The Supreme Court of India ("SC") in the recent judgment of M/s. N.N. Global Mercantile Pvt. Ltd. v M/S. Indo Unique Flame Ltd. & Ors.1 ruled that non-payment of stamp duty on a commercial agreement, does not consequently invalidate the arbitration agreement embedded in the said commercial agreement.
In the appeal filed by the M/s. N.N. Global Mercantile Pvt. Ltd. ("Appellant") against M/s. Indo Unique Flame Ltd. ("Respondent No.1") and others, the issue arose as to 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 SC in overruling its former precedent laid down in the case of SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd.2 held that it is well settled in arbitration jurisprudence that an arbitration agreement is independent from the substantive commercial contract in which it is embedded and non-stamping of the commercial contract would not invalidate the arbitration clause/ arbitration agreement and/ or render it un-enforceable, given that it exists independently.
In the present case, Respondent No.1 issued a Work Order dated 28th September 2015 ("Work Order") in favor of the Appellant for the transportation of coal. As per Clause 9 of the Work Order, the Appellant furnished a Bank Guarantee for Rs.3,36,00,000/- on 30th September 2015 ("Bank Guarantee"), in favor of the Respondent No.1. Clause 10 of the Work Order consisted of an arbitration clause ("Arbitration Clause"), which read as follows "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".
Thereafter, on 7th December, 2017, Respondent No.1 invoked the Bank Guarantee furnished by the Appellant under the Work Order. Consequently, the Appellant filed a Commercial Suit3 ("said Suit") before the Commercial Court, Nagpur against Respondent No.1 and its bankers, seeking a declaration that the Respondent No.1 was not entitled to encash the Bank Guarantee as none of the parties had acted in pursuance of the Work Order. The Appellant claimed that such invocation of the Bank Guarantee was subject to the performance of the Work Order but neither was any work allotted in accordance with the Work Order, nor any invoices raised/ payments made in relation thereto. Hence, the Appellant contented that no loss was suffered by Respondent No.1 to justify invocation of the Bank Guarantee. On 15th December 2017, the Commercial Court, Nagpur passed an ex-parte ad-interim order directing that status- to be maintained with respect to enforcement of the Bank Guarantee.
Subsequently, in view of the existence of the aforesaid Arbitration Clause, the Respondent preferred an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") in the said Suit, seeking reference of disputes to arbitration. Opposing the said Application, the Appellant submitted that it ought to be rejected given the Bank Guarantee was a separate and independent contract which did not contain any arbitration clause. Rejecting the Section 8 application, the Commercial Court vide order dated 18th January 2018 held that the Arbitration Clause was not a general arbitration clause which would cover the Bank Guarantee and further noted that due to non-performance of any part of the Work Order, the jurisdiction of the Commercial Court was not ousted by the arbitration agreement. Respondent No.1 by way of a Writ Petition4 filed before the Bombay High Court challenged the Order dated 18th January, 2018 passed by the Commercial Court, Nagpur and prayed that the same be quashed and set aside. The Bombay High Court however vide judgment dated 30th September 2020 held that since it was the admitted position that there existed an arbitration agreement between the parties, Respondent No.1's application under Section 8 of the Arbitration Act was indeed maintainable. Aggrieved by this decision, the Appellant filed a Special Leave Petition before the SC challenging the Bombay High Court's order dated 30th September 2020.
Contentions of the Appellant:
The Appellant argued that the application under Section 8 of the Arbitration Act was not maintainable, since the Work Order remained unstamped as per the provisions of the Maharashtra Stamp Act, 1958 ("Stamp Act") and thus could not be received in evidence for any purpose, or acted upon, unless it is duly stamped. Consequently, the arbitration clause embedded in the unstamped agreement also could not be acted upon or enforced since the arbitration clause would be invalid in law, unless the applicable stamp duty (and penalty, if any) is paid on the Work Order. In support of the Appellant's argument, reliance was placed on the SC's judgment in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited5, wherein it was held that "that an arbitration clause in an agreement would not exist when it is not enforceable by law".
Contentions of Respondent No.1:
Respondent No.1 on the other hand submitted that even though the Work Order was unstamped as per the provisions of the Stamp Act, the same would be enforceable pursuant to being duly stamped, for which an opportunity ought to be given to the parties. Non-payment of stamp duty would not render the entire agreement unenforceable, merely on account of a curable defect.
The three judge bench of the SC comprising of Justices Dr. D. Y. Chandrachud, I. Malhotra and I. Banerjee vide its judgment of 11th January 2021, observed that when parties enter into a commercial contract containing an arbitration clause, they are entering into two separate agreements viz. (i) the substantive contract which contains the rights and obligations of the parties arising from the commercial transaction; and, (ii) the arbitration agreement which contains the binding obligation of the parties to resolve their disputes through the mode of arbitration. Further, the SC observed that an arbitration agreement is not included in the Schedule to the Stamp Act as an instrument chargeable to Stamp Duty. The SC placing reliance on the doctrines of separability and kompetenz- kompetenz, held that even though the Work Order was an unstamped document which could not be received in evidence for any purpose, or acted upon, unless duly stamped, the arbitration agreement being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract and 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. Thus, there was no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract. In view of the above, it was held that the arbitration agreement is valid, existing and can be acted upon in spite of the substantive contract being unstamped. Further, the SC held that non-payment of Stamp Duty would not invalidate even the main contract, the same being a deficiency curable on the payment of Stamp Duty.
The SC eventually set aside the order dated 30th September 2020 passed by the Bombay High Court and directed that pursuant to assessment and determination of Stamp Duty payable on the Work Order, the Appellant make payment of the same within a period of four weeks.
Further, the SC overruled its earlier judgment in the case of SMS Tea Estate (supra) and opined that the finding in paragraph Nos. 22 & 29 of Garware Wall Ropes Limited (supra) as well as paragraph No. 92 of Vidya Drolia & Ors. v. Durga Trading Corporation6 (which had cited Garware Wall Ropes Limited (supra) to be erroneous and cast a doubt regarding the correct legal position. Given the conflicting views taken by the SC in the present judgment as compared to that in Garware Wall Ropes Limited (supra) and Vidya Drolia & Ors.(supra), the issue has now been referred to a constitutional bench of the SC.
This judgment has come as music to the ears for many who were previously prevented from proceeding with arbitration on account of an unstamped or insufficiently stamped contract. In our opinion, this recent judgment passed by the SC is sound and welcomed by most litigators/ arbitration practitioners. However, given that the recent view taken is contradictory to earlier precedent, the issue will now be settled by a constitutional bench of the SC.
1. Civil Appeal Nos. 3802 - 3803 / 2020 arising out of SLP (Civil) Nos.13132-13133 of 2020
2. (2011) 14 SCC 66
3. Commercial Suit No. 62 of 2017
4. Writ Petition No. 1801 of 2020
5. (2019) 9 SCC 209.
6. Delivered on 14.12.2020 in Civil Appeal No. 2402/2009
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