Supreme Court Elucidates the 'Validity of an Arbitration Agreement in an Unstamped Agreement

SC Elucidates the 'Validity of an Arbitration Agreement in an Unstamped Agreement

An arbitration agreement is not included in the Schedule as an instrument chargeable to Stamp Duty, the apex court bench observed.

A three judges bench of the Supreme Court comprising of Justices Dr D.Y. Chandrachud, Indu Malhotra and Indira Banerjee Monday observed that there can be no legal impediment to the enforcement of the arbitration agreement pending payment of stamp duty.

In the case of M/s. N.N. Global Mercantile Pvt Ltd. Vs. M/s. Indo Unique Flame Ltd. & Others, the bench observed, "There is no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract. The adjudication of the rights and obligations under the Work Order or the substantive commercial contract would however not proceed before complying with the mandatory provisions of the Stamp Act."

With regards to the first issue i.e., the 'validity of an arbitration agreement in an unstamped agreement' the court pointed out that in arbitration jurisprudence that an arbitration agreement is a distinct and separate agreement, which is independent of the substantive commercial contract in which it is embedded. The court further added that autonomy of the arbitration agreement is based on the twin concepts of 'separability' and 'kompetenz – kompetenz'.

The Indian Arbitration and Conciliation Act, 1996 ('Act') is based on the Model Law. Section 16, which states the Competence of arbitral tribunal to rule on its jurisdiction gives statutory recognition to the doctrine of separability and kompetenz – kompetenz.

The court further highlighted that the legislative policy of minimal interference is enshrined in Section 5, of the 'Act' is which by a non-obstante clause prohibits judicial intervention except as specified in Part I of the 'Act'. A conjoint reading of Sections 5 and 16 indicated that all civil commercial matters, including the issue as to whether the substantive contract was voidable, can be resolved through arbitration.

The court found that the phrase "duly stamped" implied that the instrument must be stamped with the requisite amount of duty determined in accordance with the Schedule to the Act. If it is found that the instrument is not stamped, or inadequately stamped, it is mandated by law to impound the instrument, and deal with it in accordance with provisions of the Stamp Act.

The court relied on Section 34 of the Maharashtra Stamp Act, 1958, (MSA,1958) that it operated as a statutory bar from receiving any instrument in evidence, or relying on it for any purpose whatsoever, or being acted upon, or registered, or authenticated, by any such person or public officer, unless the instrument is duly stamped. The proviso to Section 34 states that upon payment of the requisite stamp duty, the instrument may be admitted in evidence.

The court dealt with the second issue which was with respect to a contract or instrument which is voidable at the option of a party (u/S. 19 of the Indian Contract Act, 1872), it was held that the invalidity which attaches itself to the main agreement, may also attach itself to the arbitration agreement, if the reasons which make the main agreement voidable, exist in relation to the making of the arbitration agreement.

The court, for the third issue whether an arbitration clause in a document/agreement/conveyance which requires compulsorily to be stamped under the relevant Stamp Act, but is not duly stamped, said that it is enforceable after the insertion of clause (6A) in Section 11. The court held, "The provisions of the MSA, 1958 and Schedule I appended thereto, which enlists the instruments specified in Section 3, on which Stamp Duty is chargeable. We find that an arbitration agreement is not included in the Schedule as an instrument chargeable to Stamp Duty."

The court, for the fourth issue that whether the fraudulent invocation of the Bank Guarantee is arbitrable, made a distinction between cases where there are allegations of serious fraud and fraud simplicitor. Mere allegations of fraud simplicitor are not a sufficient ground to decline reference to arbitration. Hence, in the present case, it was arbitrable since it arises out of disputes between parties inter se, and is not in the realm of public law.

For the fifth issue whether voidable agreements are arbitrable, as per Section 19 of the Contract Act (ICA,1872), such disputes would be arbitrable since the issue whether the consent was procured by coercion, fraud, or misrepresentation requires to be adjudicated upon by leading cogent evidence, which can very well be decided through arbitration. Until it so proved and upheld as per Sections 2(i) and (j) of the ICA, 1872 such an agreement would remain enforceable, and was not void, the Court observed.

The Court overruled the judgment held in, SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and un-enforceable, as it was not laying down the correct position in law.

To conclude, the court considered it appropriate to refer the following issue, to be authoritatively settled by a Constitution Bench of five judges of this Court: "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?"