This article dealswith a scenario on the validity of an unstamped contract where arbitration agreement is mentioned in the contract and when the same is not duly stamped under the Indian Stamp Act, 1899.To further analyse the above scenario, we must first discuss about the enforceability of stamped and un-stamped contract. Firstly, as per Section 2 (11) of the Indian Stamp Act, 1899 which defines “Duly Stamped” in relation to an instrument refers to the condition where the instrument has a valid adhesive or impressed stamp affixed to it, and the stamp carries the appropriate value as per the prevailing stamp duty laws in India. Additionally, the stamp should have been affixed or used in accordance with the laws currently in force in India. This requirement ensures that the instrument has been properly stamped in accordance with the applicable stamp duty regulations.
Thereafter, as per Section 35 of the India Stamp Act, 1899 if the contract is duly stamped it can be used in evidence and if not then the contract of any instrument is inadmissible in evidence. Further, if any person in charge, or the public officer find that the instrument is not duly stamped, impound the same as per Section 33 of the Indian Stamp Act, 1899.
SO, THIS LEADS US TO THE FIRST QUESTION; WHETHER AN ARBITRATION AGREEMENT PRESENT IN THE UNSTAMPED CONTRACT VALID OR NOT?
The answer to this question was discussed by the Hon’ble Supreme Court in various judgments mentioned herein; The Hon’ble Supreme Court, in the case of Hindustan Steel Limited v. Dilip Construction Company, established that an instrument lacking proper stamping cannot be accepted as evidence by any authorized person responsible for receiving evidence. Furthermore, such an instrument cannot be acted upon either by that person or any public officer according to Section 35 of the Indian Stamp Act, 1899.
Further, in the case of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., the Supreme Court ruled that a voidable contract cannot be subjected to arbitration because it affects the validity of the arbitration agreement itself. The court also stated that the non-payment of stamp duty on the contract would render the arbitration agreement invalid.
In the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions &Engg. Ltd., the Hon’ble Supreme Court held that if an arbitration clause is included in a contract, it should be interpreted in light of Section 11(6A) of the Arbitration Act, along with Section 7(2) of the Arbitration Act and Section 2(h) of the Indian Contract Act. These provisions clarify that an arbitration clause is an agreement that ceases to exist when it is not enforceable by law. Furthermore, the court emphasized that when dealing with a Section 11 application (application for appointment of arbitrator), the court must impound the instrument (the contract or agreement) if it has not been properly stamped with the required stamp duty.
FROM THE AFORESAID JUDGMENTS IT WAS PERSPICUOUS THAT NON-STAMPING OF THE CONTRACT WILL INVALID THE ARBITRATIONN AGREEMENT
That in 2021 Hon’ble Supreme Court faced an issue in respect of an arbitration agreement “that would the arbitration agreement be enforceable and acted upon, even if the Work Order dated 28.09.2015 is unstamped and un-enforceable under the Stamp Act”.
The Hon’ble Supreme Court on 11.01.2021 in N.N. Global Mercantile Private Limited Vs. Indo Unique Flame Ltd. and Ors. in Civil Appeal Nos. 3802-3802 of 2020 has come across this issue, to which the Hon’ble Supreme Court held that since the arbitration agreement has a separate identity and existence of its own, the non-payment of stamp duty would not invalidate the arbitration agreement and overruled SMS Tea (Supra) and Garware (Supra). Further another issue was also raised regarding section 35 of the Indian Stamp Act, 1899 to which this matter was referred to the constitutional bench.
ISSUE BEFORE CONSTITUTIONAL BENCH OF THE HON�BLE SUPREME COURT
The Constitutional bench of the Hon�ble Supreme Court dealing with the issue �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, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?” Considered various aspects and judgments prior to N.N. Global judgment dated 11.01.2021.
The Hon�ble Justice K.M. Joseph and Hon�ble Justice Aniruddha Bose while deciding the issue considered the scenario before N.N. Global order dated 11.01.2021 and held that in the case of N.N. Global, the Supreme Court overturned the judgments in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Constructions &Engg. Ltd., stating that these judgments did not accurately represent the legal position. After careful consideration of all factors, concluded that the view expressed in SMS Tea Estates, as followed in Garware Wall, regarding the impact of an unstamped contract with an Arbitration Agreement and the steps to be taken by the Court, represents the correct legal position. The previous order in N.N. Global on 11.01.2021, which contradicted this view and overruled SMS Tea Estates and Garware Wall, was deemed to be incorrect. Furthermore, it was determined that the provisions of Sections 33 and the restriction under Section 35 of the Stamp Act, applicable to instruments subject to stamp duty under Section 3 read with the Schedule to the Stamp Act, render the Arbitration Agreement contained in such instruments non-existent in law unless the instrument is validated under the Stamp Act. Further, Hon�ble Justice C.T Ravikumar while full endorsing the opinion of Hon�ble Justice K.M. Joseph and Justice Aniruddha Bose, also emphasized that the Seven Judge Bench in SBP & Co. v. Patel Engg Ltd. had held that the application under section 11(6) remains a judicial process even after the amendment and insertion of 11(6A). In essence, Justice C.T. Ravikumar correctly concluded that if the original document containing the arbitration clause is found to be unstamped or inadequately stamped, the court’s duty under Section 11 is to act in accordance with Section 33 of the Indian Stamp Act.While adjudicating the current matter, Justice Ajay Rastogi also drew upon the case of DuroFelguera, S.A v. Gangavaram Port Limited, which emphasized that the legislature�s intention is unequivocal, the court should solely examine the presence of the arbitration agreement. This viewpoint was further affirmed by a three-judge bench in the case of Mayavati Trading Private Limited v. Pradyuat Deb Burman.In accordance with Section 16 of the Act, it is provided that an Arbitral Tribunal has the authority to determine its own jurisdiction, which includes deciding on any objections regarding the existence or validity of the arbitration agreement. This provision is derived from the principles of Kompetenz-Kompetenz and severability.
Further, a division bench of the Hon�ble Supreme Court in Uttarakhand PurvSainik Kalyan Nigam Limited v. Northern Coal Field Limited affirmed and relied on DuroFelguera (Supra) and held that the scope of examination is now confined only to the existence of the arbitration agreement at the Section 11 stage, and nothing more.Therefore, taking into account all relevant factors, Hon�ble Justice Ajay Rastogi concluded that a copy or certified copy of an arbitration agreement, regardless of being unstamped or insufficiently stamped during the pre-referral stage, is a valid document for the purpose of appointing an arbitrator under Section 11(6A) of the Act, 1996. Judicial intervention in such cases should be limited to a prima facie examination of the �existence of an arbitration agreement� alone, in line with the objective of the 2015 amendment. Moreover, courts must strictly adhere to the prescribed time schedule for the appointment of an arbitrator under Section 11(13) of the Act, 1996. Hence, The decision in SMS Tea Estates Private Limited(supra) stands overruled. Paras 22 and 29 of Garware Wall Ropes Limited(supra) which are approved in paras 146 and 147 in Vidya Drolia and Others(supra) are overruled to that extent.The Hon�ble Justice Hrishikesh Roy while taking into account of all the respective above-mentioned judges elaborated the judgments of SMS tea (Supra), Garware (Supra) and Vidya Drolia (Supra) and held that non-stamping of agreement would not render it void. Finally, the Constitutional Bench of Hon�ble Supreme Court of India in N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Ors. decided on 25.04.2023 held that it was determined, by the majority of three ratio two, that an arbitration agreement contained in an unstamped contract that is subject to stamp duty will not be enforceable as it involves an unstamped agreement that is subject to stamp duty.
CONCLUSION
In view of the Minority ratio, the inclination towards minimizing judicial intervention may better reflect the true spirit and purpose of the Arbitration Act.Following the recent ruling of the Larger Bench, there has once again been a question regarding the interaction between substantive contracts and arbitration clauses contained within them. In the future, parties must be cautious about fulfilling stamp duty obligations as required by the Stamp Act. Furthermore, it may be necessary to reassess the manner in which arbitration agreements are drafted and executed, exploring the possibility of a separate arbitration agreement to protect the rights of the involved parties.
