Arbitration Agreement In Unstamped Contract Which Is Exigible To Stamp Duty Is Not Enforceable In Law: SC Observes By 3:2 Majority
The Supreme Court by a three: two majority opinion, has ruled that an instrument that is exigible to stamp duty, may contain an arbitration clause, and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under section 2(g) of the said Act.
The judgment was delivered by the Constitution Bench of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy, and Justice C.T. Ravikumar observing that being unstamped or insufficiently stamped, the agreement would not be available to be ‘admitted in evidence’ and ‘to be acted upon’, till it is validated following the procedures prescribed under the provisions of the Stamp Act and till then, it would not exist ‘in law’.
Advocate Gagan Sanghi appeared on behalf of the Appellant, whereas the Respondent was represented by Senior Advocate K. Ramakanth Reddy. Senior Advocate Gourab Banerjee appeared as Amicus Curiae.
Going by the case's background, Indo Unique Flame Ltd. (Respondent) was awarded a Work Order and then entered into a sub-contract with N.N. Global Mercantile Pvt. Ltd. (Appellant). The Work Order contained an Arbitration Clause that was not stamped, however, pursuant to the Respondent’s application seeking reference under section 8 of the Arbitration Act, the Commercial Court rejected the application. A contention had been raised that the Arbitration Agreement became unenforceable as the Work Order was unstamped. On appeal, the High Court had allowed the Respondent’s Writ, giving rise to the issue of whether the Arbitration Agreement would be enforceable and acted upon, even if the Work Order was unstamped and unenforceable under the Indian Stamp Act.
Earlier in this matter, a 3-Judge Bench of the Supreme Court had held that an Arbitration Agreement was a distinct and separate agreement independent from the substantive commercial contract in which it was embedded. Regarding Section 34 of the Maharashtra Stamp Act, which corresponded to Sec. 35 of the Indian Stamp Act, the Apex Court held that Sec. 34 of the Maharashtra Stamp Act did not make the unstamped instrument, invalid, non-existent, or unenforceable in law.
The three-Judge Bench referred to the issue pertaining “existence” of an arbitration agreement under the Supreme Court's decision in Vidya Drolia, which affirmed the Apex Court's decision in Garware Wall Ropes Ltd., to be authoritatively settled by a Constitution Bench of 5 Judges of the Apex Court. The question that arose was, “Whether the statutory bar contained in Section 35 of the 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, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument."
Justice K.M. Joseph and Justice Aniruddha Bose’s Observations:
1. Elaborating 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, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act.”, the Bench asserted that an unstamped instrument, when it was required to be stamped, being not a contract and not enforceable in law, could not, therefore, exist in law.
2. Observing the true intention behind the insertion of Sec. 11(6A) in the Arbitration Act was to confine the Court, acting under section 11, to examine and ascertain the existence of an Arbitration Agreement, the Bench elucidated that if the original of the instrument was produced and it was unstamped, the Court, acting under section 11 of the Arbitration Act, was duty-bound to act under section 33 of the Stamp Act, wherein, it was ordinarily the duty of the Court to examine the matter with reference to the duty under section 33(2) of the Stamp Act.
3. The Bench highlighted that an arbitration agreement, within the meaning of Section 7 of the Arbitration Act, which attracted stamp duty and which was not stamped or insufficiently stamped, could be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, the necessary certificate was provided under section 42 of the Stamp Act.
Justice Ajay Rastogi’s Observations:
1. Elucidating that the law on the subject is well settled that duly certified copy/photocopy of the alleged instrument cannot be validated by impounding and this cannot be admitted in evidence under the Act, 1899, Justice Rastogi added that “It leads to the conclusion that the deficiency in an instrument, whether it is unduly stamped or insufficiently stamped, can be rectified through a procedure as prescribed under the Act, 1899. It clearly indicates that the requirement under the Act can indeed be fulfilled even after the time when the instrument was executed. The requirement under the Act is not rigid or strict, so as to make the instrument invalid at the first instance.”
2. Further, underscoring that when the arbitration agreement is not required to be compulsorily registered as referred to under section 17 of the Registration Act, 1908, the reference of a certified copy under the Scheme of Rules, 1996 appears to be of an authenticated copy of the arbitration agreement that qualifies the requirement of Sec. 7 of the Arbitration Act at the pre-referral stage for the purposes of appointment of an Arbitrator under section 11(6A) of the Arbitration Act, Justice Rastogi opined that the existence of a copy/certified copy of an arbitration agreement whether unstamped/insufficiently stamped at the pre-referral stage is an enforceable document for the purposes of appointment of an Arbitrator under section 11(6A) of the Arbitration Act, where the judicial intervention shall be minimal confined only to the prima facie examination of “existence of an arbitration agreement” alone, keeping in view the object of 2015 amendment and the courts must strictly adhere to the time schedule for the appointment of Arbitrator prescribed under section 11(13).
Justice Hrishikesh Roy’s Observations:
1. Justice Roy highlighted that that Sec. 35 of the Stamp Act proscribes authorities from considering unstamped documents but the exceptions to the statutory bar under section 35 as provided in Sec. 35(a), (b), (d) and (e) and Sec. 36, would clearly suggest that non-payment of stamp duty is a curable defect and the document would not be rendered void at the first instance, if the requisite stamp duty is not paid, thus, stated there is no absolute bar.
2. Concurring with Justice Joseph’s view that an arbitration agreement has to comply with the indispensable requirements under the Contract Act, such as competency to contract and presence of sound mind, Justice Roy, however, dissented that “when it comes to “formal” validity which could include requirements of signature, stamps, seals; I’m unable to concur that the evidentiary bar under Section 35 of the Stamp Act should be juxtaposed with Section 2(g) and (2h) of the Contract Act to make the agreement “void”.”
4. The Bench further observed that Sec. 35 of the Arbitration Act does not preclude an arbitrator to impound or admit evidence, thus, the statutory bar under section 35 of the Stamp Act would not apply when a document is produced at the stage of a Sec. 11 proceeding of the Arbitration Act, and emphasized that “Impounding at the stage of Section 11 would stall arbitral proceedings right at the outset because of the statutory bar under Section 35 of the Stamp Act."
6. The Bench highlighted that “An arbitration agreement does not even mandatorily require signature for it to be valid as per Section 7 of the Arbitration Act. The Stamp Act is rooted in the past and does not consider the changing nature of transactions and enactments such as the Arbitration Act. The Bench therefore emphasized that the examination of stamping and impounding need not be done at the threshold by a Court, at the pre-reference stage under section 11 of the Arbitration Act. It was held that non-stamping/insufficient stamping of the substantive contract/instrument would not render the arbitration agreement non-existent in law and unenforceable/void, for the purpose of referring a matter for arbitration and that “An arbitration agreement should not be rendered void if it is suffering stamp deficiency which is a curable defect.”.
Justice C.T. Ravikumar’s Observations:
1. Explaining that an application for ‘Appointment of Arbitrators’ is filed, by one party asserting the existence of an arbitration agreement or arbitration clause in an ‘instrument’ executed between the parties concerned, Justice Ravikumar agreed with the opinion of Justice Joseph that exercise of power coupled with duty under Section 33 of the Stamp Act cannot be accused of judicial interference in contravention to Sec. 5 of the Arbitration of the Act and that it shall not be confused with examination whether an arbitration agreement or arbitration clause in the said instrument, exists so as to appoint arbitrator in invocation of the power under Section 11(6) of the Act.
3. Further, highlighting that the nature of exercise of power under section 11(6) is ‘judicial’ and therefore, it was thought only fit to permit to exercise such power only on the original instrument or else, on its certified copy, to be understood with reference to Section 63(1) read with section 74 and 76 of the Evidence Act, Justice Ravikumar explained that when once the intention behind paragraph 2(a) of the Appointment of Arbitrators by the Scheme is understood in that manner with reference to the provisions under section 63 (1), 74, 76 and 79 of the Evidence Act, the expression ‘certified copy’ employed in paragraph 2(a) of the scheme framed under section 11(10) of the Arbitration Act cannot be interpreted to mean any other kind of copies provided under section 63 of the Evidence Act other than under section 63(1) of the Evidence Act.
Cause Title: N.N. Global Mercantile Pvt Ltd v. Indo Unique Flame and Ors.