Arbitration and Conciliation Act, 1996 – ss. 8, 11 and 37 – Maharashtra Stamp Act, 1958 – ss. 30, 32A, 33, 34, 35, 36, 37, 41 and 58 – Commercial Courts Act, 2015 – s.13(1A) – Respondent no.1 furnished bank guarantee for Rs.29.29 crores in favour of KPCL, in pursuance of the work order awarded to it by KPCL for work of washing of coal – Subsequently, respondent no.1 entered into a sub-contract/work order dated 28.09.2015 (with arbitration clause) with the appellant company for transportation of coal from its washery – Appellant company also furnished bank guarantee of Rs.3,36,00,000/- in favour of the banker of the respondent no.1 – Dispute arose between KPCL and respondent no.1, which led to invocation of the bank guarantee by KPCL – In turn, respondent no.1 invoked the bank guarantee furnished by the appellant company – Appellant filed a civil commercial suit against the respondent no.1 for a declaration that respondent no.1 was not entitled to encash the bank guarantee as the work order was not acted upon – It was also alleged that invocation of bank guarantee was fraudulent – The Commercial Court directed to maintain statusquo – Respondent no.1 filed an application u/s.8 of the 1996 Act seeking reference to arbitration – Application rejected by the Commercial Court – It held that the arbitration clause in the work order dated 28.09.2015 was not a general arbitration clause, which would cover bank guarantee – Bank guarantee was an independent contract – Writ petition by respondent no.1 – The High Court held that application u/s. 8 of the 1996 Act was maintainable and disputes could be resolved through arbitration – It also held that the filing of suit before the Commercial Court was not justified – Issues arised for consideration before the Supreme Court were: (i) Whether an arbitration agreement would be enforceable and acted upon, even if the work order dated 28.09.2015 is unstamped and un933 enforceable under the Stamp Act; (ii) Whether allegation of the fraudulent invocation of bank guarantee is an arbitrable dispute;
(iii) Whether writ petition was maintainable to challenge an order rejecting an application for reference to arbitration u/s.8 of the 1996 Act – Held: Non-payment or deficiency of Stamp duty on the work order does not invalidate the main contract – The arbitration agreement contained in the work order is independent and distinct from the underlying commercial contract – s.3 of the Maharashtra Stamp Act does not subject an arbitration agreement to payment of Stamp Duty – On the basis of the doctrine of separability, the arbitration agreement being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract – 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 – The civil aspect of fraud is considered arbitrable – The criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjusted by a Court of law, since it may result in conviction, which is in the realm of public law – In the instant case, the allegation of fraud with respect to the invocation of the bank guarantee are arbitrable, since it arises out of the disputes between the parties inter se and is not in realm of public law – The writ petition filed by the respondent no.1 was not maintanable, since a statutory remedy under the amended s.37 of the 1996 Act is available.
Arbitration – Arbitration agreement – Held: An arbitration agreement is a distinct and separate agreement, which is independent from the substantive commercial contract in which it is embedded – This is based on the premise 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.
Doctrines/Principles – Doctrine of separability of the arbitration agreement – Held: The doctrine of separability of the arbitration agreement connotes that the invalidity, ineffectiveness, or termination of the substantive commercial contract, would not affect the validity of the arbitration agreement, except if the arbitration agreement itself is directly impeached on the ground that the arbitration agreement is void ab initio.
Doctrines/Principles – Doctrine of kompetenz – Held: kompetenz implies that the arbitral tribunal has the competence to determine and rule on its own jurisdiction, including objections with respect to the existence, validity, and scope of the arbitration agreement, in the first instance, which is subject to judicial scrutiny by the courts at a later stage of the proceedings – Under the Arbitration Act, the challenge before the Court is maintainable only after the final award is passed as provided by sub-section (6) of s.16.
Referring the issue to the Constitution Bench, the Court HELD: Validity of an arbitration agreement in an unstamped agreement.
1. The Stamp Act is a fiscal measure enacted to secure the revenue of the State on certain classes of instruments specified in Schedule I of the Act. The stringent provisions of the Stamp Act have been framed to protect the interest of the revenue of the State. Section 34 of the Maharashtra Stamp Act, 1958 operates as a statutory bar to an unstamped instrument being admitted in evidence, or being acted upon, for any purpose, by any authority having by law or consent of parties, the power to receive evidence, unless such instrument is duly stamped. The proviso to Section
34 states that upon payment of the requisite stamp duty, the instrument may be admitted in evidence. The words “for any purpose” occurring in the Indian Stamp Act was interpreted by the Privy Council in Ram Rattan v. Parma Nand. [Para 5.4][969F-H]
2. The arbitration agreement contained in the Work Order is independent and distinct from the underlying commercial contract. The arbitration agreement is an agreement which provides the mode of dispute resolution. Section 3 of the Maharashtra Stamp Act does not subject an arbitration agreement to payment of Stamp Duty, unlike various other agreements enlisted in the Schedule to the Act. This is for the obvious reason that an arbitration agreement is an agreement to resolve disputes arising out of a commercial agreement, through the mode of arbitration. On the basis of the doctrine of separability, the arbitration agreement being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract. The arbitration agreement would not be rendered invalid, un-enforceable or nonexistent, even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty. [Para 6.4][977-G-H; 978-A-B]
3. In view of this Court, 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. [Para 6.6][979-G-H; 980-A]
4. The Stamp Act is a fiscal enactment for payment of stamp duty to the State on certain classes of instruments specified in the Stamp Act. Section 40 of the Indian Stamp Act,1899 provides the procedure for instruments which have been impounded, and sub-section (1) of Section 42 requires the instrument to be endorsed after it is duly stamped by the concerned Collector. Section 42(2) provides that after the document is duly stamped, it shall be admissible in evidence, and may be acted upon. [Para 6.7][980-B-C]
5. In view of this Court, the decision in SMS Tea Estates does not lay down the correct position in law on two issues i.e. (i) that an arbitration agreement in an unstamped commercial contract cannot be acted upon, or is rendered un-enforceable 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. This Court holds 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 view taken by the Court on the issue of separability of the arbitration clause on the registration of the substantive contract, ought to have been followed even with respect to the Stamp Act. 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. [Para 6.8][980-C-F]
6. The Garware judgment has followed the judgment in SMS Tea Estates. The Counsel for the Appellant has placed reliance on paragraph 22 of the judgment to contend that the arbitration clause would be non- existent in law, and unenforceable, till Stamp Duty is adjudicated and paid on the substantive contract. This Court holds that this finding is erroneous, and does not lay down the correct position in law. This Court has already held that an arbitration agreement is distinct and independent from the underlying substantive commercial contract. Once the arbitration agreement is held to have an independent existence, it can be acted upon, irrespective of the alleged invalidity of the commercial contract. [Para 6.10][980-B-D]
7. This Court doubt the correctness of the view taken in paragraph 92 of the three-judge bench in Vidya Drolia. This Court considers it appropriate to refer the findings in paras 22 and 29 of Garware Wall Ropes Limited, which has been affirmed in paragraph 92 of Vidya Drolia, to a Constitution Bench of five judges. [Para 6.12][983-B]
8. The next issue which arises is as to which authority would exercise the power of impounding the instrument under Section
33 read with Section 34 of the Maharashtra Stamp Act, in a case where the substantive contract contains an arbitration agreement. [Para 7][983-C]
9. In an arbitration agreement, the disputes may be referred to arbitration by three modes.
a) The first mode is where the appointment of the arbitrator takes place by the parties consensually in accordance with the terms of the arbitration agreement, or by a designated arbitral institution, without the intervention of the court. In such a case, the arbitrator / tribunal is obligated by Section 33 of the Indian Stamp Act, 1899 (or the applicable State Act) to impound the instrument, and direct the parties to pay the requisite Stamp Duty (and penalty, if any), and obtain an endorsement from the concerned Collector. This would be evident from the provisions of Section 34 of the Stamp Act which provides that “any person having by law or consent of parties authority to receive evidence” is mandated by law to impound the instrument, and direct the parties to pay the requisite stamp duty.
b) The second mode of appointment is where the parties fail to make the appointment in accordance with the arbitration agreement, and an application is filed under Section 11 before the Court to invoke the default power for making the appointment. In such a case, the High Court, or the Supreme Court, as the case may be, while exercising jurisdiction under Section 11, would impound the substantive contract which is either unstamped or inadequately stamped, and direct the parties to cure the defect before the arbitrator / tribunal can adjudicate upon the contract. c) The third mode is when an application is filed under Section 8 before a judicial authority for reference of disputes to arbitration, since the subject matter of the contract is covered by an arbitration agreement. In such a case, the judicial authority will make the reference to arbitration. However, in the meanwhile, the parties would be directed to have the substantive contract stamped in accordance with the provisions of the relevant Stamp Act, so that the rights and obligations emanating from the substantive contract can be adjudicated upon. [Para 7.1][983-DH] Whether the fraudulent invocation of the Bank Guarantee is arbitrable?
10. In view of this Court, all civil or commercial disputes, either contractual or non- contractual, which can be adjudicated upon by a civil court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded either expressly by statute, or by necessary implication. The Arbitration and Conciliation Act, 1996 does not exclude any category of disputes as being non arbitrable. Section 2(3) of the Arbitration Act however recognizes that certain categories of disputes by law may not be submitted to arbitration. In all jurisdictions, certain categories of disputes are reserved by the legislature, as a matter of public policy, to be adjudicated by a court of law, since they lie in the realm of public law. [Para 8.10][988-F-G; 989-A]
11. Traditionally, disputes relating to rights in rem are required to be adjudicated by courts and / or statutory tribunals. A right in rem is a right exercisable against the world at large. Actions in rem refer to actions which create a legal status such as citizenship, divorce, testamentary and probate issues, etc. A lis in rem is not arbitrable by a private tribunal constituted by the consent of parties. Actions in personam determine the rights and interests of parties to the subject matter of the dispute, which are arbitrable. The broad categories of disputes which are considered to be non arbitrable are penal offences which are visited with criminal sanction; offences pertaining to bribery /corruption; matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody and guardianship matters, which pertain to the status of a person; testamentary matters which pertain to disputes relating to the validity of a Will, grant of probate, letters of administration, succession, which pertain to the status of a person, and are adjudicated by civil courts. [Para 8.11][989-B-D]
12. The civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence, with the only exception being where the allegation is that the arbitration agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself. Another category of cases is where the substantive contract is “expressly declared to be void” under Section 10 of the Indian Contract Act, 1872 where the agreement is entered into by a minor (without following the procedure prescribed under the Guardian and Wards Act, 1890) or a lunatic, which would be with a party incompetent to enter into a contract. [Para 8.12][990-B-D]
13. The ground on which fraud was held to be non arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc. The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. However, the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law. [Para 8.16][992-E-G]
14. In the present case, the allegations of fraud with respect to the invocation of the Bank Guarantee are arbitrable, since it arises out of disputes between parties inter se, and is not in the realm of public law. [Para 8.17][993-A]
Maintainability of the Writ Petition
15. This Court is of the view that the Writ Petition filed by the Respondent No. 1 to challenge the Order dated 18.01.2018 passed by the Special Commercial Court / District Judge-I in Commercial Dispute No. 62/2017 was not maintainable, since a statutory remedy under the amended Section 37 of the Arbitration Act is available. [Para 9.1][993-B-C]
16. Since the judgment and order of the Commercial Court dated 18.01.2018 refusing to refer the parties to arbitration was an appealable order under Section 37(1)(a) of the Arbitration Act, the Writ Petition was not maintainable. The appeal would lie before the Commercial Appellate Division of the High Court under Section 13(1A) of the Commercial Courts Act, 2015. [Para 9.2][993-E-F]
17. This Court considers it appropriate to refer the following issue, to be authoritatively settled by a Constitution bench of five judges of this Court :
“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, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?’’ [Para 12][995-CE] Vidya Drolia & Ors. v. Durga Trading Corporation [2019] SCR 465; Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209 : [2019] 5 SCR 579 – referred to Constitution Bench.
SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd. (2011) 14 SCC 66 : [2011] 9 SCR 382 – partly overruled.
Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. (2020) 2 SCC 455; A. Ayyasamy v. Parmasivam & Ors. (2016) 10 SCC 386 : [2016] 11 SCR 521; Hindustan Steel Limited v. M/s. Dilip Construction Company (1969) 1 SCC 597 : [1969] 3 SCR 736 – relied on.
SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618 : [2005] 4 Suppl. SCR 688; National Insurance Co. v. Boghara Polyfab (2009) 1 SCC 267 : [2008] 13 SCR 638; Mayavati Trading Private Limited v. Pradyuat Deb Burman. (2019) 8 SCC 714 : [2019] 12 SCR 123; Shriram EPC Limited v. Rioglass Solar SA (2018) 18 SCC 313 : [2018] SCR 749; Duro Felguera v.
Gangavaram Port Ltd. (2017) 9 SCC 729 : [2017] 10 SCR 285; N. Radhakrishnan v. Maestro Engineers. (2010) 1 SCC 72 : [2009] 15 SCR 371; Abdul Kadir v. Madhav Prabhakar AIR 1962 SC 406 : [1962] 3 SCR 702; Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra (2012) 2 SCC 144 : [2011] 10 SCR 685; Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr. (2018) 15 SCC 678 : [2018] 6 SCR 1001; Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710 : [2019] 12 SCR 460; Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings
(Mauritius Limited) (2020) SCC OnLine SC 656; Naina Thakkar v. Annapurna Builders. (2013) 14 SCC 354; Deccan Paper Mills v. Regency Mahavir (2020) SCC OnLine SC 655; Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532 : [2011]
7 SCR 310; Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677 : [2014]
6 SCR 514; State of West Bengal v. Associated Contractors (2015) 1 SCC 32 : [2014] 10 SCR 426; Swiss Timing Ltd. Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited) (2020) SCC OnLine SC 656; Avinash Kumar Chauhan v. Vijay Krishna Mishra (2009) 2 SCC 532; Black Pearl Hotels (P) Ltd. v. Planet M. Retail Ltd. (2017) 4 SCC 498; Master Construction Company v. Union of India (2011)
12 SCC 357; A. Ayyasamy v. A. Paramasivam & Ors. (2016) 10 SCC 386 : [2016] 11 SCR 521; Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751; Vimal Kishor Shah & Others v. Jayesh Dinesh Shah & Others. (2016) 8 SCC 788 – referred to.
Ram Rattan v. Parma Nand (1945-46) 73 IA 28 : AIR 1946 PC 51 – referred to.
Heyman v. Darwins Ltd. [1942] AC 356; Bremer Vulkan Schiffbau und Maschinefabrik v. South India Shipping Corporation [1981] AC 909; Harbour Assurance v. Kansa General International Insurance [1993] 1 Lloyd’s Rep. 455 (CA); Lesotho Highlands
Development Authority v. Impregilo SpA and Others : [2005] UKHL 43 : [2006] 1 A.C. 221; Gosset v. Caparelli, Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963), 545; Fiona Trust & Holding Corporation v. Privalov [2007] EWCA Civ 20; Fili Shipping Co. Ltd. and Others v. Premium Nafta Products Ltd. and Others [2007] UKHL 40; Prima Paint Corporation v. Flood & Conklin MFG. CO. 388 US 395 (1967); Buckeye Check
Cashing, Inc v. Cardegna et. al US SC 440 (2006); Prima Paint and Southland Corp. v. Keating. 79 L Ed 2d: 465 US 1 (1984); Rent-A- Center, West, Inc. v. Jackon 561 US 63 (2010); Russel v. Russel [1880] 14 Ch. D 471 – referred to.
Ivory Properties & Hotels Pvt. Ltd. v. Nusli Neville Wadia 2011 (2) Arb LR 479 (Bom); RRB Energy Ltd. v. Vestas Wind System & Ors. (2015) 219 DLT 516 – referred to.
Malhotra’s Commentary on the Law of Arbitration, [4th ed., Wolters Kluwer (2020)], p.339, Volume I.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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