SUPREME COURT REITERATES THE PRINCIPLES OF DOCTRINE OF SEPARABILITY OF ARBITRATION CLAUSE IN CONTRACTS

The #SupremeCourt has in a recent case of M/S. N.N. Global Mercantile Pvt. Ltd. Vs M/S. Indo Unique Flame Ltd. and Others passed a Judgment dated 11-01-2021 and reiterated the principles of #Doctrine of #Separability of #arbitration clauses/#agreements.

In this case, the Respondent No. 1 entered into a Contract for washing of coal with Karnataka Power Corporation Ltd. (KPCL) on 18-09-2015 (Principal Contract) and further, entered into a Sub-Contract for transportation of coal with the Appellant, M/s. N.N. Global Mercantile Pvt. Ltd. on 28-09-2015 (Sub-Contract). Soon thereafter, certain disputes arose between KPCL and the Respondent under the Principal Contract, which led to the invocation of Bank Guarantees furnished by the Appellant. Aggrieved by the invocation of Bank Guarantees by the Respondent, the Appellant filed a Suit against the Respondent and its Banker in the Commercial Court, Nagpur, thereby praying for a declaration that the Respondent is not entitled to invoke the Bank Guarantees as the Respondent had not allotted any work under the Sub-Contract and there were no invoices issued, etc, and as such the Respondent has not suffered any loss in order to justify the invocation of Bank Guarantees.

The Commercial Court passed an Interim Order dated 15-12-2017 and directed status-quo to be maintained with regard to the invocation of Bank Guarantees.

Aggrieved, the Respondent filed an Application under Section 8 of the Arbitration and Conciliation Act 1996 (the Act) seeking reference of disputes to arbitration, owing to the Arbitration Clause in the Sub-Contract. Here, the Appellant challenged the maintainability of Section 8 Application on the ground that the Clause of Bank Guarantee was a part of separate and independent Principal Contract, and the Principal Contract did not contain any arbitration clause.

The Commercial Court passed an Order dated 18-01-2018 and dismissed the Section 8 Application on the ground that the Arbitration Clause specified in the Sub-Contract did not cover Bank Guarantees. The Bank Guarantee was an independent contract. Further, that the jurisdiction of the Commercial Court is not ousted by the Arbitration Agreement as neither of the Parties had performed any work under the Sub-Contract.

Aggrieved, the Respondent filed a Civil Revision Petition before the Bombay High Court, where the High Court allowed the Respondent to file a petition under Article 226 and 227 of the Constitution of India 1950 (the Constitution), vide Order dated 09-07-2020.

Upon filing a Writ Petition, the Bombay High Court quashed and set aside the Order passed by the Commercial Court dated 18-01-2018, vide Judgment dated 30-09-2020. The Bombay High Court held that as there was an Arbitration Agreement existing between the Parties, the disputes have to be settled through arbitration, and not Civil Suit. Hence, the High Court held Section 8 Application filed by the Respondent in the Commercial Court and the Writ Petition filed before the High Court are maintainable.

Aggrieved by the Judgment dated 30-09-2020 passed by the Bombay High Court, the Appellant filed a Special Leave Petition before the Supreme Court.

One of the significant observations made by the Apex Court in this case is with regard to validity of arbitration agreement, in a case where the underlying contract is unstamped:

1- That arbitration clause/agreement is a distinct and separate agreement, independent from the underlying substantive commercial contract.

2- Thus, the invalidity of the underlying contract would not affect the validity of the Arbitration Agreement.

3- The arbitral tribunal is competent to hear and adjudicate objections and disputes pertaining to jurisdiction, validity and scope of the arbitration agreement, etc. It may be subject to judicial scrutiny by courts at a later stage of proceedings. For instance, challenge of jurisdiction of arbitrator can be made before the court under Section 16 (6) of the Act, after the final award has been passed. This would ensure minimal judicial intervention.

Section 16 (6) of the Act provides that “A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.”

4- This Section 16 gives statutory recognition to the Doctrine of Separability, i.e. an arbitration clause/agreement is distinct and separate from the principle contract. Section 16 (1) (a) of the Act states that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract”

5- In this case, the Appellant contended that the Section 8 Application under the Act is not maintainable as the underlying Sub-Contract was an unstamped document and thus, could not be received in evidence. Therefore, the Arbitration Clause being a part of the Sub-Contract would also not be enforceable.

6- The Supreme Court considered the contention of the Appellant to the extent that the Sub-Contract was not stamped as per the requirements of Maharashtra Stamp Act 1958 (the Stamp Act), and hence, not admissible as evidence under Section 34 of the Stamp Act. But that would certainly not invalidate the Sub-Contract, as it would amount only to a deficiency, which can be cured on the payment of the requisite stamp duty.

Therefore, applying the aforesaid #Doctrine of #Separability to this case, the Apex Court held that the Arbitration Clause/Agreement would not be rendered invalid or unenforceable, even if the underlying Sub-Contract is rendered inadmissible in evidence. Hence, there is no legal bar on the enforceability of the Arbitration Agreement and the commencement of arbitration proceedings.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer