Arbitration Agreement In Unstamped Contract Which Is Exigible To Stamp Duty Not Enforceable: Supreme Court Holds By 3:2 Majority

A 5-Judge Bench, comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar decided the issue by 3:2 majority.

Justice Joseph in concurrence with Justice Bose and Justice Ravikumar decided that "an instrument which is exigible to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of S. 2(h) of the Contract Act and is not enforceable under S 2(g) of the Contract Act”.

Justice Rastogi and Justice Roy concluded that non-stamping or insufficient stamping of the substantive instrument would not render the arbitration agreement unenforceable. The minority judgment noted that stamp deficiency being a curable defect would not render the arbitration agreement void. 

The majority concluded 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."

Moreover, the majority opined that the Court at the Section 11(Arbitration and Conciliation Act) stage is bound to examine the instrument and if found to be unstamped or insufficiently stamped the instrument is to be impounded at this stage itself.

However, the minority 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. As per the minority view the copy or certified copy of arbitration agreement whether unstamped or insufficiently stamped, at the pre-reference stage, is an enforceable document for the appointment of arbitrator. It also noted that deciding on the stamp duty at the threshold also stalls the process, leading to procedural complexity and delay in litigation before the Courts. 

The majority upheld the view taken in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd.; that in para 22 and 29 in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited and Vidya Drolia And Ors. v. Durga Trading Corporation to the extent it follows Garware. 

The majority clarified that certified copy can be produced at the Section 11 stage only if it clearly indicate the stamp duty paid. If the same is not mentioned, the Court should no act on the said certified copy. 

The Bench 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 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 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 ?

As per the statutory bar under Section 35, no instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.

The Amicus argued that in an application under Section 11 of the Arbitration and Conciliation Act, 1996 the Courts are confined merely to the examination of the existence of the 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. He pointed out 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’. The Amicus added that at the Section 11 stage if the Court finds that no agreement exists then it can take a final view and not proceed with appointing Arbitrator. However, if the Court feels that a deeper consideration is required then the same can be left to the Arbitrator. According to the Amicus this is the way ahead to harmonise the existence of S. 11(6A) and S.16.

On the issue of stamping, the Amicus averred that a non-stamped document at the highest may be incapable of being performed. Being a curable defect, non-stamping would not render the instrument null and void. He 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. It was argued that only if Section 33(2) of the Stamp Act (Examination and impounding of instruments) is triggered, Section 35 will follow. According to the Amicus, 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 argued that the issue of stamping can be looked into at the very threshold, by the Court in exercise of Section 11(6A), when the consideration with respect to appointment of an 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. He further submitted that under Section 33 of the Indian Stamp Act it would be mandatory for the authority at the first instance to impound the instrument.

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. 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 Constitution Bench 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 Constitution Bench that various High Courts, exercising power under Section 9 stage, are awaiting its decision 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.

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

Citation : 2023 LiveLaw (SC) 343

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