The doctrine of separability, which provides that the invalidity of the substantive commercial contract does not affect the validity of the arbitration agreement except if the arbitration agreement itself is directly impeached as void ab initio, has been widely accepted in the arbitration jurisprudence.
 However, it has been adopted by the Indian Supreme Court (“Court”) only recently. By way of its judgment in N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others (“N.N. Global Judgment”), the Court has for the first time answered in negative – “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?”
The N.N. Global Judgment is noteworthy as by applying the doctrine of separability of arbitration agreement from the underlying contract, the Court has undertaken a complete departure from its previous decisions. It has declared that its previous judgments which held that the non-payment of stamp duty on a commercial contract would invalidate even the arbitration agreement and render it non-existent in law and un-enforceable, are bad in law. In fact, since this is the first time the Court has adopted a diametrically opposite view on this issue in complete dismissal of the precedent set by its co-ordinate bench, the issue has now been referred to a Constitution Bench of five judges of the Court so that the law may be authoritatively settled.
Factual and Procedural Background
Indo Unique had entered into a contract with the Karnataka Power Corporation Ltd. (“KPCL”) pursuant to an open tender. Subsequently, Indo Unique executed a sub-contract, being Work Order dated September 28, 2015 (“Work Order”), with M/s N. N. Global Mercantile Pvt. Ltd. (“Global Mercantile”) for transportation of coal. Clause 10 of the Work Order incorporated an arbitration clause providing for resolution of disputes by an arbitrator appointed by mutual consent. Further, in satisfaction of the requirements of Clause 9 of the Work Order, Global Mercantile had furnished a bank guarantee for INR 33.6 million in favor of the State Bank of India, the banker of Indo-Unique. Thereafter, certain disputes arose between Indo Unique and KPCL. Consequently, Indo Unique invoked the bank guarantee furnished by Global Mercantile under the Work Order.
In response, Global Mercantile filed a commercial suit against Indo Unique and its banker seeking a declaration that Indo Unique was not entitled to fraudulently encash the bank guarantee as the Work Order had not been acted upon and no loss was suffered by Indo Unique as a result. Pursuant thereto, Indo Unique filed an application before the Commercial Court under Section 8 of the Arbitration and Conciliation Act (“Arbitration Act”) seeking reference of the dispute to arbitration. This was opposed by Global Mercantile as not maintainable since the bank guarantee was an independent contract. By way of judgment dated January 18, 2018, the Commercial Court accepted Global Mercantile’s argument and rejected the application while holding that its jurisdiction was not ousted by the arbitration agreement in the Work Order.
Challenging the decision of the Commercial Court, Indo Unique approached the Bombay High Court with a writ petition. The High Court, by way of judgment dated September 30, 2020, set aside the Commercial Court’s judgment. It held that it was the admitted position that there was an arbitration agreement between the parties and therefore the application under Section 8 was maintainable. The High Court further held that the issue that the non-stamping of the Work Order rendered the arbitration agreement unenforceable could be raised by Global Mercantile before a court under Section 11 of the Arbitration Act or before the arbitral tribunal. Aggrieved by the decision of the High Court, Global Mercantile approached the Court.
Analysis Of The N.N. Global Judgment
Numerous issues were raised by Global Mercantile before the Court, however this paper concentrates on the findings of the Court on the issue – “Whether an arbitration agreement would be enforceable and acted upon, even if the Work Order dated 28.09.2015 is unstamped and un-enforceable under the Stamp Act?”. Global Mercantile argued that the application under Section 8 of the Arbitration Act for reference of disputes to arbitration was not maintainable. It contended non-maintainability on the ground that the Work Order not being stamped as per the relevant Stamp Act could not be received in evidence or acted upon, thus, the arbitration clause contained therein also could not be enforced. On the other hand, Indo Unique contended that non-payment of stamp duty on the Work Order was a curable defect and did not render the Work Order unenforceable. Therefore, opportunity should be granted to Indo Unique to cure the defect by paying the deficient stamp duty.
The Court, while arriving at its holdings in the N.N. Global Judgment, analyzed the development of the doctrine of separability internationally through judgments delivered in the United Kingdom, United States and France. The Court acknowledged that Section 16 of the Arbitration Act recognizes the doctrine of separability and kompetenz-kompetenz in India. Further, Section 5 and Section 11 of the Arbitration Act enshrine the legislative policy of minimal judicial intervention. A conjoint reading of Section 5 and Section 16 of the Arbitration Act reveals that the issue whether the main contract is voidable is to be resolved through arbitration. On a careful perusal of the relevant Stamp Act, the Court opined that stamp duty is not chargeable on an arbitration agreement and is only payable on the main contract. The non-payment of stamp duty on the Work Order did not invalidate it but only created a deficiency which could be cured by payment of the requisite stamp duty.
The Court held that on an application of the doctrine of separability – (a) the arbitration agreement contained in the Work Order being independent and distinct from the underlying contract; and (b) no stamp duty being chargeable on it – the arbitration agreement would survive independent of the Work Order. Arbitration agreement would not be rendered invalid or unenforceable on the ground that the contract containing it cannot be acted upon due to non-payment of stamp duty. The N.N. Global Judgment declared that the previous judgments on this issue are bad in law for not upholding the doctrine of separability. Further as a co-ordinate three-judges’ bench of the Court had previously arrived at a contrary decision, in deference to the doctrine of stare decisis, the issue was referred to a Constitution Bench of the Court for authoritative determination.
Comments On The N.N. Global Judgment
The issue of enforceability of an arbitration agreement contained in an unstamped agreement has previously been addressed by the Court in numerous judgments. The Court in SMS Tea Estates Pvt. Ltd. v. M/s Chandmari Tea Co. Pvt. Ltd. held that until the payment of stamp duty with penalty, a court cannot act upon the contract which means consequently the court cannot act upon the arbitration agreement contained in the contract. This issue also came up for the consideration of the Court in 2019 in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited wherein it was held that the Stamp Act applies to the whole contract, hence, it is impossible to separate the arbitration clause contained in the contract from the remainder of the contract to give the arbitration clause an independent existence. This position of the Court was further cited with approval by a three judges’ bench in Vidya Drolia & Ors. v. Durga Trading Corporation, which held that arbitration agreement presupposes the existence of a valid and enforceable agreement, so it does not exist when a party cannot sue and claim rights based on an unenforceable agreement.
The Court by way of the NN Global Judgment was right in declaring the judgment in SMS Tea Estates Pvt. Ltd. and Garware Wall Ropes Limited as bad in law and doubt the correctness of the view adopted in Vidya Drolia & Ors. as these judgmentscompletely disregard the well-established doctrine of separability.The doctrine of separability is incorporated in Article 16(1) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) which provides that a decision of the arbitral tribunal that a contract is null and void will not automatically render the arbitration clause invalid. The Arbitration Act was codified and implemented in India with a view to implement the Model Law to create a unified legal framework for the fair and efficient settlement of disputes. In fact the doctrine of separability contained in Article 16(1) of the Model Law is codified in Section 16(1) of the Arbitration Act. Therefore, the previous judgments of the SC clearly failed to appreciate that the doctrine of separability is the mandate of the codified law in India and are thus bad in law.
The legislative policy of promoting arbitration by limiting judicial intervention in arbitration can be gleaned from the 2015 amendment to Section 11 of the Arbitration Act. The Court has interpreted the amendment to reflect the legislative intent that at the pre-reference stage, courts seized of the matter must exercise minimal judicial intervention and only decide on the issue of existence of arbitration agreement. The Court has repeatedly emphasized that under the now amended Section 11(6A) of the Arbitration Act, in deference to the doctrine of kompetenz-kompetenz embodied in Section 16, the scope of court’s examination is limited to determining the existence of the arbitration agreement and all other preliminary / threshold issues are to be decided by the arbitrator. Thus, once a court has prima facie determined that an arbitration agreement exists, issues regarding the invalidity of the agreement due to non-stamping have to be referred to an arbitrator in terms of the arbitration agreement.
Further, the stamp duty is only a fiscal measure to secure revenue and not a weapon of technicality, so there is no bar on an unstamped instrument being acted upon once the defect is cured. In any event, under the Stamp Act no stamp duty is levied on an arbitration agreement. Hence, non-stamping of the main agreement (a) does not affect the validity of the arbitration agreement; and (b) does not render the main agreement void and is only a technical defect which can be cured by payment of stamp duty and penalty. This being the case, a party cannot be permitted to misuse the Stamp Act to deny the other party the pre-agreed remedy of arbitration.
The N.N. Global Judgment, by accepting the doctrine of separability, has finally brought the Indian arbitration law in line with the international practices. The UK Court of Appeal, while accepting that the principle of separability exists in English Law, had held that if the arbitration clause is not directly impeached it is capable of surviving the invalidity of the contract so that the arbitrator has the jurisdiction to determine the initial validity of the contract. When the validity of the contract is challenged, the arbitration agreement is treated as an autonomous procedural contract and not as an element of a material-legal contract. The internationally accepted doctrine of separability has finally been accepted and applied by India’s apex court.
In recent times, the Court has adopted a policy to promote India as an arbitration-friendly nation. This is evident from its decision in A. Ayyasamy v. Parmasivam & Ors., wherein it held – “The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution.” The N.N. Global Judgment is another in a series of pro-arbitration judgments of the Court aimed at evolving a robust framework of Indian arbitration law, benchmarked against the best international practices. The World Bank’s Doing Business 2020 report reveals that India ranks 63rd in the ‘Ease of Doing Business Rankings’. Promoting India as an arbitration-friendly jurisdiction is vital for attracting more investments and the N.N. Global Judgment is a welcome step in that direction.
Ananya Dhar Choudhury is an LL.M. candidate in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law. Prior to attending NYU, she worked as an Associate with the Litigation and Disputes Resolution team at Cyril Amarchand Mangaldas, a leading full-service law firm in India.
[] Tibor Varady et al., International Commercial Arbitration: A Transnational Perspective 192 (7th ed. 2019).
[] N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others, 2021 SCC OnLine SC 13 at ¶1.
[] Id. at ¶12.
[] Under Article 226 of the Constitution of India, every High Court has the power to issue to any person, in its territories, any direction for the enforcement of any of the rights and for any other purpose. Further, Article 227 of the Constitution of India bestows the High Court with supervisory jurisdiction over all courts and tribunals throughout its territorial jurisdiction. Therefore, in this case the Bombay High Court had supervisory jurisdiction over the Commercial Court to pass any direction it deems fit.
[] If the parties fail to agree on the appointment of an arbitrator or tribunal, then either party may approach the court under Section 11 of the Arbitration Act requesting the court to make such an appointment. The decision of the court, pursuant to such a request, is final.
[] N. N. Global Mercantile Pvt. Ltd., supra at ¶2.
[] The House of Lords in Fili Shipping Co. Ltd. and others v. Premium Nafta Products Ltd. and Others,  UKHL 40 held that the main agreement and the arbitration agreement must be treated as having been separately concluded. The arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and not as a mere consequence of the invalidity of the main agreement.
[] The US Supreme Court in in Buckeye Check Cashing, Inc. v. Cardegna et. al., US SC 440 (2006) held that challenge to the contract does not prevent a court from enforcing a specific agreement to arbitrate contained therein.
[] The French Cour de Cassation in Gosset v. Caparelli, Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963), 545 held that the arbitration agreement is completely autonomous in law and remains unaffected by the possible invalidity of the main contract.
[] (2011) 14 SCC 66 at ¶19.
[] (2019) 9 SCC 209 at ¶19, 22.
[] (2021) 2 SCC 1 at ¶147.
[] N. N. Global Mercantile Pvt. Ltd., supra at ¶6.10, 6.12.
[] Preamble to the Arbitration Act; Harpreet Kaur, The 1996 Arbitration and Conciliation Act: A Step Toward Improving Arbitration in India, 6 Hastings Bus. L.J. 261, 264 (2010).
[] Duro Felguera v. Gangavaram Port Ltd., (2017) 9 SCC 729 (affirmed by a three-judge bench of the Court in Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714).
[] Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd, (2020) 2 SCC 455 at ¶7.8, 7.10.
[] Hindustan Steel Limited v. M/s Dilip Construction Company, (1969) 1 SCC 597 at ¶7.
[] Harbour Assurance v. Kansa General International Insurance,  1 Lloyd’s Rep. 455 (CA).
[] Sojuznefteexport v. Joc Oil Limited, 15 Yearbk. Comm. Arb’n 384 (1990).
[] A. Ayyasamy v. Parmasivam & Ors., (2016) 10 SCC 386 at ¶53.
[] World Bank Group, Doing Business 2020, World Bank, https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf.