Unstamped Arbitration Agreement Is Valid, Though Not Admissible As Evidence : Amicus Tells Supreme Court Constitution Bench

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 an Amicus to assist it, because, at present, there is no contesting respondent in the matter. The Bench commenced hearing the matter on 17th Jan, 2023 (Tuesday). Taking it through the judgments mentioned in the reference order and citing other relevant case laws and statutory provisions, the Amicus concluded his submissions on Thursday.

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 ? "

On the previous occasion, the Amicus essentially argued that 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.

In view of the submission of the Amicus, on Thursday, Justice Ravikumar enquired whether Section 11(6) would have full play only if it is found that the arbitration agreement is not valid and the Court would refuse to appoint an arbitrator? In case the Court finds the agreement to be valid it would only take a prima facie view? He was of the opinion that if the Legislature intended the same, it would have been categorically mentioned. However the provision does not say so. But, the Judge agreed that harmonised interpretation ought to be resorted to.

The Amicus reckoned that in the present case the Bench was considering a situation where the Court has to look beyond the existence and into the stamping aspect of the agreement.

Justice Bose pointed out that the concern is not about the existence of the agreement, but about enforceability of the document which contains the arbitration clause.

Justice Joseph observed, “Why do you mean by enforceability/unenforceability of an instrument? How do you enforce a contract…Suppose there is an unstamped document. Parties oblige to the contract, in that sense it continues to exist. When they go to Court and seek sanction of the law, it would be a problem because you cannot enforce it.”

The Amicus submitted -

“Under Stamp Act, as I have sought to demonstrate to your lordships, unstamped agreement is a valid contract, valid under law, maybe admissible in evidence. It is not a S. 2(g) (Indian Contract Act) situation where agreement is void due to non-stamping, If it is not void, it is valid and therefore it is a contract. Because it is curable it is not void…”

On the issue of enforceability, he said that it ought to be looked into if the agreement exists as a matter of fact, and in law. He argued that unstamped agreement is valid agreement and the admissibility of the same is a matter left to the adjudicator.

Justice Bose opined the Court exercising power under S. 11(6) can be the adjudicator deciding on admissibility. But, the Amicus averred that the jurisdiction under S. 11(6) is limited to the ‘examination of the existence of the arbitration agreement’ and adjudicating on the admissibility would amount to ‘deciding’.

Justice Bose enquired, “What is our job then? Just to say that in this paper the clause is there?”

The Amicus responded, “Unfortunately, that is the scope of S.11.”

The Judge opined, “If we are appointing an arbitrator, don’t we have to see the eligibility criteria?...We have to look at the document in order to appoint an arbitrator.”

Justice Joseph asked the Amicus if his submission was that an unstamped document exists; it is not void; it is not even voidable. The only issue is with its enforcement through law.

The Amicus submitted that there is only an evidentiary bar which does not otherwise affect the transaction under the instrument. However, he clarified that the parties cannot get the assistance from the court in enforcing their substantive rights and obligations under an unstamped instrument.

“Only evidentiary bar. You can continue with the transaction. But, cannot get aid from court in enforcing your substantive rights and obligations.”

The Amicus concluded his arguments, by submitting that making stamp related determination while appointing arbitrator at the Section 11 stage would defeat the object and purpose of arbitration, in essence, by delaying the whole process.

“This interpretation that you do it at the outset will defeat every thought of arbitration right through. That is the only conclusion that your lordships have to consider. Nobody will get hurt. The Government will not get hurt, they will get their money, they will extract their pound of flesh just a little later…the alternative is neither will the Govt. get its money nor will the arbitration go on.”

The Counsel for the petitioner commenced with his arguments. The matter is next listed on 24.01.2023 (Tuesday).

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