Enforceability Of Arbitration Agreements Arising Out Of Unstamped Or Insufficiently Stamped Contracts (The judicial journey and issues that must be addressed by the seven Judge Bench)

In relation to the stamping of instruments, the Constitutional Bench of the Hon’ble Supreme Court took the view, that an agreement will not be considered as a legally enforceable contract under Section 2(h) of the Contract Act, 1872 if it has not been duly stamped and this omission would not be seen as a “curable defect”. Recently, this issue was referred to and heard by a seven Judge Bench of the Supreme Court.

The Hon’ble Supreme Court (Supreme Court), seven Judge Bench heard the question of enforceability of an arbitration clause in an unstamped/insufficiently stamped agreement. The Supreme Court by re-visiting the issue has re-opened the issue that had been settled by the Constitutional Bench of the Supreme Court earlier this year. This article aims to trace the judicial journey and bring to the fore some of the questions that should be considered by the Seven Judge Bench.

The Constitutional Bench of the Court in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited, (2023)7 SCC 1 (Five Judge Bench),held that in an India-seated arbitration, the statutory bar under Section 35 of the Indian Stamp Act,1899 which is attached upon instruments chargeable to stamp duty will be attached upon arbitration agreements as well. Consequently, this made an arbitration clause in an unstamped agreement ‘non-existent, unenforceable or invalid.’ However, considering the larger ramifications of the decision, the Supreme Court, referred the issue for reconsideration to a 7-Judge Bench which was heard and reserved by the Apex Court.

BACKGROUND

The case of NN Global supra arose between the parties out of a Work Order, a sub-contract, which provided for arbitration in cases of disputes. The Hon’ble Bombay High Court (High Court)held that as the Work Order was unstamped as per the Indian Stamp Act, 1899, the arbitration agreement contained within it, was unenforceable. Afterwards, the parties approached the Supreme Court and a 3-Judge-Bench of the Supreme Court while negating the legal position laid down in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd, (2011) 14 SCC 66 and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209, applied the doctrine of separability to hold that in cases where the stamp duty is not paid, the underlying contract would not invalidate the arbitration agreement to render it void and non-existent in the eyes of the law. However, the Supreme Court doubted the correctness of certain findings rendered by a coordinate bench in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 wherein the Court while affirming the findings of SMS Tea Estates supra and Garwaresupra, held that existence of a contract is intertwined with its validity and therefore, arbitration agreements arising out of invalid contracts with deficient stamp duty cannot be enforced. Subsequently, the Supreme Court referred the matter to a larger bench (Five Judge Bench) to settle the issue authoritatively.

LEGAL FINDINGS

The Five Judge Bench discussed various provisions, amongst others, provisions of the Arbitration and Conciliation Act, 1996, Indian Stamp Act, 1899 and Indian Contract Act, 1872. In relation to the stamping of instruments, the Court took the view, that an agreement will not be considered as a legally enforceable contract under Section 2(h) of the Contract Act, 1872 if it has not been duly stamped and this omission would not be seen as a “curable defect”. However, the parties can act upon such unstamped/ insufficiently stamped documents, but it cannot be used as evidence for any purpose.

Previously as per SMS Tea Estates, arbitration clauses embedded in unstamped/ insufficiently stamped documents could not be acted upon as per Section 35 of the Indian Stamp Act, 1899. Post this judgement, Section 11(6A) in the Arbitration and Conciliation Act, 1996came to be inserted, which provided for a confined scope of adjudication limited to the determination of the existence of an arbitration agreement. The Five Judge Bench focused on the enforceability of the contract, rather than the literal existence of an agreement to arbitrate between the parties, in order to ensure minimal interference by the Courts. Lastly, while dealing with the principle of kompetenz-kompetenz, the Court rejected the argument that the issue of the sufficiency of stamping of agreements shall be dealt solely by the arbitrators and noted that the Court cannot wave off its responsibility as provided under law.

All in all, for a successful reference to arbitration, the underlying agreement must arise out of an enforceable contract and must satisfy all the requirements under the Arbitration and Conciliation Act, 1996, Indian Stamp Act, 1899 and Indian Contract Act, 1872.

CONCLUSION

While the matter has already been heard by the seven Judge Bench, there are certain issues which we feel the Court must consider while delivering the Judgment. The Supreme Court must consider the fate of all those arbitrations that arise out of unstamped agreements and pending at the stage of appointment of arbitrators. Further, questions of Interim Relief under Section 9 of Arbitration and Conciliation Act, 1996, challenging an Arbitral Award under Section 34 or enforcement of an Arbitral

Award under Section 36 are left open and not touched upon by the Five Judge Bench. Moreover, considering the time consuming process employed in cases of post-impounding adjudication under the Stamp Act and the absence of any direction or guidelines mandating the officials to act in an expeditious manner, it appears that it is imperative that the parties ensure that the relevant stamp duty is sufficient and adequate before it proceeds with submissions on urgent reliefs/emergency awards sought. To avoid such perils, parties should aim to mutually agree on the terms and complete the payment of the stamp duty during the negotiation process itself and additionally, re-examine the entire manner of incorporating arbitration clauses within contracts.

While the judgment of the Supreme Court is awaited, it is incumbent upon parties to make sure that the applicable stamp duty is paid on agreements containing an arbitration agreement. The need of the hour is to establish a balance between sufficiency of stamping and quick redressal of disputes through amendments in the statutes to harmonize the law that will be laid down by the Supreme Court in future.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.