the substantive contract. The Court further observed that non-payment under the Act was a corrigible fault; therefore, arbitration could not be postponed until stamp duty was paid. Thus, the court adopted a harmonious construction between the provisions of the Act and the enforcement of arbitration agreements. Hence, it held that, failure to pay a stamp duty on the commercial substantive contract would not make the arbitration agreement included therein null or unenforceable.

Cross-Jurisdictional Analysis

One of the abstract and practical cornerstones of domestic and international arbitration is the doctrine of separability. Article 16(1) of the United Nations Commission on International Trade Law (‘UNCITRAL Model Law’) recognizes the doctrine of separability and provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”. Despite its limited scope, this regulation is followed by several jurisdictions. Most of the countries which have ratified the New York Convention, have accepted the idea of separability.

In English law, Section 7 of the Arbitration Act 1996 (‘AA 1996’) enshrines the idea of separability. The theory of separability, according to English courts, “is solely intended to give legal force to the parties’ choice to settle disputes through arbitration rather than to separate the arbitration agreement from the underlying contract for all purposes”. This approach by the courts could be called partial separability in layman terms. The Supreme Court of USA recognized the concept of separability in the case of Prima Paint Corp v Flood & Conklin Mfg. Co.case.

In the context of Singaporean arbitration, the Singapore High Court, in the case of BNA v BNB held that doctrine of separability is a “tool of arbitration law that treats an arbitration agreement as distinct from the substantive contract containing it”. In the case at hand, the High Court held that “the doctrine of separability could be used to save an arbitration agreement even where the purported defect was inherent to the arbitration agreement itself”. All in all, the judgment propounded in the NN Global case has now made the Indian arbitration regime consistent with UNCITRAL Model Law, New York Convention, and both the English as well as Singaporean jurisdictions, as far as the doctrine of separability is concerned.

Conclusion

The stand of various High Courts has been varied as far as the doctrine of separability is concerned. Needless to say, the Apex Court’s decision in NN Global will be welcomed by arbitration practitioners in India. As far as the foreign jurisdictions are concerned, the ruling will now be consistent with the New York Convention countries and the legislation in Singapore. The judgment in the case of NN Global has to be applied widely and practically. With the help of this ruling, the judiciary has resolved the dilemma that had been lingering owing to prior instances, and the court’s decision may be safely regarded as a stand that will benefit arbitration procedures in India.