Enforcement of Arbitration Agreements: Is Adjudication and Payment of Stamp Duty Mandatory for Referring Disputes to Arbitration?

Examining the Delhi High Court’s recent position on whether lower courts are bound to follow an earlier decision of the Supreme Court which has been doubted by a bench of equal strength and thereafter referred to a larger bench for consideration.

RECENTLY, the Delhi High Court, while hearing a petition for the appointment of an arbitrator under Section 11(5) of the Arbitration and Conciliation Act, 1996 remarked that once a Supreme Court bench has doubted the correctness of an earlier bench of equal strength and referred the issue to a larger bench, lower courts may not be bound to follow the earlier decision.

The single judge bench of Justice C. Hari Shankar observed that:

“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 the hierarchy should continue to follow the earlier decision, appears to be debatable.”[emphasis added]

While referring to the precedents on the issue, the High Court noted that although the legal position that the arbitration agreement was non-existent and unenforceable until adjudication and payment of stamp duty on the contract/agreement, as laid down by the Supreme Court in Garware Wall Ropes Limited versus Coastal Marine Constructions (2019) was affirmed by a larger bench of the Supreme Court in Vidya Drolia versus Durga Trading Corporation (2020), it was doubted by a three-judge bench of the apex court in NN Global Mercantile versus Indo Unique Flame Ltd (2021). Subsequently, the issue had been referred to a Constitution Bench of five judges.

The Delhi High Court thus turned down the respondent’s objection raised in the petition vis-à-vis referring of the dispute to arbitration on the ground that the agreement between parties was inadequately stamped, and referred it to arbitration.

Pending the view of the Constitution Bench of the Supreme Court on the issue, a jurisprudential question arises as to whether the view taken by the Delhi High Court is correct to the extent of holding that lower courts may not be bound to follow the law approved by the full bench in the Vidya Drolia judgment.

Reference to a larger Bench of the Supreme Court

In Garware Wall Ropes Limited, the Supreme Court had held that the arbitration clause in an agreement/contract was non-existent and unenforceable until adjudication and payment of stamp duty on the commercial contract.

However, this view was doubted in the recent case of NN Global Mercantile, wherein it was held:

“The Garware judgment has followed the judgment in SMS Tea Estates. The Counsel for the Appellant has placed reliance on paragraph 22 of the judgment to contend that the arbitration clause would be non-existent 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.” [emphasis added]

However, observing that the larger bench had approved the law laid down in SMS Tea Estates versus M/s Chandmari Tea (2011) and Garware Wall Ropes Limited, it was held:

“We consider it appropriate to refer the findings in paras 22 and 29 of Garware Wall Ropes Limited, which has been affirmed in paragraph 92 of Vidya Drolia, to a Constitution Bench of five judges.”

Does this mean that lower courts are not bound by the earlier judgments?

In Ashok Sadarangani versus Union of India (2012), the Supreme Court held that the pendency of a reference to a larger bench did not mean that all proceedings involving the same issue would remain stayed till a decision was rendered in the reference. It was held that till such time as the decisions cited at the bar were not modified or altered in any way, they would continue to hold the field. The bench in para 29 observed-

“As was indicated in Harbhajan Singh’s case (supra), the pendency of a reference to a larger Bench, does not mean that all other proceedings involving the same issue would remain stayed till a decision was rendered in the reference. 

The reference made in Gian Singh’s case (supra) need not, therefore, detain us. Till such time as the decisions cited at the Bar are not modified or altered in any way, they continue to hold the field.”[emphasis added]

Undoubtedly, the three-judge bench in NN Global Mercantile, while referring the matter, has doubted the correctness of the finding that an arbitration clause would be non-existent and unenforceable in law until stamp duty is adjudicated and paid on the arbitration agreement/contract. However, the views given in SMS Tea Estates and Garware Wall Ropes Limited (which have been approved by the three-judge bench in the Vidya Drolia case) have not yet been modified or overruled by virtue of the reference.

In this backdrop, it is manifest that until the Constitution Bench delivers its opinion on the issue, the judgments rendered in SMS Tea Estates and Garware Wall Ropes Limited would continue to hold the field. A priori, the Delhi High Court’s view to the extent of holding that lower courts may not be bound to follow the previous judgment is not in consonance with the law laid down in the Ashok Sadarangani ruling.

On this count, the view given by the single judge bench of the Delhi High Court requires immediate reconsideration.

(Gaurav Thote is an advocate practising at the Bombay High Court and the Mumbai bench of the National Company Law Tribunal. The views expressed are personal.)

The article was originally published in The Leaflet.