Supreme Court: Unstamped Arbitration Agreement is Not Legally Enforceable

Supreme Court: Unstamped Arbitration Agreement is Not Legally Enforceable

The Constitution bench of Supreme Court by a majority of 3:2 has ruled that an unstamped agreement, which had an arbitration clause and was required to be registered and stamped, the same cannot be considered as a valid legal document under Section 2(g) of the Indian Contract Act, 1872.

The Constitution Bench of the Apex Court, comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar, held by a 3:2 majority that, an instrument which is entitled to stamp duty and contains an arbitration clause, but was not stamped, could not be said to be a contract enforceable in law within the meaning of Section 2(h) of the Contract Act.

Justice Joseph, Justice Bose and Justice Ravikumar wrote the majority opinion, while Justice Rastogi and Justice Roy gave the dissenting verdict, asserting that unstamped arbitration agreements were valid at the pre-referral stage.

The majority bench held that the Supreme Court was duly empowered to act under the Stamp Act. If a document was not stamped, the arbitration agreement not validated by the Stamp Act would stand non est in law.

The significant issue which was considered by the Apex Court in the present case was:

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?

In the present case, the Petitioner- NN Global Mercantile Private Limited and the Respondent- Indo Unique Flame Limited and others., had entered into 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 (in short A&C Act, 1996) in the suit and sought for reference of disputes to arbitration. However, the Commercial rejected the application.

Thereafter, a revision petition was filed by the Respondent before the Bombay High Court. While noting the objections on maintainability the Court granted liberty to the Respondent to withdraw the review and file a writ petition.

The High Court, in the writ petition filed by the Respondent, held that the Section 8 application was maintainable. However, the key issue raised before the High Court was that the arbitration agreement was unenforceable since the sub-contract was unregistered and unstamped. The Court noted that the said issue can be raised in application filed under Section 11 or before the Arbitral Tribunal.

While hearing the appeal, the Apex Court noted that the view taken in SMS Tea Estates Private Limited vs. M/s. Chandmari Tea Co Pvt. Ltd. and Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited, 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 unenforceable, is not the correct position in law.

While noting the decision taken in the case of Garware Wall Ropes Limited (Supra), which was later affirmed in the case of Vidya Drolia and others. vs. Durga Trading Corporation, which was decided by a coordinate Bench, the three-Judges Bench of the Apex Court thought it fit to refer the matter to a Constitution Bench.

The Bench had appointed Senior Advocate, Mr. Gourab Banerji, as the Amicus Curiae to assist it as there was no contesting Respondent in the matter.

The Amicus contended that an application under Section11 of the A&C Act, 1996, the Courts are confined merely to the examination of the existence of the agreement.

According to Amicus, the extent 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.

It was further highlighted by the Amicus that as per 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 is ‘confined to the examination of the existence of an arbitration agreement’.

He further contended that at the stage of Appointment of arbitrator(s) encapsulated under Section 11 of the A&C Act, 1996, if the Court fails to find existence of any agreement, then it cannot proceed with the appointment of Arbitrator. However, in the event the Court is of the view that a deeper consideration is required then the same can be left to the Arbitrator. The Amicus labelled this to be the ‘way ahead to harmonize’ the existence of Section 11(6A) and Section 16 of the A&C Act, 1996.

Next on the issue regarding the stamping, the Amicus submitted that a non-stamped document at the maximum may be incapable of being performed. Since the nature is of a curable defect, non- stamping would not render the instrument null and void. He opined that the statutory bar in Section 35 of the Stamp Act (Instruments not duly stamp inadmissible in evidence) would only be triggered if there is a finding that the document is not duly stamped.

The Amicus emphasized that there ought to be an inquiry stamping. It was argued that only if Section 33(2) of the Stamp Act (Examination and impounding of instruments) is triggered, Section 35 will follow. Therefore, the Amicus concluded by stating that, the examination under Section 33(2) is not to be undertaken by a Court under Section 11(6), but by an Arbitrator.

The Counsel for the petitioner, Mr. Gagan Sanghi contended that the issue of stamping can be delved at the very threshold, by the Court in exercise Section 11(6A), when the consideration with respect to appointment of an arbitrator is undertaken. He asserted that, in sum and substance, an instrument would exist in law only when it is enforceable.

Thus, when the Court under Section 11(6A) is considering the existence of the arbitration agreement it can appositely probe the issue of non-stamping or inadequate stamping. Furthermore, the Counsel submitted that under Section 33 of the Indian Stamp Act it is mandatory for the authority at the first instance to impound the instrument.

Retaliating to the argument forwarded by the Counsel for Petitioner, the Amicus vehemently argued that the unstamped/ unduly stamped instrument ought to be impounded at the very threshold and submitted that it might not be strictly correct.

He orated 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. The Court under Section 2(1)(e) is the ‘authority to receive evidence’. He further emphasized that as per Section 116(A), in order to form an opinion, the Court should only form a prima facie conclusion.

Senior Advocate, Ms. Malvika Trivedi submitted that decision of the Constitution Bench with respect to Section 11(6A) would also have an impact on Section 9, wherein the parties approach the Court for interim relief. She explained before the Constitution Bench that various High Courts, exercising power under Section 9 stage, are awaiting its decision in the present reference. She further highlighted that there was variance in the method adopted by different High Courts - some are granting interim relief without looking at stamping, while others are awaiting the reference order.

The majority bench upheld the view taken in the case of SMS Tea Estates Pvt. Ltd. vs. M/s. Chandmari Tea Co Pvt. Ltd; that in para 22 and 29 in Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited and Vidya Drolia and others. vs. Durga Trading Corporation to the extent, it followed Garware.

However, overruling the decision in the Tea Estates case, Justice Rastogi said that such an examination should not open the door wide open for judicial examination. The existence of a certified copy of the arbitration agreement, whether unstamped or not, was enforceable for the appointment of arbitrator. All preliminary maintainability issues of the document were referable to the arbitrator.

Justice Roy, who also gave a dissenting opinion, appealed to the legislature to revisit the amendments necessary in the Stamp Act to efface inconsistencies. The judge observed that statutory schemes must be interplayed in a constructive manner if India was to become a Centre for arbitration.

Moreover, the majority bench opined that if the instrument is found to be unstamped or insufficiently stamped, it must be impounded at Section 11 stage as per A&C Act, 1996.

The minority bench expressing its dissenting opinion was of the view that the examination of the stamping and impounding may not be done at the threshold, i.e., at the pre-referral stage under Section 11. The minority judgment noted that stamp deficiency being a curable defect would not render the arbitration agreement void.

The majority bench concluded by observing that, “an arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act attracts stamp duty and which is not stamped or insufficiently stamped cannot be acted upon in view of Section 35 of the Stamp Act unless following impounding and paying requisite duty...the provisions of Section 33 and the bar under Section 35 of the Stamp Act...would render the arbitration agreement contained in such instrument as being non-existent in law until the instrument is validated under the Stamp Act.”