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Will non-payment of stamp duty, hold the contract's arbitration clause invalid?

  • Date: 2021-01-25 14:41:04
  • Views: 22

The Constitutional Bench of the Supreme Court shall determine if the non-payment of the stamp duty on a commercial contract will invalidate the arbitration provision which forms part of that contract and render it invalid or unenforceable by statute.

This development emerged after the three-jurisdiction Bench of the Supreme Court varied on Monday from the Supreme Court's earlier judgments in this regard in SMS Tea Estates Pvt. This is Ltd. v. M/s. Oh, Chandmari Tea Co. Oh, Pvt. Ltd, Garware Wall Ropes Limited v. Coastal Maritime Building and Engineering Limited and Vidya Drolia v. Durga Trading Company.

The Court also framed the following question as follows: "Authoritatively settled by a constitutional bench of five judges:"

"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?"

The Bench believed that the settlement agreement/clause would survive independently of the substantive contract as a distinct and separate deal from the underlying commercial contract. Consequently, the non-payment of the stamp duty on a commercial deal does not invalidate or make the arbitration provision unenforceable, because it has a separate life of its own.

"There is, in our opinion, no procedural impediment to the enforceability of the arbitration arrangement awaiting payment of the stamp duty on the substantive contract. We hold that 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 unenforceable since it has an independent existence of its own," the Court held.

As this position was contrary to the earlier judgments of the Court in SMS Tea Estates (two-judge Bench), Garware Wall Ropes (two-judge Bench) and Vidya Drolia (three-judge Bench), the Bench, which also included Indu Malhotra and Indira Banerjee, found it fitting to refer the matter to the Constitutional Bench.

The Court held that the decision in SMS Tea Estates did not lay down the right legal stance on the following two issues:

An arbitration agreement in an unstamped commercial contract cannot be acted upon or is rendered unenforceable in law; and (ii) that an arbitration agreement would be invalid where the contract or instrument is voidable at the option of a party, such as u/S. 19 of the Indian Contract Act, 1872.

Garware's judgment, the Court observed, followed SMS Tea Estates' judgment, and Garware's judgment was followed in turn by a Bench of three judges in Vidya Drolia.



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