Unstamped Arbitartion Agreements Are Not Enforceable By Law

Introduction

By a majority ruling in the matter of M/s. N.N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors.[i], a Constitution Bench of the Supreme Court held that an arbitration agreement which is eligible for stamp duty, if not stamped, is not enforceable by law. However, the minority ruling addressed the reference by overruling the cases of SMS Tea[ii] and Garware Wall Ropes[iii] and held that in accordance with Section 11(6A) of the Arbitration and Conciliation Act, 1996, an arbitral agreement which is insufficiently stamped or unstamped is an enforceable instrument at the pre-referral stage for the court’s appointment of an arbitrator.

Factual matrix of the case

Respondent No. 1 entered into a sub-contract Work Order with the Appellant for the transportation of coal. Clause 9 of the Work Order required the Appellant to furnish a bank guarantee to Respondent No. 1, and Clause 10 of the Work Order provided for an arbitration clause. Due to conflicts with the principal contract Work Order, the bank guarantee furnished by the Appellant was invoked. Thereafter, the Appellant filed a suit in the Commercial Court of Nagpur for a declaration that Respondent No. 1 was not entitled to encash the bank guarantee furnished by the Appellant. Accordingly, Respondent No. 1 filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 in the suit and sought consideration of disputes through arbitration. However, the Commercial Court rejected the application holding that the bank guarantee was an independent contract.

Respondent No. 1 filed a writ petition against the order of the Commercial Court before the Bombay High Court. The High Court held that as both parties had admitted to the existence of the arbitration agreement, the application under Section 8 was maintainable. Concerning the contention that the arbitration agreement was null and void because the Work Order was not stamped, it was decided that the Appellant in this case might bring the argument under Section 11 of the Arbitration Act before the arbitral tribunal at the appropriate stage. The High Court held the writ petition to be maintainable. Aggrieved by this decision, the Appellant approached the apex court through a special leave petition. A bench of 3-judges overruled the previous precedent which held that an arbitration clause in an unstamped agreement will not be enforced by the court unless stamp duty is paid. Thereafter, the matter was referred to a constitution bench of five judges.

Submissions on behalf of the Appellant

  • The Appellant submitted that the doctrine of arbitration agreement being distinct has been erroneously understood in the context of Section 33 [Examination and impounding of instruments] and Section 35 [Instruments not duly stamped inadmissible in evidence] of the Stamp Act, 1899.
  • Section 35 barred admission of not duly stamped instrument in evidence for any purpose in court. Even when an application is filed under Section 11 of the Arbitration Act, the examination and admissibility of instruments in accordance with Sections 33 and 35 of the Stamp Act must be properly observed by the court.
  • The court, considering the existence of arbitration agreement under Section 11(6A) of the Arbitration Act, could examine the issue of non-stamping or inadequate stamping.

Submissions on behalf of the Respondent

  • It was pointed out that non-stamping did not render the agreement null and void.
  • The Respondent argued that the court is confined to examining the existence of the agreement according to Section 11 of the Arbitration Act. If Section 11(6A) were properly interpreted, it would be clear that the arbitrator appointed according to Section 11 should impound any instrument that was not properly stamped or was not stamped at all rather than the judge.
  • The ambit of Section 16 deals with the competence of an arbitral tribunal to rule on its jurisdiction, and is wide enough to allow the arbitrator to make considerations with respect to the stamping of the documents.

Findings of the Court and judgement

The Supreme Court held that an instrument that is subject to stamp duty and contains an arbitration clause but is not stamped is not a contract that is enforceable in law under Section 2(h) of the Indian Contract Act, 1872 and is not enforceable under Section 2(g) of the Contract Act. The Court found that the view taken in SMS Tea Estates, as followed in Garware Wall Ropes and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju & Bros[iv] that an unstamped arbitration agreement cannot be enforced and contracts are only enforceable if they are duly stamped, represents the correct position of law. Subsequently, the Court also approved Vidya Drolia[v].

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arbitration

The Court found that an arbitration agreement is a distinct and separate agreement. Under the doctrine of Kompetenz-Kompetenz, the arbitral tribunal is competent to rule on its own jurisdiction. The underlying intention behind the inclusion of Section 11(6A) in the Act was to confine the Court’s ability to examine and decide the existence of an arbitration agreement when acting under Section 11. If the instrument is produced and unstamped, the court acting under Section 11 has a duty to act under Section 33 of the Stamp Act.

In accordance with Section 35 of the Stamp Act, it was also held that an arbitration agreement, as defined by Section 7 of the Act, that attracts stamp duty but is not stamped or is not sufficiently stamped, cannot be acted upon unless the necessary certificate is provided under Section 42 of the Stamp Act, following impoundment and payment of the requisite duty.

Thus, the Court ruled that the provisions of Section 33 and the bar under Section 35 of the Stamp Act, which apply to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would make the arbitration agreement contained in such instrument void unless the instrument is duly stamped with necessary requirements under the Stamp Act.

Conclusion

The Constitution Bench judgment rendering an arbitration agreement/clause is bound to be duly stamped and the court acting under Section 11, is bound to act under Sections 33 and 35 of the Stamp Act. An instrument which is not stamped or insufficiently stamped has a wide-range of implications in arbitration proceedings. The judgement assures strict adherence to the stamping requirements, ensuring that the arbitration agreement or clause can be enforced and affirms the Supreme Court’s established position in this regard. The ruling also undercuts the widely accepted idea of kompetenz-kompetenz, which allows an arbitrator to determine their jurisdiction, leading to assume that a successful harmonisation between both legislations ought to have not been achieved. Practical amendments must be made to any legal rules, such as those for impounding and stamping, which can obstruct the legal procedure, especially when the defect can be fixed later. As a result, even though the order guarantees strict compliance, the arbitration proceedings nevertheless require a workable approach with the Stamp Act.

Author:Tejaswi D. Shetty, A Student at Sri Dharmasthala Manjunatheshwara Law College, Mangalore, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[i] 2023 SCC OnLine SC 495.

[ii] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66.

[iii] Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209.

[iv] (2020) 4 SCC 612.

[v] Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1.

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