Arbitration Law: Supreme Court Removes Another Thorn
The Supreme Court of India 

Arbitration Law: Supreme Court Removes Another Thorn

Just because a commercial contract is unstamped doesn’t mean that the arbitration clause in it will become invalid, a three-judge bench of the Supreme Court of India has held.

It is a significant decision that will be welcomed by arbitration practitioners as well as various segments of the business community, particularly financial institutions, who have found themselves unable to even get an arbitrator appointed in cases where the main contract is insufficiently stamped, said Kingshuk Banerjee, partner at Khaitan & Co.

In two previous two cases, the apex court took a contrary view. The earlier rulings held that if an agreement is unstamped, it will not be possible to bifurcate the arbitration clause contained in such an agreement.

This difference of opinion will now be resolved by a constitution bench. A five-judge bench will now determine whether a contract, on which stamp duty hasn’t been paid, renders the arbitration clause in it unenforceable as well pending payment of stamp duty, according to the apex court’s last week order.

The situation on this issue right now will be in limbo until the constitution bench settles the question, Shaneen Parikh, partner at Cyril Amarchand Mangaldas, said. "But I do think the position laid down by the Supreme Court last week is correct and hope the constitution bench will affirm it."

Arbitration Agreement Independent Of Commercial Contract, Says Supreme Court

The apex court's last week order came in dispute on a work order between Indo Unique and N.N. Global Mercantile Pvt. Ltd.

Indo Unique had entered into a contract with Global Mercantile for transportation and handling of coal from its washery. As a security deposit for the coal handed over, Global Mercantile submitted a bank guarantee. Certain differences led to the invocation of the bank guarantee, prompting Global Mercantile to approach the court.

It had argued that the dispute could not be referred for arbitration as the work order being unstamped could not be relied upon as evidence for any purpose. The arbitration clause under this agreement too could not be acted upon until the stamp duty was paid, the company had stated.

The Supreme Court dismissed the argument saying it’s well-settled jurisprudence that an arbitration agreement is a distinct and separate agreement, which is independent of the commercial contract in which it is embedded.

“An arbitration agreement exists and can be acted upon irrespective of whether the main substantive contract is valid or not.” - Supreme Court order, January 2021

The court noted that the Maharashtra Stamp Act makes it clear that an unstamped instrument—in this case a work order—cannot be relied upon as evidence or be acted upon if the stamp duty is not paid. But this deficiency can be cured after the requisite stamp duty is paid, the apex court held.

The court pointed out that an arbitration agreement is not included in the Schedule of the law as an instrument on which stamp duty has to be paid.

“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.” - Supreme Court order, January 2021

Parties will now be able to approach an arbitral tribunal to initiate arbitral proceedings, Parikh said. The tribunal will then be able to consider whether an underlying agreement has been adequately stamped, and if not, direct parties to cure the defect—something that was left to courts so far, she explained.

‘As such, any arbitration or court proceeding in relation to the main agreement will only continue after the stamp duty is paid,’ Parikh pointed out.

Fraud is Arbitrable, Supreme Court Reiterates

Global Mercantile had argued that the invocation of bank guarantee was fraudulent and so, the dispute cannot be referred to arbitration. It stated that the work order was not acted upon—i.e. no work was allotted, no invoices issued nor any payments made. The invocation of bank guarantee, which was linked to work performance, was fraudulent, the company had said.

The earlier rulings of the apex court which held that fraud is not arbitrable are based on an “outdated view of the law”, the Supreme Court said. The civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence, the apex court noted in its order.

The exception to this, it added, would be situations where a particular dispute has been kept out of the scope of arbitration by law or necessary implication.

This discussion and observations by the top court on this issue are a welcome and refreshing development, Kingshuk Banerjee, partner at Khaitan & Co., told BloombergQuint.

The Supreme Court has in no uncertain terms discarded this oft-used defence and held that barring the criminal aspect of fraud which is in the realm of public law, allegations of fraud arising out of disputes between parties inter-se are arbitrable.
Kingshuk Banerjee, Partner, Khaitan & Co.

In the instant case, the court has allowed for the stamp duty to be calculated on the work order within 45 days and the payment of the duty will have to be done four weeks after that. The question of fraudulent invocation of the bank guarantee has been allowed to be decided by arbitration.

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