The arbitration agreement is an independent agreement between the parties and is not chargeable to payment of stamp duty therefore the non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause

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Civil Appeal No. 3802/03 OF 2020, Decided On January 11, 2021

JUDGES: Dr Dhananjaya Y Chandrachud, Indu Malhotra & Indira Banerjee  JJ.

Facts: IU, a company, applied for grant of work of beneficiation/washing of coal to K Ltd. (“KPCL”) in an open tender. K awarded the Work Order to IU. In pursuance of the aforesaid Work Order, IU furnished Bank Guarantees for Rs.29.29 crores in favour of K through its bankers.

Thereafter, IU, subsequently entered into a sub-contract termed as a Work Order with GM, the appellant company, for the transportation of coal from its washery at District Yavatmal to the stockyard, siding, coal handling and loading into the wagons at District Chanderpur, Maharashtra. As per the Work Order, GM furnished a Bank Guarantee for Rs.3,36,00,000/- in favour of SBI-the banker of IU.

Under the principal contract with K dated 18.09.2015, certain disputes and differences arose with IU, which led to the invocation of the Bank Guarantee by K. Thereafter, IU, invoked the Bank Guarantee furnished by GM under the Work Order. It was this invocation of the Guarantee which led to the proceedings travelling from the Commercial Court to the Bombay High Court and all the way up to the Supreme Court. The following issues had arisen before the Hon’ble Apex Court


Whether an arbitration agreement would be enforceable and acted upon, even if the Work Order is unstamped and un-enforceable under the Stamp Act?


The Apex Court with regard to the facts of the case at hand held that the arbitration agreement contained in the Work Order is independent and distinct from the underlying commercial contract. The Court further went on to observe that an arbitration agreement is an agreement to resolve disputes arising out of a commercial agreement, through the mode of arbitration and on the basis of the doctrine of separability, the arbitration agreement being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract. Moreover, the Court held that the arbitration agreement would not be rendered invalid, un-enforceable or non-existent, even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty.

In conclusion 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 un-enforceable, since it has an independent existence of its own. The non-payment of stamp duty on the substantive contract would not invalidate even the main contract. It is a deficiency which is curable on the payment of the requisite Stamp Duty.


Whether allegation of the fraudulent invocation of the bank guarantee is an arbitrable dispute?


The Supreme Court observed that all civil or commercial disputes, either contractual or non-contractual, which can be adjudicated upon by a civil court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded either expressly by statute, or by necessary implication. The Arbitration and Conciliation Act, 1996 does not exclude any category of disputes as being non arbitrable.

The Court further went on to observe that 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.



Whether a Writ Petition under Articles 226 and 227 of the Constitution would be maintainable to challenge an Order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act?


With regard to the maintainability of the Writ Petition under Article 226/2227 of the Constitution of India the Court held that since, a statutory remedy under the amended Section 37 of the Arbitration Act is available, therefore, the writ petition was not maintainable. 

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