Arbitration gets support in validity and fraud challenges

By Sonam Gupta, Sneha Jaisingh and Saloni Gupta, Bharucha & Partners

The Supreme Court, in delivering its judgement in NN Global Mercantile Pvt Ltd v Indo Unique Flame Ltd & Ors, has reinforced India’s recent pro-arbitration approach to dispute resolution. The court held that arbitration agreements contained in unstamped, underlying agreements are valid and enforceable. In doing so, the court overturned SMS Tea Estates Pvt Ltd v M/s Chandmari Tea Co Pvt Ltd but referred the issue to a constitution bench in the light of the conflicting positions taken by differently constituted benches of the Supreme Court in the recent cases of Garware Wall Ropes Ltd v Coastal Marine Constructions and Engineering Ltd and Vidya Drolia & Ors v Durga Trading Corporation. The court also held that civil fraud is within the competence of an arbitral tribunal to adjudicate and is no longer an exception that allows a party to escape arbitration.

Sonam Gupta, Partner, Bharucha & Partners
Sonam Gupta
Bharucha & Partners

Indo Unique had invoked a bank guarantee furnished by NN Global under a contract or work order for the transportation of coal. NN Global alleged that the invocation was fraudulent as Indo Unique had not allotted any work to NN Global and had made no payments. Indo Unique had, therefore, suffered no loss and knew that it was not entitled to the guarantee. The commercial court rejected Indo Unique’s application under section 8 of the Arbitration and Conciliation Act, 1996 (act), on the grounds that the guarantee was a separate and independent contract and did not contain any arbitration clause. The court held that the arbitration clause in the contract was not a general arbitration clause that would include the guarantee.

In a challenge before the high court, Indo Unique’s application was allowed as the high court found that the allegations of fraud were neither criminal in nature nor required voluminous evidence. The question of the unenforceability of the arbitration agreement because the work order was invalid was ordered to be raised under section 11 of the act or before the tribunal. NN Global appealed to the Supreme Court.

The Supreme Court acknowledged that the act enshrines the principle that a tribunal has the jurisdiction to rule on its own competence, that is the principle of kompetenz–kompetenz, the principle of separability and the principle of minimal judicial interference. It, therefore, held that an arbitration agreement contained in an unstamped underlying contract would not be invalid, unenforceable or non-existent. The arbitration agreement was a separate and distinct contract, independent of the underlying commercial contract. Under the Maharashtra Stamp Act, 1958, stamp duty is a fiscal provision and failure to pay it is a curable defect, not invalidating the commercial bargain. Indeed, arbitration contracts do not appear to require stamping. This is the question that has now been referred to a full bench.

Sneha Jaisingh,Bharucha & Partners
Sneha Jaisingh
Bharucha & Partners

As to the alleged fraudulent invocation of the guarantee, the court held that the view that fraud – which entails voluminous and extensive evidence – is too complicated to be decided in arbitration, is archaic and must be discarded. It does not accord with contemporary arbitration practice. The court clarified its decision in Avitel Post Studioz Ltd & Ors v HSBC Pl Holdings (Mauritius Limited) that the civil aspect of fraud can be determined in arbitration. Going further, the court stated that all civil or commercial disputes which may be adjudicated by a civil court can, in principle, be resolved through arbitration unless expressly excluded by statute or necessary implication.

The court’s pragmatic recognition of the doctrines of separability, kompetenz-kompetenz and minimal court interference, and its determination that the arbitral process should not be obstructed by technicalities shows faith in the arbitral process. This demonstrates India’s commitment to becoming an arbitration hub. The decision is also pivotal in that it prevents parties from evading arbitration by alleging complex and serious fraud. This encourages the speedy and efficacious resolution of disputes. The decision is also in line with the recommendations of the 246th Law Commission Report (paragraph 50), that fraud be made arbitrable. The validity of an arbitration agreement in an unstamped agreement, however, remains to be decided by the five-judge bench.

Sonam Gupta and Sneha Jaisingh are partners at Bharucha & Partners. Saloni Gupta, an associate, also contributed to the article

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