Bhagwati Devi Gupta & Anr. v. Star Infratech Private Limited

1. This is a petition under Section 11(5) of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”), for appointment of an arbitrator to arbitrate on the dispute between the parties.

2. The substance of the dispute is set out in para 7 sub-paras (a) to (q) of para 2 of the petition, which, for the sake of brevity are not being reproduced here. The notice invoking arbitration was issued by the petitioner to the respondent on 1st August, 2020. The parties having failed to arrive at any agreement regarding the arbitrator to arbitrate on the disputes, the petitioner has approached this Court under Section 11(5) of the 1996 Act.

3. The only objection raised by Mr. Rakesh Saini, learned Counsel for the respondent, regarding the reference of the disputes to arbitration is that the agreement between the parties is inadequately 2021:DHC:2435 stamped. He has relied on the judgment of the Supreme Court in N.N. Global Mercantile Pvt. Ltd. v. M/s Indo Unique Flame Ltd.[1] to contend that, till this defect is rectified, the Court cannot refer the dispute to arbitration. Mr. Singhal, learned Counsel for the petitioner, per contra submits that the arbitration agreement is not insufficiently stamped and that, even if it were, this aspect could be decided by the learned Arbitrator.

4. In fact, the decision in N.N. Global Mercantile[1] “6.[1] The issue which has arisen in the present case is whether the arbitration agreement incorporated in the unstamped Work Order dated 28.09.2015, would also be legally unenforceable, till such time that the Work Order is subjected to payment of Stamp Duty. Undisputedly, the Work Order is chargeable to payment of Stamp Duty under Item NO. 63 of the First Schedule to the Maharashtra Stamp Act, 1958. 6.[2] In our view, the non-payment or deficiency of Stamp Duty on the Work Order does not invalidate the main contract. Section 34 provides that an unstamped instrument would not be admissible in evidence, or be acted upon, till the requisite stamp duty is paid. This would amount only to a deficiency, which can be cured on the payment of the requisite stamp duty. 6.[3] The point for consideration is whether the nonpayment of Stamp Duty on the Work Order, would render the arbitration clause invalid, nonexistent, or unenforceable in law, till the stamp duty is paid on the substantive commercial contract. defeats the submission of Mr. Saini. Paras 6.[1] to 6.10 of the decision may be reproduced thus: 6.[4] The arbitration agreement contained in the Work Order is independent and distinct from the underlying commercial contract. The arbitration agreement is an agreement which provides the mode of dispute resolution. Section 3 of the Maharashtra Stamp Act does not subject an arbitration agreement to payment of Stamp Duty, unlike various other agreements enlisted in the Schedule to the Act. This is for the obvious reason that an arbitration agreement is an agreement to resolve disputes arising out of a commercial agreement, through the mode of arbitration. 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. The arbitration agreement would not be rendered invalid, unenforceable 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. 6.[5] A three-Judge Bench of this Court in Hindustan Steel Limited v. M/s. Dilip Construction Company[2] held that:

6.10 The Garware judgment[4] has followed the judgment in SMS Tea Estates[3]

5. On this position being brought to his notice, Mr. Saini sought to rely on the earlier decision of a Bench of three Hon’ble Judges of the Supreme Court in Vidya Drolia v. Durga Trading Corpn. The Counsel for the Appellant has placed reliance on paragraph 22 of the judgment to contend that the arbitration clause would be nonexistent in law, and unenforceable, till Stamp Duty is adjudicated and paid on the substantive contract. We hold that this finding is erroneous, and does not lay down the correct position in law. We have already held that an arbitration agreement is distinct and independent from the underlying substantive commercial contract. Once the arbitration agreement is held to have an independent existence, it can be acted upon, irrespective of the alleged invalidity of the commercial contract.”. In this respect, paras 6.11 and 6.12 of the decision in N.N. Global Mercantile[1] “6.11 We notice that the judgment in Garware Wall Ropes Limited observe thus: has been cited with approval by a co-ordinate bench of this Court in Vidya Drolia & Ors. v. Durga Trading Corporation[5] “92. We now proceed to examine the question, whether the word ‘existence’ in Section 11 merely refers to contract formation (whether there is an. Paragraph 92 of the judgment reads thus: Garware Wall Ropes v. Coastal Marine Engg. & Constructions Ltd, (2019) 9 SCC 209 arbitration agreement) and excludes the question of enforcement (validity) and therefore the latter falls outside the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word “existence’. However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of ‘existence’ requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. We would proceed to elaborate and give further reasons:

(i) In Garware Wall Ropes Ltd.4, this Court had examined the question of stamp duty in an underlying contract with an arbitration clause and in the context had drawn a distinction between the first and second part of Section 7(2) of the Arbitration Act, albeit the observations made and quoted above with reference to ‘existence’ and ‘validity’ of the arbitration agreement being apposite and extremely important, we would repeat the same by reproducing paragraph 29 thereof: “29. This judgment in Hyundai Engg. case[6] 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.”

6.12 We doubt the correctness of the view taken in paragraph 92 of the three-judge bench in Vidya Drolia[5]. We consider it appropriate to refer the findings in paras 22 and 29 of Garware Wall Ropes Limited[4], which has been affirmed in paragraph 92 of Vidya Drolia[5] United India Insurance Co. V. Hyundai Engg. & Construction Co. Ltd, (2018) 17 SCC 607, to a Constitution Bench of five judges.” The question of whether, once a bench of the Supreme Court has doubted the correctness of an earlier bench of co-equal strength, and referred the issue to a larger bench, Courts lower in hierarchy should continue to follow the earlier decision, appears to be debatable.

6. In this view of the matter, Mr. Saini agrees to reference of the dispute to arbitration.

7. In view of the above, the parties are referred to the Delhi International Arbitration Centre (DIAC), which would appoint a suitable arbitrator to arbitrate thereon. The arbitration would take place under the aegis of the DIAC and would abide by its rules and regulations. The arbitrator would be entitled to fees in accordance with the schedule of fees maintained by the DIAC or as otherwise agreed between the parties and the learned arbitrator.

8. The arbitrator would furnish the requisite disclosure under Section 12(2) of the 1996 Act within a week of entering on reference.

9. All issues of fact and law, including the aspect of non-stamping of the agreement between the parties and, if so, the consequences thereof on arbitrability of the dispute, are left open for agitation before the learned Arbitrator. This Court does not return any definitive opinion thereon.