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The Ground That Allegations Of Fraud Are Not Arbitrable Is A Wholly Archaic View, Deserves To Be Discarded: SC

                                           In a fresh, fine and favourable development, we saw how just recently on January 11, 2021, a three Judge Bench of the Apex Court comprising of Justice Dr DY Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee in a latest, learned, laudable and landmark judgment titled M/s. N.N. Global Mercantile Pvt. Ltd. Vs.  M/s. Indo Unique Flame Ltd. & Others in Civil Appeal Nos. 3802-3803/2020 (Arising out of SLP (Civil) Nos. 13132-13133 of 2020) in exercise of its civil appellate jurisdiction has clearly, cogently and convincingly held that the ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. It must be mentioned that the Bench observed thus while holding rightly that the allegations of fraud with respect to the invocation of the Bank Guarantee are arbitrable, since it arises out of disputes between parties inter se and is not in the realm of public law. Very rightly so!

                            To start with, the ball is set rolling in para 1 of this commendable judgment authored by Justice Indu Malhotra for herself, Justice Dr Dhananjaya Y Chandrachud and Justice Indira Banerjee wherein it is observed that, “This case raises interesting issues with respect to the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded; 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.”

                               While laying the background, the Bench then enunciates in para 1.1 that, “The Respondent No.1-Indo Unique Flame Ltd. (“Indo Unique”) applied for grant of work of beneficiation/washing of coal to the Karnataka Power Corporation Ltd. (“KPCL”) in an open tender. KPCL awarded the Work Order vide letter of Award No.A1M1B3/Washed Coal/1052 dated 18.09.2015 to Indo Unique. In pursuance of the Work Order dated 18.09.2015, the Respondent No.1 Company furnished Bank Guarantees for Rs.29.29 crores in favour of KPCL through its bankers, State Bank of India (“SBI”), the Respondent No.2 herein.”

                                     While continuing in a similar vein, the Bench then puts forth in para 1.2 that, “Indo Unique, the Respondent No.1 herein, subsequently entered into a sub-contract termed as a Work Order dated 28.09.2015 with the Appellant Company – M/s. N.N. Global Mercantile Pvt. Ltd. (“Global Mercantile”), for the transportation of coal from its washery at Village Punwat, District Yavatmal to the stockyard, siding, coal handling and loading into the wagons at Pandharpaoni siding, District Chanderpur, Maharashtra.

Clause 9 of the Work Order provided for furnishing a security deposit which reads as :

“9. Security Deposit : You will submit the Bank Guarantee for Rs.5.00 crores for the average stock of washed coal lying at your stockyard. This Bank Guarantee can be issued from any nationalised Bank/first class bank, initially valid for a period of 18 (eighteen) months.”

Clause 10 of the Work Order incorporates an arbitration clause, which reads as:

“10. Arbitration : In case of any dispute due to difference of opinion in interpretation of any clause or terms and conditions or meaning of the work or language the decision of the arbitrator appointed with mutual consent shall be treated as final and binding on both the parties.””

                            Let us have a quick glance from para 1.3 to para 1.12 to have a better understanding of this case. It goes as: “1.3 As per Clause 9 of the Work Order, Global Mercantile furnished a Bank Guarantee for Rs.3,36,00,000/- on 30.09.2015, in favour of SBI-the banker of Indo Unique. The Bank Guarantee was extended from time to time, and was last extended on 10.11.2017.

1.4 Under the principal contract with KPCL dated 18.09.2015, certain disputes and differences arose with Indo Unique, which led to the invocation of the Bank Guarantee by KPCL on 06.12.2017.

1.5 Indo Unique, on 07.12.2017, invoked the Bank Guarantee furnished by Global Mercantile under the Work Order. It is the invocation of this Guarantee which has led to the present proceedings.

1.6 Global Mercantile filed a Civil (Commercial) Suit No.62 of 2017 against Indo Unique, and its banker SBI, as also the banker of the Appellant i.e. the Union Bank of India (Respondent No.3 herein), before the Commercial Court, Nagpur praying inter alia for a declaration that Indo Unique was not entitled to encash the bank guarantee as the Work Order had not been acted upon. It was expressly stated that Indo Unique had not allotted any work under the Work Order, nor were any invoices raised, or payments made by it. Consequently, there was no loss suffered which would justify the invocation of the Bank Guarantee. It was alleged that the invocation of the Bank Guarantee was fraudulent, since it was not in termsof the Work Order, being a conditional guarantee linked to the performance of work. The Commercial Court vide an ex parte ad interim Order dated 15.12.2017 directed status-quo to be maintained with respect to the enforcement of the Bank Guarantee.

1.7 Indo Unique filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in Civil (Commercial) Suit No.62 of 2017, seeking reference of disputes to arbitration. Global Mercantile opposed the application under Section 8 as being not maintainable since the Bank Guarantee was a separate and independent contract, and did not contain any arbitration clause.

1.8 The Commercial Court vide Order dated 18.01.2018 rejected the application under Section 8, and held that the arbitration clause in the Work Order dated 28.09.2015 was not a general arbitration clause, which would cover the Bank Guarantee. The Bank Guarantee was an independent contract between SBI and Union Bank of India for due performance of the contract. The Court noted the contention of Global Mercantile that neither of the parties had performed any part of the Work Order dated 28.09.2015, and consequently held that the jurisdiction of the Commercial Court was not ousted by the arbitration agreement.

1.9 Indo Unique then filed Civil Revision Petition No.9 of 2018 before the Bombay High Court challenging the Order passed by the Commercial Court. On an objection being raised on the maintainability of the Civil Revision Petition, the High Court vide Order dated 09.07.2020 permitted the withdrawal of the Civil Revision Petition, with liberty to file a petition under Articles 226 and 227 of the Constitution of India.

1.10 Indo Unique filed W.P. No.1801 of 2020 before the Bombay High Court to quash and set aside the Order dated 18.01.2018 passed by the Commercial Court/District Judge-I, Nagpur in Civil (Commercial) Suit No.62/2017. The High Court vide the Impugned Judgment dated 30.09.2020 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. With respect to the contention that the invocation of the Bank Guarantee was fraudulent, it was held that the allegations of fraud did not constitute a criminal offence which would entail recording of voluminous evidence. The disputes could be resolved through arbitration, and the filing of the Suit before the Commercial Court was not justified. The Commercial Court was not justified in restraining the invocation of the bank guarantee in the absence of any finding on fraud or special equities. On the issue of the arbitration agreement being unenforceable since the Work Order was unstamped, it was held that the plaintiff/ Appellant herein, could raise the issue either under Section 11 of the Arbitration Act, or before the arbitral tribunal at the appropriate stage. The Writ Petition was held to be maintainable, since there is no absolute bar to entertain a Writ Petition even if an alternate remedy is available. The Writ Petition was allowed vide Judgment and Order dated 30.09.2020, and the Order dated 18.01.2018 passed by the Commercial Court was set aside. On the request of the counsel for the Appellant, the High Court suspended the operation of its Order for a period of one month from 30.09.2020. 1.11 The Review Petition filed by the Appellant was withdrawn vide Order dated 28.10.2020 passed in Review Application (ST) No. 9819 of 2020. On the request by the counsel for the Appellant, the Order of stay was continued till 20.11.2020.

1.12 Aggrieved by the judgment of the High Court, Global Mercantile has filed the present Special Leave Petition before this Court.”

                              Most significantly and most remarkably, what forms the cornerstone of this whole judgment is then stated lucidly in para 8.16 that, “The ground on which fraud was held to be non arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc. The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. 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.”

                                          For the sake of clarity, the Bench then envisages in para 8.17 that, “In the present case, the allegations of fraud with respect to the invocation of the Bank Guarantee are arbitrable, since it arises out of disputes between parties inter se, and is not in the realm of public law.”

                                Briefly stated, it is then stipulated in para 9.1 that, “We are of the view that the Writ Petition filed by the Respondent No. 1 to challenge the Order dated 18.01.2018 passed by the Special Commercial Court / District Judge-I in Commercial Dispute No. 62/2017 was not maintainable, since a statutory remedy under the amended Section 37 of the Arbitration Act is available. Section 37(1) has been amended by Act 3 of 201649. Section 37(1)(a) provides for an appeal to be filed against an Order refusing to refer the parties to arbitration. Section 37(1)(a) reads as :

“37. 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; …””

                               Be it noted, it is then stated in para 9.2 that, “Since the judgment and order of the Commercial Court dated 18.01.2018 refusing to refer the parties to arbitration was an appealable order under Section 37(1)(a) of the Arbitration Act, the Writ Petition was not maintainable. The appeal would lie before the Commercial Appellate Division of the High Court under Section 13(1A) of the Commercial Courts Act, 2015. Section 13(1A) read as :

“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).”

  In view of the availability of a statutory remedy, the judgment of the High Court passed under Articles 226 and 227 of the Constitution is liable to be set aside on the ground of maintainability.”

                                                Needless to say, the Bench then points out in para 10 that, “In the present case, since both parties have admitted the existence of the arbitration agreement between the parties, as recorded in the judgment of the High Court, and even before this Court during oral submissions, parties may either appoint a sole arbitrator consensually; failing which, an application u/S. 11 for appointment of the arbitrator may be made before the High Court.”

                         To put things in perspective, the Bench then holds in para 11 that, “In view of the discussion hereinabove, we hold that :

(i)    The impugned judgment and order dated 30.09.2020 in W.P. No. 1801 of 2020 passed by the Bombay High Court is set aside;

(ii)     We direct the Secretary General of this Court to impound the Work Order dated 28.09.2015, and forward it to the concerned Collector in Maharashtra for assessment of the Stamp Duty payable on the said instrument, to be completed within a period of 45 days from receipt of the same;

(iii)  On determination of the Stamp Duty payable, the Appellant / Plaintiff is directed to make the payment assessed by the Collector u/S.30(f-a) of the Maharashtra Stamp Act, 1958 within a period of four weeks from the date of receipt of communication of the Order;

       The Stamp Duty assessed by the Collector will, however, be subject to the statutory right available to file a revision / appeal under the Maharashtra Stamp Act.

(iv)  With respect to the invocation of the Bank Guarantee, the Appellant may seek interim relief u/S. 9 of the Arbitration and Conciliation Act, 1996. We extend the stay granted by the High Court for a further period of eight weeks.

                                     Finally, it is then held in the last para 12 that, “We are of the considered view that the finding in SMS Tea Estates and Garware that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and un-enforceable, is not the correct position in law.

            In view of the finding in paragraph 92 of the judgment in Vidya Drolia by a co-ordinate bench, which has affirmed the judgment in Garware, the aforesaid issue is required to be authoritatively settled by a Constitution bench of this Court.

We consider it appropriate to refer the following issue, to be authoritatively settled by a Constitution bench of five judges of this Court :

“ Whether the statutory bar contained in Section 35 of the Indian Stamp Act, 1899 applicable to instruments chargeable to Stamp Duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract / instrument ? ”

 In light of the same, the Registry may place this matter before the Hon’ble Chief Justice of India for appropriate orders / directions.”

                                              In sum, the Bench has thus made it ostensibly clear that the ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. It has also made it apparently clear that if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of a proceeding under Section 17 of the Indian Contract Act, 1872, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so. The Apex Court noted the legal position as held in so many judgments which it cited also and the most prominent being a very recent judgment in Vidya Drolia and others v. Durga Trading Corporation in Civil Appeal No. 2402 of 2019 decided vide judgment dated 14.12.2020 and which has been discussed in para 8.16 above in detail.

 Sanjeev Sirohi

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