The Supreme Court has held that the non-payment or underpayment of stamp duty does not invalidate an arbitration agreement contained in a contract, but because of a conflict with an earlier Supreme Court judgment, the question has been referred to a larger bench.
The Defendant had entered into a sub-contract with the Plaintiff for the transportation of coal. The Plaintiff furnished a bank guarantee. Disputes arose and the Defendant invoked the bank guarantee.
The Plaintiff filed a civil suit. Since the sub-contract contained an arbitration clause, the Defendant filed an application under §8 of the Arbitration & Conciliation Act 1996 seeking reference to arbitration.
The application was rejected. In appeal, the Bombay High Court allowed the reference to arbitration since the existence of the arbitration agreement was not disputed.
This decision was then appealed to the Supreme Court.
The Plaintiff said that the arbitration agreement was ineffective because it was contained in the sub-contract, and the sub-contract was unstamped.
The Defendant said that the non-stamping of the sub-contract was curable and in any event did not invalidate the arbitration agreement.
The Supreme Court held that non-stamping/insufficient stamping is curable. Further, since the arbitration agreement is: (a) an independent agreement, and (b) not chargeable as per the stamping statutes, the non-payment of duty on the contract did not prevent the parties from relying upon the arbitration agreement contained in the contract.
The Supreme Court over-ruled its previous judgment in SMS Tea1 and disagreed with the findings in Garware Wall Ropes2. However, since this judgment had recently been approved by a co-ordinate bench of the Supreme Court3, the Supreme Court referred the issue to be decided by a larger bench.
The Supreme Court also provided guidelines on how Courts and Tribunals should deal with an objection regarding non-stamping or insufficient stamping:
- An Arbitral Tribunal will impound the document and direct the parties to pay the stamp duty along with any penalty to the satisfaction of the collector;
- Under §8 (reference to arbitration), the Court will refer the matter to arbitration and not impound the document. However, the Court will direct the parties to stamp the document before the Tribunal adjudicates upon the dispute;
- Under §9 (interim relief), the Court can grant relief to safeguard the subject matter of the arbitration, but it will then impound the document and direct the parties to pay the stamp duty; and
- Under §11 (appointment of arbitrator), the Court will appoint a Tribunal, but will direct the parties to stamp the document before the Tribunal can adjudicate upon the dispute.
It had become a trend for parties to raise the objection of stamping at the pre-reference stage in order to avoid or delay arbitration. The judgment seeks to minimise judicial intervention at the pre-reference stage and provide an effective means to safeguard the revenue of the State while ensuring that the arbitration does not come to a standstill.
1 (2011) 14 SCC 6
2 (2019) 9 SCC 209
3 In Vidya Drolia & Ors v Durga Trading Corporation Judgment dated 14 December 2020 in C.A. No. 2402/2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.