Is Arbitration Clause In Unstamped Contract Valid? Supreme Court Constitution Bench Reserves Judgment

A 5-Judge Bench, comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar had appointed Senior Advocate, Mr. Gourab Banerji, as the Amicus Curiae to assist it as there is no contesting respondent in the matter.

The petitioner and the respondent in the matter has 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 the suit and sought for reference of disputes to arbitration. However, the Commercial Court rejected the application. A revision petition was filed by the respondent before the Bombay High Court. Considering objections on maintainability the Court granted liberty to the respondent to withdraw the review and file a writ petition. Subsequently, 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 or before the Arbitral Tribunal. In appeal, the Apex Court noted that the view taken in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd. and Garware Wall Ropes Limited v. Coastal MarineConstructions 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 was affirmed by Vidya Drolia And Ors. v. Durga Trading Corporation, which is a coordinate Bench, the 3-Judge Bench of the Apex Court thought it fit to refer the matter to a Constitution Bench. The issue framed is as under -

“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 ?"

The sheet anchor of the Amicus’ submission was the determination that an arbitration agreement is duly stamped or not must be left to the arbitrator. He argued, 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. According to him, the ambit of Section 16, which deals with the competence of an arbitral tribunal to rule on its jurisdiction, is wide enough to allow the arbitrator to make determination with respect to the stamping of the instrument. He pointed out that under Section 16, apart from jurisdiction, the arbitrator is contemplated to decide 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 Amicus also submitted that the statutory bar in Section 35 of the Stamp Act (instruments not duly stamped inadmissible in evidence) would only be triggered if there is a finding that the document is not duly stamped. For the same, there ought to be an inquiry into stamping. Only if Section 33(2) of the Stamp Act (Examination and impounding of instruments) is triggered, Section 35 will follow. According to him the examination under Section 33(2) is not to be undertaken by a Court under Section 11(6A), but by an arbitrator.

The Counsel for the appellant, Advocate, Mr. Gagan Sanghi, argued that the issue of stamping is to be looked into at the very threshold, even if it is in exercise of Section 11(6A),i.e., at the time the consideration with respect to appointment of arbitrator is undertaken. He averred 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.

The Amicus countered the argument that the unstamped/ unduly stamped instrument ought to be impounded at the very threshold and submitted that it might not be strictly correct position. He 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. It is averred that the Court under Section 2(1)(e) is the ‘authority to receive evidence’. Moreover, it was emphasised that in some sense, under Section 11(6A) the Court is to only form a prime facie opinion.

Senior Advocate, Ms. Malvika Trivedi submitted that what the Court decides with respect to Section 11(6A) would also have a bearing on Section 9, wherein the parties approach the Court for interim relief. She apprised the Court that various High Courts, exercising power under Section 9 stage, are awaiting the decision of the Constitution Bench in the present reference. It was pointed out that there is 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.

“What is decided for S.11 will have an impact on S.9. At S.9 clauses of substantive contract have to be looked into.”

She submitted that if the Constitution Bench decides, without giving any leeway, that the stamping is to be done at the stage of execution of the document, all the timelines provided in the Arbitration and Conciliation Act, 1996 will get streamlined. She added -

“If in the reference finally the court says that it cannot be held that the substantive contract can actually pass muster without being stamped it will have an impact S.9 as well.”

The Amicus, in this closing statement, formulated the primary issue for consideration before the Constitution Bench -

“Whether the issue of examination and impounding of instruments should be done by a S.11 judge or be left to an arbitrator?”

He reiterated that though a Court exercising power under Section 11 has a certain role to play; the real issue is to determine the extent of that role. He also argued that merely by appointing arbitrators the Court does not let go of the matter; it has the ultimate supervisory jurisdiction. The Amicus argued throughout that the non-stamping does not make the contract void. He submitted that - 

“I am not saying that the Stamp Act will not apply, I am just saying that I am postponing the event.”

As the Judges repeatedly enquired if the Court is not bound to impound the unstamped/inadequately stamped  at the threshold, the Amicus responded - 

“Nobody files original documents at S.11 stage. It is sufficient for S.11 jurisdiction to file a (certified) copy...As per a Constitution Bench judgment a copy is not an instrument and therefore, neither Section 33 nor Section 35 of the Stamp Act would apply...A Court cannot compel a party to produce the original, until they do it voluntarily."

[Case Status: M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors. CA No. 3802-03/2020]

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