Whether An Unstamped Document Would Invalidate The Main Arbitration Agreement: Supreme Court

CASE TITLE:
M/s NN Global Mercantile Pvt Ltd Vs M/s Indo Unique Flame Ltd & Others

DATE OF ORDER:
11 January 2021.

JUDGE(S):
Justice Indu Malhotra.

PARTIES:
Petitioner: M/s. N.N. Global Mercantile Pvt. Ltd.
Respondent: M/s. Indo Unique Flame Ltd. & Others.

SUBJECT

In the present case, the Court is dealing with the matter of the validity of unstamped documents under the Arbitration Act.

IMPORTANT PROVISIONS

The Maharashtra Stamp Act, 1958

• Section 34-Instruments not duly stamped inadmissible in evidence.

BRIEF FACTS

• In the present case, the respondent applied for grant of work for beneficiation/washing of coal to the Karnataka Power Corporation Ltd. (“KPCL”) in an open tender and similarly, they were awarded with a Work Order on 18 September 2015. The respondent company furnished Bank Guarantees for Rs. 29.29 crores in favour of KPCL through its bankers i.e State Bank of India (“SBI”).
• Thereafter, the respondent entered into a sub-contract termed as a Work Order dated 28 September 2015 with the appellant company for the transportation of coal from its washery at Punwat village to the stockyad, siding, coal handling and loading into the wagons at Pandharpaoni siding in Maharashtra.
• The petitioner company thereby furnished a Bank Guarantee for Rs. 3.36 Crores on 30 September 2015 in favour of the respondent company through SBI. This guarantee was extended from time to time and the last was extended on 10 November 2017.
• Certain disputes and differences arose in the principal contract between the respondent company and KPCL which led to the invocation of the Bank Guarantee on 6 December 2017.
• The respondent company also invoked the Bank Guarantee furnished by the petitioner company on 7 December 2017.
• The petitioner Company filed a Civil Suit against the respondent Company and its Bankers in the Commercial Court. Through their suit they prayed inter alia for a declaration that the respondent company was not entitled to encash the bank guarantee as they did not fulfil the Work Order. They stated that no work was allotted by them nor were any invoices raised or payments made by it. They also cited that the invocation of the Bank Guarantee was fraudulent since it was not in terms with the Work Order.
• The Commercial Court gave an ex parte ad interim Order and directed to maintain status-quo with respect to the enforcement of Bank Guarantee on 15 December 2017.
• The respondent Company filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 seeking reference of the disputes to the arbitration. It was rejected by both the petitioner Company and the Commercial Court as it was an independent contract and did not contain any arbitration clause.
• The respondent company thereafter filed a Civil Revision Petition in the Bombay High Court against the order of the Commercial Court. The High Court permitted them to file a petition under Articles 226 and 227 of the Constitution of India and directed to withdraw the present petition by order dated 9 July 2020.
• A writ petition was filed by the respondent Indo Unique before the Bombay High Court to quash and set aside the order given by the commercial court. The High Court granted the petition and stated that the disputes could have been solved through arbitration and the suit before the commercial court was not needed. It also held that the plaintiff could raise the issue of the unenforceability of the arbitration agreement u/s 11 of the Arbitration Act or before the arbitral tribunal.
• On a request of the appellant, the High Court suspended the operation of the above mentioned order for a period of one month.
• The appellant withdrew their revision petition but again on their request, the Order of stay was continued.

QUESTIONS RAISED

• 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?
• Whether allegation of the fraudulent invocation of the bank guarantee is an arbitrable dispute?
• Whether a Writ Petition under Articles 226 and 227 of the Constitution would be maintainable to challenge an Order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act?
• Whether the arbitration agreement incorporated in the unstamped Work Order, would also be legally unenforceable, till such time that the Work Order is subjected to payment of Stamp Duty?

ARGUMENTS ADVANCED BY THE APPELLANT

• The appellant contended that the reference for disputes mentioned as per Section 8regardingarbitration was not maintainable. This is because the Work Order was an unstamped document and hence, it could not be received in evidence for any purpose or acted upon, as per Section 34 of the Maharashtra Stamp Act, 1958.
• The appellant counsel relied on-

1. Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited [(2019) 9 SCC 209]:“that an arbitration clause in an agreement would not exist when it is not enforceable by law”.
2. Naina Thakkar v. Annapurna Builders [(2013) 14 SCC 354].

ARGUMENTS ADVANCED BY THE RESPONDENT

• The respondent counsel submitted that even though the Work Order was unstamped still it is enforceable after it is duly stamped and an opportunity must be given to the parties to make up for their deficiency.

ANALYSIS OF THE COURT

• The Court observed that the non-payment or deficiency of Stamp Duty on the Work Order does not invalidate the main contract. Section 34 gives a provision that an unstamped instrument would be admissible if the requisite stamp duty is paid. Hence, the deficiency of the respondents can be cured.
• The Court relied on the following two decisions to explain the above point-

1. 1. SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd.[(2011) 14 SCC 66].
2. 2. Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited. [(2019) 9 SCC 209].

• The Court also submitted that the arbitration agreement contained in the Work Order was independent and distinct from the underlying commercial contract. Also, Section 3 of the Maharashtra Stamp Act does not make it mandatory ofr an arbitration agreement to payment of stamp duty.
• On the basis of the doctrine of separability, the arbitration agreement would not be rendered invalid, un-enforceable or non-existent even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty. To support this statement, the Court relied on Hindustan Steel Limited v. M/s. Dilip Construction Company [(1969) 1 SCC 597].
• The Court did not view any legal impediment to the enforceability of the arbitration agreement. It further stated that the adjudication of the rights and obligations under the Work Order or the substantive contract would only proceed when it complies with the mandatory provisions of the Stamp Act.
• Therefore the Court set aside the impugned judgement given by the Bombay High Court. The Court directed that Secretary General to impound the Work Order and forward it to the concerned Collector in Maharashtra for assessment of the Stamp Duty payable on the said instrument. Including this, the Appellant was directed to make the payment assessed after determination of the Stamp Duty.

CONCLUSION

The Court rightly pointed out that a stamp cannot invalidate the main importance of a document. A stamp is for verification and authorisation purpose but it cannot un-enforce the grievance of a document.

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