[Doctrine of Separability] AP HC discussed the enforceability of arbitration clause embedded in an unstamped charter party/agreement

Andhra Pradesh High Court: A Division Bench of Prashant Kumar Mishra, CJ and M Satyanarayan Murthy, J. dismissed the appeal being devoid of merits.

The facts of the case are such that the petitioner (respondent herein) is a company incorporated under the Companies Act, carrying on shipping business known as ―Norvic Shipping Asia Pte. Limited whereas the respondent (appellant herein) is another company carrying on its business in the name and style of ―VR Commodities Private Limited. The petitioner and respondent entered into fixture note, Charterparty and settlement agreement for transportation of coal from ―Muara Bunyuasi to ―Tuticorin and ―New Mangalore, India. But there is a breach of agreement of Charter party allegedly and the petitioner sustained loss due to default of certain terms under the charter party agreement, requiring the petitioner to have arbitral proceedings. To make good for the amount possibly to recover from the respondent, the petitioner sought various interim reliefs under Section 9 of the Arbitration and Conciliation Act. The single Judge ordered ad-interim injunction on in favour of the petitioner against the respondent restraining the respondent, from directly or indirectly through its nominees, agents, associates, affiliates, representatives or employees, in any manner, acquiring, selling, encumbering, alienating, transferring, issuing delivery orders, getting possession or otherwise dealing with the cargo. Aggrieved by this, present appeal was preferred under Section 37 of the Arbitration and Conciliation Act.

Counsel for the appellant Sri Mr Sanjay Suraneni submitted that since Charterparty is inadmissible in evidence and passing of order under Section 9 of the Arbitration and Conciliation Act based on arbitration clause in the substantive agreement, is a serious illegality. The charterparty between the petitioner and respondent is unstamped and when it is presented before the officer, who is authorised to receive the document in evidence, unless it is impounded collecting stamp duty and penalty under Section 35 of the Indian Stamp Act, 1899, the same is inadmissible, thereby the impugned order is illegal.

According to Section 35 Indian Stamp Act there is a clear prohibition against receipt of unstamped and not duly stamped document in evidence by public officer, who is entitled to receive such document in evidence and when it is produced before him, he shall examine the same and impound the same, collect stamp duty payable on the document.

As per Schedule-I and Schedule-I A, stamp duty is to be paid on charter party. Whereas, Schedule – I of the Indian Stamp Act and Schedule –IA (Andhra Pradesh) did not prescribe any stamp duty payable on arbitration agreement. When arbitration agreement though forms part of substantive agreement, it can be separable from the substantive agreement i.e. charter party.

 Doctrine of Separability

The doctrine of separability treats an agreement to arbitrate contained within a contract as an independent agreement that is deemed to be separable from the main contract. The doctrine preserves the validity and enforceability of the arbitration clause in a contract, even when the primary contract is found to be invalid and unenforceable, providing autonomy to the arbitration clause. The UNCITRAL Model law on International Commercial Arbitration, 1985, Article 16[1], integrates the doctrine of separability as an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.

The Doctrine was first recognised in England, through the landmark judgment in ―Heyman vs. Darwins Ltd. 1942 AC 356, which laid down the principle of separability of arbitration agreement, and was later incorporated in the Arbitration Act of 1996, based on UNCITRAL Model Law through legislation.

The Court remarked that in the charter party, English law alone is applicable the seat of the arbitration is at Singapore, thus it adverted to few decisions under English law relating to separability of arbitration clause from original agreement and relied on judgments Fiona Trust & Holding Corp v. Privalov (2007) UKHL 40 and Sulamrica Cia Nacional de Seguros SA v. Enesa Engenharia SA (2012) WLR (D) 148 wherein it was observed that the only purpose of the doctrine of separability is to give legal effect to the parties’ intention of resolving disputes through arbitration and not to insulate the arbitration agreement from the substantive contract for all purposes.

A Singapore Court judgment named BNA v. BNB, (2019) SCGA 84 was relied on to observe that the root cause behind evolution of the doctrine of separability is the desire to give effect to the arbitration agreement even if the substantive contract is ineffective. Court refused to accept this as limitation of the doctrine following which it was held that it is legitimate to presume that the parties want the arbitration clause to survive. The only limitation the court stated was to only give ‘reasonable effect’ to this intention.

The Court placed relied on N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited, (2021) 4 SCC 379 and observed that separability of arbitration agreement from substantive contract in which it is embedded is well settled law. Invalidity, ineffectiveness or termination of substantive commercial contract does not effect the validity of the arbitration agreement.

It was further noted that in view of the settled law laid down by the United Kingdom and separate clause contained in Singapore Arbitration Act, the clause relating to settlement of disputes by arbitration shall be an independent and autonomous clause. Though Charterparty is not stamped, still, in view of separability of arbitration clause, which does not require any stamp duty payable thereon either under the Indian Stamp Act or law relating to the State of Andhra Pradesh, the arbitration clause is independent clause. When once the arbitration agreement is not liable for stamp duty, based on such arbitration clause, though the substantive agreement is not duly stamped, the Court can take into consideration of such clause independently and pass appropriate orders under Section 9 of the Arbitration and Conciliation Act, 1996.

The Court thus held “we find no merits in the contention of the learned counsel for the appellant-respondent, hence the order under challenge cannot be interfered on the ground that the substantive agreement is not stamped.” [VR Commodities Pvt. Ltd. v. Norivic Shipping Asia Pte. Ltd., 2022 SCC OnLine AP 1001, decided on 05-05-2022]


Counsel for respondent- Sri Amitava Majumdar


Arunima Bose, Editorial Assistant has reported this brief.

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