Does non-payment of stamp duty in a commercial contract invalidate the arbitration clause? Issue referred to the Constitutional bench to decide

Supreme Court: The three-judge bench comprising DY Chandrachud, Indira Banerjee and Indu Malhotra, JJ. has observed that non-payment of stamp duty in a commercial contract does not invalidate the arbitration clause mentioned in the contract. The bench decided to refer the matter to a constitutional bench after it realized that it differed from the earlier Supreme Court judgments of SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd (2011) 14 SCC 66, Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209 and the three judge bench of Vidya Drolia v. Durga Trading Corporation (2019) 20 SCC 406.

The judgment authored by Indu Malhotra, J. 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 Court was of the view that there was no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantive contract. It observed 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. However this view of the Court was different from  earlier judgments of the Court in SMS Tea Estates (two-judge Bench), Garware Wall Ropes (two-judge Bench) and Vidya Drolia (three-judge Bench) and therefore they decided to refer the issue to a larger bench.

The Court was not satisfied with the judgment in SMS Tea Estates 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 judgment in SMS Tea Estate Case was followed by Garware Case which relied on Paragraph 22 of the SMS Tea Estate Case. This in turn was approved by the 3 judge bench case of Vidya Drolia in Paragraph 92 where they approved the findings in Para 22 to 29 in the Garware case.  The Court was of the opinion that the finding in SMS Tea Estates and Garware case 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 unenforceable, was 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 was required to be authoritatively settled by a Constitution bench of the Supreme Court, the Court held.

[NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd.,  2021 SCC OnLine SC 13, decided on January 11, 2021]

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