Constitution Bench of Supreme Court to decide whether non-payment of stamp duty on contract will invalidate arbitration clause in the contract
Justices Indu Malhotra, DY Chandrachud, Indira Banerjee Supreme Court

Constitution Bench of Supreme Court to decide whether non-payment of stamp duty on contract will invalidate arbitration clause in the contract

This development came about after a three-judge Bench of the Supreme Court on Monday differed with the earlier judgments of the top court in this regard.

A Constitution Bench of the Supreme Court will decide whether non-payment of stamp duty on a commercial contract would invalidate even the arbitration clause, which is part of such contract, and make it invalid or unenforceable in law.

This development came about after a three-judge Bench of the Supreme Court on Monday differed with the earlier judgments of the top court in this regard in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd, Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited and Vidya Drolia v. Durga Trading Corporation.

The Court also framed the following question to be “authoritatively settled by a Constitution 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 three-judge Bench headed by Justice DY Chandrachud was of the view that an arbitration agreement/ clause being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract. Hence, 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.

“In our view, there is no legal impediment to the enforceability of the arbitration agreement, pending payment of 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 un-enforceable, since it has an independent existence of its own,” the Court held.

Since, 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 comprised Justices Indu Malhotra and Indira Banerjee considered it appropriate to send the issue for consideration by a Constitution Bench.

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The Court held that the decision in SMS Tea Estates does not lay down the correct position in law on the following two issues:

(i) that 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.

The Garware judgment, the Court noted, followed the judgment in SMS Tea Estates and judgment in Garware was in turn followed by a three-judge Bench in Vidya Drolia.

“We are of the considered view that the finding in SMS Tea Estates and Garware that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and un-enforceable, is not the correct position in law. In view of the finding in paragraph 92 of the judgment in Vidya Drolia by a co-ordinate bench, which has affirmed the judgment in Garware, the aforesaid issue is required to be authoritatively settled by a Constitution bench of this Court,” the Court said.

[Read Judgment]

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