OVERVIEW:
The Apex Court on
The Court also held that 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.
BACKGROUND:
DECISIONS OF THE COMMERCIAL COURT AND THE
Being aggrieved of such invocation of their bank guarantee, Indo Unique filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking reference of the dispute for arbitration. The Commercial Court, had refused to refer the parties to arbitration. Consequently, Indo Unique filed a civil revision petition before the
ISSUE BEFORE THE
Aggrieved by the order of the
FINDINGS OF THE
While considering the issue regarding validity of an arbitration agreement in an unstamped agreement, the bench of the Apex Court extensively analysed two landmark judgments namely SMS
The Court held 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
The Court further noticed that the judgment in Garware Ropes has been cited with approval by a co-ordinate bench of
“22. In
- This judgment in Hyundai Engg. case is important in that what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did “exist”, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration clause that is contained in the subcontract would not “exist” as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6A) deals with “existence”, as opposed to Section 8, Section 16 and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court's understanding of the expression “existence” in Hyundai Engg. case, as followed by us.”
Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.”
The Court relying upon the aforesaid observations, reiterated that an arbitration agreement is distinct and independent from the underlying substantive commercial contract and can be acted upon, irrespective of the alleged invalidity of the commercial contract.
In view of the aforesaid finding, the Court considered it appropriate to refer the findings in paragraphs 22 and 29 of Garware Ropes, which were affirmed in paragraph 92 of Vidya Drolia, to a Constitution Bench of five judges for an authoritative determination. The issue to be referred has been reproduced below:
“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 ?”
Further on the issue of arbitrability of fraudulent invocation of the bank guarantee, the Court answered in affirmative and held that such issue would be arbitrable, since it arises out of disputes between parties inter se, and is not in the realm of public law. The Court upheld the view taken in the case of Avitel Post Studioz v HSBC PI Holdings5 and held 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. The Court further clarified that 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.
CONCLUSION:
This judgment reaffirms the position given in section 7 of the Arbitration and Conciliation Act, 1996 that requires an arbitration agreement to be in black and white in order for it to be enforceable and the judiciary has repeatedly held arbitration agreements forming part of documents, emails etc., which are signed and exchanged between the parties as enforceable in the eyes of law.
The judgment is a welcome decision by the apex court as it reasserts the principle of severability and Kompetence-Kompetence. It further signifies that the arbitration agreement forming part of any unstamped agreement which should have been compulsorily stamped, cannot defeat the intent of the parties to seek their resolution of disputes by way of arbitration.
Lastly and more importantly, a requirement of stamping or registration of an arbitration agreement would have aided in delay in the dispute resolution mechanism in
Footnotes
1 SLP (Civil) Nos.13132-13133 of 2020
2 (2011) 14 SCC 66
3 (2019) 9 SCC 209
4Delivered on
5 (2020) SCC OnLine SC 656.
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