Del HC | Does non-payment of stamp duty on a commercial contract invalidates arbitration agreement? Explained

Delhi High Court: Sanjeev Narula, J., decides a matter covering various aspects of the arbitration agreement.

Instant petition under Section 11 of the Arbitration and Conciliation Act sought appointment of a Sole Arbitrator.

Respondent was called upon to file a reply to the petition vide Order 08-02-2021, but no reply was filed.

Factual Matrix

Parties entered into a Memorandum of understanding on 1-01-2020 with the objective of promoting their respective business interests and profitability.

In the MoU it was provided that both the parties agree that they shall not attempt to solicit, contact or attempt to contact employees of each other for the purpose of offering employment.

Disputes arose as MSD breached its obligations under Clause 2.4 as explained above. MSD also indulged in various criminal activities which violate the terms of MoU, such as tampering with the servers of IMZ, forcibly gaining access to the computer database and electronic records of IMZ, sending emails to clients of IMZ and further making a false allegation against the directors and employees of IMZ.

On being aggrieved with the above, IMZ invoked the arbitration. Since MSD did not respond to the notice of Delhi International Arbitration Centre, IMZ approached this Court by way of the present petition.

Analysis

High Court while analyzing the matter stated that in exercising jurisdiction under Section 11, Court needs to only examine if there is an existence of the arbitration agreement and whether there is the existence of arbitral disputes.

Supreme Court in the decision of Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, observed that “the rule for the Court is ‘when in doubt, do refer”.

Therefore, it was noted that only in cases when ex-facie, the document appeared to be fabricated, that the Court would make a judicial enquiry. Mere allegation of fraud is not enough.

Bench stated that the purported veracity of the document in the present case, though disputed by MSD, was not sufficient to hold that the document is fraudulent, or that the Court should not proceed to appoint an Arbitrator.

Non-Compliance of Pre-Arbitration Procedure 

Arbitration clause stipulated that the parties shall attempt to resolve the disputes mutually through negotiations, falling which the same shall be referred to and decided by a sole arbitrator.

Bench found it to be surprising and irreconcilable that, on hand, MSD initiated criminal proceedings by filing an FIR against IMZ and on the other hand, it looked forward to mutually resolve the disputes through negotiation.

Moreover, in Court’s opinion, having regard to the ongoing litigation between directors of the parties before the NCLT, criminal proceedings, and conduct of the parties, relegating them to mutual negotiation to resolve the disputes would be an empty formality

 In such a situation which arose in the present matter, insistence on negotiation as a pre-condition to arbitration should not get in the way of the dispute resolution process agreed upon between the parties.

Non-payment of stamp duty on a commercial contract would invalidate the arbitration agreement?

High Court stated that the issue of stamping also stands covered by N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2021 SCC OnLine SC 13, wherein the Supreme Court in clear and unequivocal terms overruled the decisions in SMS Tea Estates (P) Ltd. v. Chandmari Tea Company (P) Ltd.,(2011) 14 SCC 66, and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd., (2019) 9 SCC 209, however, the same was affirmed in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

Thus, Court opined that the plea of agreement being unstamped wouldn’t prevent the Court in appointing an arbitrator while exercising jurisdiction under Section 11 of the Act.

IMZ established that the contingencies provided under Section 11(6) of the Act were satisfactorily made out. Hence the present petition was allowed.

Shashank Garg, Advocate was appointed as the Sole Arbitrator to adjudicate the disputes that arose between the parties under the MoU.

Appeal was allowed in view of the above terms. [IMZ Corporate (P) Ltd. v. MSD Telematics (P) Ltd., 2021 SCC OnLine Del 3016, decided on 4-06-2021]


Advocates before the Court:

For Petitioner: Mr Nikhil Malhotra, Advocate

Mr Devadatt Kamat, Senior Advocate with Mr Sumeet Lall,

Mr Sidhant Kapoor and Mr. Javedur Rehman, Advocates.

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