Supreme Court on Arbitrability of Fraud and Unstamped Arbitration Agreements

 

Introduction

 

In the case of N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Others, 2021 SCC OnLine SC 13, the Supreme Court dealt with the following question: -

 

Whether an arbitration agreement would be non-existent in law, invalid or un-enforceable, if the underlying contract was not stamped as per the relevant Stamp Act; and, whether allegations of fraudulent invocation of the bank guarantee furnished under the substantive contract, would be an arbitrable dispute.

 

Thus, there are following sub-issues involved in this case: -

 

What is the validity of an unstamped Arbitration Agreement?

Whether allegation of a fraud is an arbitrable dispute?

What is the maintainability of Writ Petition under Articles 226 and 227 of Constitution of India to challenge an Order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act?

 

Validity of an Unstamped Arbitration Agreement

 

There are many agreements wherein the Stamp Act of a particular state requires payment of stamp duty. The Court discussed the jurisprudence behind an Arbitration Agreement and analysed the various judicial precedents in this regard. After doing so, the Court held that: -

 

a. The Court held that “an arbitration agreement is distinct and independent from the underlying substantive commercial contract. Once the arbitration agreement is held to have an independent existence, it can be acted upon, irrespective of the alleged invalidity of the commercial contract.”

 

b. It was further held that in cases of Applications under S.8 (Power of the Court to refer the parties to Arbitration), S. 9 (grant of interim relief before or during the Arbitral Proceedings) and S.11 (Appointment of Arbitrator), of the Arbitration & Conciliation Act, 1996, the Court can proceed with the Applications to safeguard the subject-matter of the arbitration; however, then the substantive/original contract would have to be impounded and the concerned party is to be directed for payment of the requisite stamp duty in accordance with the relevant local laws. The bottom-line is that deficiency in payment of stamp duty is a curable defect and a chance ought to be provided to the concerned party to cure such defect. The assessment of the stamp duty is generally made by the Collector under the local laws and as such, the findings relating to same could be challenged in separate proceedings as per law.

 

c. In case where the Arbitrator has already been appointed consensually, the Arbitrator would be obligated to impound the contract/instrument and direct the concerned party to pay the requisite stamp duty.

 

d. SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd., (2011) 14 SCC 66, was overruled and the findings of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209, as also, Vidya Drolia v. Durga Trading Corporation, C.A. No. 2402/2019, were found to be erroneous in relation to existence of an Arbitration Agreement.

 

Is ‘Fraud’ an Arbitrable Dispute?

 

The Court discussed various case laws and made a distinction between cases where there are allegations of serious fraud and fraud simplicitor. It held that mere allegations of fraud simplicitor are not a sufficient ground to decline reference to arbitration and there is no express bar in the Arbitration Act with respect to arbitrability of disputes involving allegations of fraud. Therefore, discarding the archaic view that fraud is non-arbitrable and holding it to be obsolete, the Court observed that the civil aspect of fraud can be adjudicated by an arbitral tribunal; “however, the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law.”

 

Maintainability of Writ Petitions under Articles 226 and 227 of Constitution of India in relation to Section 8 of the Arbitration Act

 

The Court cited Section 37 (1) (a) of the Arbitration Act and Section 13(1A) of the Commercial Courts Act, 2015, which read as under: -

 

“Section 37 of the Arbitration Act

 Appealable orders.— (1) An appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—

(a) Refusing to refer the parties to arbitration under section 8; …”

 

“Section 13 (1A) of the Commercial Courts Act

13. Appeals from decrees of Commercial Courts and Commercial Divisions.-(1) Any person aggrieved by the judgment or order of a Commercial Court below the level of a District Judge may appeal to the Commercial Appellate Court within a period of 60 days from the date of judgment or order.

(1A) Any person aggrieved by the judgment or order of a Commercial Court at the level of District Judge exercising original civil jurisdiction or, as the case may be, Commercial Division of a High Court may appeal to the Commercial Appellate Division of that High Court within a period of sixty days from the date of the judgment or order:

Provided that an appeal shall lie from such orders passed by a Commercial Division or a Commercial Court that are specifically enumerated under Order XLIII of the Code of Civil Procedure, 1908 (5 of 1908) as amended by this Act and Section 37 of the Arbitration and Conciliation Act, 1996 (26 of 1996).”

 

Thus, the Court held that where is there is availability of a statutory remedy, the Writ Petitions under Articles 226 and 227 would be non-maintainable and liable to set aside.

 

Concluding Remarks

 

Though I have summarized the findings of the Court in this case, yet the Court drew a lengthy judgment and made painstaking efforts to explain the entire jurisprudence behind the existence of arbitration act and arbitrability of dispute. I find it to be a path-breaking case-law that provides much needed respite to the parties who wish to get their disputes arbitrated. Fraud is a touchy issue and countless number of judicial pronouncements had only complicated the matter to understand its arbitrability. The present judgment by the Court is unequivocal in its approach and succinctly puts across the point that the disputes relating to fraud are indeed arbitrable as long as the aspects of penal consequences are not involved.

 

With respect to unstamped arbitration agreements too, the Court observed that deficiency in payment of stamp duty is a separate issue and must be dealt as such and as long as the deficiency in payment of stamp duty is cured by the parties within time, it would not invalidate the arbitration agreement itself.

 

Lastly, the unscrupulous habit of the litigants to approach the High Courts under Articles 226 and 227 would also receive a blow by way of this judgment. There is one small caveat that I wish to add. Though fraud in civil domain has been held to be arbitrable yet parties may try to cleverly bypass the same by invoking frivolous criminal proceedings to oust the arbitrability of fraud. But I guess nothing much could be done about such people except initiate proceedings for malicious prosecution. All in all, it is a ground-breaking judgment and I hope that it would encourage the arbitration scenario in India.