2021 (1) TMI 1121 - SC - Indian Laws

Doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded - validity of arbitration agreement if the underlying contract was not stamped as per the relevant Stamp Act - fraudulent invocation of the bank guarantee furnished under the substantive contract - arbitral dispute or not. HELD THAT - It is deemed 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, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument? The Registry may place this matter before the Hon'ble Chief Justice of India for appropriate orders/directions.

Summary

Issues Involved:
1. Validity of an arbitration agreement in an unstamped agreement.
2. Arbitrability of allegations of fraudulent invocation of a bank guarantee.
3. Maintainability of a writ petition under Articles 226 and 227 of the Constitution to challenge an order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act.

Detailed Analysis:

1. Validity of an Arbitration Agreement in an Unstamped Agreement:
- The court examined whether an arbitration agreement embedded in an unstamped contract is enforceable. It emphasized the doctrine of separability, which treats the arbitration agreement as independent from the underlying contract. This doctrine ensures that the arbitration agreement remains valid even if the main contract is invalid due to non-payment of stamp duty.
- The court referred to various precedents, including *Heyman v. Darwins Ltd.*, *Harbour Assurance v. Kansa General International Insurance*, and *Fiona Trust & Holding Corporation v. Privalov*, to affirm that an arbitration agreement is a distinct contract.
- The court held that the non-payment of stamp duty on the substantive contract does not invalidate the arbitration agreement. It overruled the judgment in *SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd.*, which held that an arbitration agreement in an unstamped contract is unenforceable.
- The court decided to refer the issue to a Constitution Bench for authoritative settlement, given the conflicting views in *Garware Wall Ropes Ltd.* and *Vidya Drolia*.

2. Arbitrability of Allegations of Fraudulent Invocation of a Bank Guarantee:
- The court reviewed whether allegations of fraudulent invocation of a bank guarantee are arbitrable. It noted that arbitrators are competent to deal with civil fraud allegations.
- The court referred to *N. Radhakrishnan v. Maestro Engineers* and subsequent cases like *A. Ayyasamy v. A. Paramasivam* and *Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Limited*, which distinguished between serious fraud and fraud simpliciter.
- The court concluded that the allegations of fraud in the present case are arbitrable since they pertain to disputes between parties inter se and do not involve complex issues or criminal offenses that require extensive evidence.

3. Maintainability of a Writ Petition Under Articles 226 and 227:
- The court held that the writ petition filed to challenge the order of the Commercial Court was not maintainable because a statutory remedy under Section 37 of the Arbitration Act was available.
- The court emphasized that the appeal would lie before the Commercial Appellate Division of the High Court under Section 13(1A) of the Commercial Courts Act, 2015.
- The court set aside the High Court's judgment on the ground of maintainability and directed the parties to appoint an arbitrator consensually or seek appointment under Section 11 of the Arbitration Act.

Conclusion:
- The court set aside the High Court's judgment and directed the impounding of the Work Order for assessment of stamp duty.
- It extended the stay on the invocation of the bank guarantee for eight weeks.
- The court referred the issue of the enforceability of an arbitration agreement in an unstamped contract to a Constitution Bench for authoritative settlement.

This summary preserves the legal terminology and significant phrases from the original text, providing a comprehensive analysis of the judgment while maintaining the privacy of the parties involved.