SC rules that unstamped Arbitration Agreements are invalid in law, Read Judgement

 

The Supreme Court explained that an arbitration agreement within a contract exigible for Stamp Duty could not be enforced if it is inadequately stamped or signed. The decision was upheld by a 3:2 ratio, with Justice Bose and Justice Ravikumar agreeing with Justice Joseph. They concluded that an instrument subject to stamp duty, including an arbitration clause, but not stamped cannot be considered a legally enforceable contract under Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. However, Justice Rastogi and Justice Roy opined that the arbitration agreement could still be enforced, even if the substantive instrument lacked stamp duty or had insufficient stamping, as the deficiency could be rectified.

 

Brief Facts:

M/s Indu Unique Flame Pvt Ltd. (hereinafter referred to as 'Respondents') and M/s NN Global Merchantile Pvt Ltd. (hereinafter referred to as 'Appellants') had entered into a work order for the transportation of coal, which contained an arbitration agreement under clause 10 of their commercial contract. However, disputes arose between the parties, leading the Respondents to invoke the bank guarantee under clause 9, which prompted the Appellants to challenge the encashing by initiating a lawsuit. In response, the Respondents resisted the suit and sought a reference to arbitration under Section 8 of the Indian Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Arbitration Act”). Subsequently, the Respondents contested the Commercial Court's decision and filed a Writ Petition. A 5-judge bench adjudicated the writ petition.

Contentions of the Appellants:

It was asserted that Section 35 of the Stamp Act prohibited the admission of an instrument prescribed by law for stamp duty that is unduly stamped as evidence for any purpose in court.

Additionally, it was claimed that an arbitration agreement could not exist independently of the primary commercial contract. Therefore invalidity of the main contract will render the arbitration agreement void by extension under Sections 33 and 35 of the Stamp Act. It was insisted that the Principle of Stare Decisis should have been considered, and the amendment to Section 11 did not empower a court to overlook the mandate of Sections 33 and 35 of the Stamp Act.

Contentions of the Respondents:

Following Article 5 of Schedule I of the Maharashtra Stamp Act, 1958, it was contended that failure to pay stamp duty did not render an arbitration agreement invalid and was a curable defect. 

 

It was argued that Section 11(6A) of the Arbitration Act mandated the arbitrator, rather than a judge, to impound any unstamped or inadequately stamped document. A judge's inquiry was limited solely to the existence of the arbitration agreement.

It was further contended that an unstamped instrument could be enforced upon payment of the requisite duty and penalty. It was argued that the stamp duty was levied on the instrument rather than the transaction itself, citing Section 5 of the Stamp Act, which prohibited judicial intervention, and Section 8, which allowed a reference to arbitration to be disallowed only if the court determined that there was no valid arbitration agreement prima facie.

Observations of the Court:

The issue primarily to be decided was Whether the Arbitration Agreement would be enforceable and acted upon, even if the Work Order was unstamped and unenforceable under the Indian Stamp Act of 1899

The Majority opined that an unstamped contract with an arbitration agreement is not enforceable in law. The Court further clarified that an instrument required to be stamped but not stamped cannot be considered a contract and is not enforceable under the Contract Act.

According to the Stamp Act, instruments must be stamped during execution, and failing to do so is punishable under Section 62. If an agreement is unenforceable due to substantive law, including the Stamp Act, it cannot be considered a contract according to Section 2(h) of the Contract Act. 

 

Therefore, an unstamped arbitration agreement cannot be considered a "curable defect" and remains unenforceable until adequately stamped. Section 17 of the Stamp Act specifies when an instrument must be stamped. If it is not stamped or is insufficiently stamped, it is liable to be impounded under Section 33 and cannot be used as evidence or registered. However, if the duty and penalty are paid, and a certificate is endorsed, the instrument regains validity, and the bar in Section 35 of the Stamp Act is permanently removed. An unstamped or insufficiently stamped instrument is invalid because it is not enforceable through civil action.

If an instrument chargeable to stamp duty is not validated under the Stamp Act, the arbitration agreement contained in it is considered non-existent in law, as per Sections 33 and 35 of the Stamp Act.

Minority Opinion:

Justices Rastogi and Roy concluded that the non-stamping or inadequate stamping of the substantive instrument did not make the arbitration agreement unenforceable. They clarified that the Stamp Act of 1899 may not be relevant for determining the existence of an arbitration agreement under Section 11(6A) of the Arbitration Act. At the pre-referral stage, the court's only consideration is determining the prima facie existence of an arbitration agreement as referred to in Section 7 of the Arbitration Act. The court held that an unstamped or insufficiently stamped copy or certified copy of an arbitration agreement at the pre-referral stage is an enforceable document to appoint an arbitrator under Section 11(6A) of the Arbitration Act. All preliminary and debatable issues, including the validity of the arbitration agreement, are preferable to the arbitrator under Section 16 of the Arbitration Act.

The decision of the Court:

The main findings of the Court were: 

 

1. The arbitration agreement in a document which is required to be stamped would be non-existent if the same is not validated under the Stamp Act.
2. There cannot be a situation in law where the contract is unstamped but the arbitration agreement in it is stamped unless misrepresentation or fraud is present.
3. The recission of the main contract would not render the arbitration clause terminated.
4. The Court acting under Section 11 of the Arbitration Act is bound to act under Sections 33 and 35 of the Stamp Act if the instrument (arbitration agreement, clause in instruments, standalone agreement attracting stamp duty) is not stamped or improperly stamped.

Case Title: M/s N.N. Global Mercantile Pvt. Ltd. V. M/s Indo Unique Flame Ltd. & Os.

Coram: Hon’ble Mr. Justice K.M.Joseph, Hon’ble Mr. Justice Ajay Rastogi, Hon’ble Mr. Justice Aniruddha bose, Hon’ble Mr. Justice Hrishikesh Roy, Hon’ble Mr. Justice C.T. Ravikumar

Case No.: Civil Appeal No. 3802-3802 of 2020

Citation No.: 2023 Latest Caselaws 368 SC

Advocate for Petitioners: Adv. Rameshwar Prasad Goyal

Advocate for Respondents: Advs. Sanjay Kapur, Charu Ambwani

 

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