Supreme Court to consider Whether Arbitration Agreement which is not registered and duly stamped is enforceable

Supreme Court to consider Whether Arbitration Agreement which is not registered and duly stamped is enforceable

The Constitution bench of Supreme Court comprising of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar heard the submissions forwarded by the Amicus Curaie Senior Advocate, Mr. Gourab Banerji in a three-Judge reference which raised the issue - whether the arbitration clause in a contract, which is required to be registered and stamped, but is not registered and stamped, is valid and enforceable.

The bench appointed an Amicus to assist it, because, at present, there is no contesting respondent in the matter.

In an appeal filed by the appellant- M/s. N.N. Global Mercantile Pvt Ltd. vs M/s. Indo unique Flame Ltd. and others had entered a sub-contract which contained an arbitration clause, certain disputes arose and the respondent invoked the Bank Guarantee furnished by the petitioner. A suit was filed regarding the said invocation. The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 'Act') in the suit and sought for reference of disputes to arbitration. However, the Commercial Court rejected the application.

Before the Bombay High Court, a revision petition was filed by the respondent. Considering objections on maintainability the Court granted liberty to the respondent to withdraw the review and file a writ petition.

Afterwards, in the writ petition filed by the respondent, the High Court held that the Section 8 application was maintainable. One of the issues before the High Court was that the arbitration agreement was unenforceable since the sub-contract was unregistered and unstamped. It noted that the said issue can be raised in application under Section 11 of the Act or before the Arbitral Tribunal.

In the appeal, the Top Court noted that decisions taken in SMS Tea Estates Pvt. Ltd. vs M/s. Chandmari Tea Co Pvt. Ltd. and Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited that non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable is not the correct position in law. Considering that Garware's case decision was affirmed in the case of Vidya Drolia and Ors. v. Durga Trading Corporation, which is a coordinate the three-Judges Bench of the Apex Court thought it fit to refer the matter to a Constitution Bench.

The issue before the Apex Court is, "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, un- enforceable, or invalid, pending payment of stamp duty on the substantive contract / instrument?"

According to Amicus, while exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996, the Court should confine itself to the examination of the existence of an arbitration agreement. He submitted that the ambit of Section 16, which deals with the competence of an arbitral tribunal to rule on its jurisdiction, was wide enough to allow the arbitrator to make considerations with respect to the stamping of the document.

The Amicus voiced that under Section 16, apart from jurisdiction, the arbitrator is contemplated to rule on objections with respect to the 'existence and validity of the arbitration agreement', while under Section 11(6A), which deals with appointment of arbitrators by Courts, the consideration by the Court is 'confined to the examination of the existence of an arbitration agreement'.

The counsel for petitioner, Advocate Mr. Rameshwar Prasad Goyal argued that the issue of stamping can be examined at the very outset, even in exercise of Section 11(6A), when the consideration with respect to appointment of an arbitrator has been assumed. He asserted that, in sum and substance, an instrument would exist in law only when it is enforceable. Therefore, when the Court under Section 11(6A) is considering the existence of the arbitration agreement it can examine the issue of non-stamping or inadequate stamping.

Justice Joseph pointed out that Section 11(6A) was perhaps introduced so as to minimize judicial interference at the dawn stage where it has to determine whether the arbitration agreement exists or not. He was of the considered view that the same ought to be borne in mind otherwise the exercise would be counterproductive.

Further, Justice Joseph drew attention to the fact that the impounding is done by 'authority to receive evidence.' He further probed if the Court power under Section 11(6A), is an 'authority to receive evidence'.

Mr. Goyal submitted that the evidence in Section 11(6A) to determine the existence of the arbitration agreement, would be the instrument.

Per contra, the Amicus argued that a Court exercising power under Section 11(6A) is not a Court as defined in Section 2(1)(e) of the Arbitration and Conciliation Act. Additionally, it was contended that the Court under Section 2(1)(e) is the 'authority to receive evidence.' Moreover, it was emphasized that, under Section 11(6A) the Court only form a prime facie opinion.

The Apex Court is currently in the process of hearing the matter.