CASE: N.N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd.
CITATION: [CIVIL APPEAL NOS. 3802 – 3803 / 2020] (Arising out of SLP (Civil) Nos.13132-13133 of 2020)
CORAM: Hon’ble Justice D.Y. Chandrachud, Hon’ble Justice Indu Malhotra and Hon’ble Justice Indira Banerjee
A three judge bench of the Supreme Court held that an arbitration agreement will not be invalidated if the stamp duty on the commercial contract is unpaid.
The bench disagreed with two judgement and referred a question to the Constitutional Bench;
“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 ?”
One question raised in the appeal against the Bombay High Court judgement was that whether an arbitration agreement would still be enforceable if the work order is unenforceable and unstamped under the Stamp Act. In this case the Commercial Court had refused to refer he parties to arbitration. One of the parties filed a writ petition in the High Court and the order of the Commercial Court was set aside.
Wile looking into the appeal the court saw the case of SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd.(2011) where it was held that an arbitration agreement where it is an unstamped commercial contract is rendered unenforceable in law. It was also stated that an arbitration agreement would not be valid where the instrument is voidable at the option of a party.
The court disagreed with the judgement and stated “Since the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the commercial contract, would not invalidate the arbitration clause, or render it un-enforceable, since it has an independent existence of its own. The non-payment of stamp duty on the substantive contract would not invalidate even the main contract. It is a deficiency which is curable on the payment of the requisite Stamp Duty.”
“The second issue in SMS Tea Estates that a voidable contract would not be arbitrable as it affects the validity of the arbitration agreement, is in our view not the correct position in law.”
The court also noticed the judgement of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) where it was held that an arbitration contract would not be enforceable till the stamp duty on substantive contract is paid.
“In our view, there is no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract. The adjudication of the rights and obligations under the Work Order or the substantive commercial contract would however not proceed before complying with the mandatory provisions of the Stamp Act..”
The bench set aside the High Court order stating that the order passed by the Commercial Court could be appealed under Section 37(1)(a) of the Arbitration and Conciliation Act, therefore the writ petition was not maintainable.