Supreme Court: In an appeal against a full bench judgment in primarily challenging the non-admissibility of an unstamped arbitration agreement and judicial Court’s intervention in matters of arbitration, the 5-Judge Bench comprising of K.M. Joseph*, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and C.T. Ravikumar*, JJ. by a 3:2 majority, held that unstamped arbitration agreements are not valid in law. While KM Joseph, Aniruddha Bose and C.T Ravikumar, JJ. formed the majority, Ajay Rastogi and Hrishikesh Roy, JJ. dissented and opined that unstamped arbitration agreements are valid at the pre-referral stage.
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 Arbitration and Conciliation Act, 1996 (‘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?
The Court also dealt with the scope and nature of the Court’s intervention, specifically at the stage of appointment of arbitrator under Section 11 of the Arbitration Act, 1996.
The Court said that the powers conferred under Section 16 of the Act often referred to as ‘Kompetenz-Kompetenz’ which means that the Arbitral Tribunal is empowered and thus got competence to rule on its own jurisdiction, including on all jurisdictional issues and existence or validity of the arbitration agreement. But the provision under Section 11 (6) of the Act applies when the procedures envisaged under the arbitration agreement have not worked and an application is filed for invocation of the power thereunder before the Court for making appointment of the Arbitrator.
The Court also analysed Hindustan Steel Ltd. v. Dilip Construction Co., (1969) 1 SCC 597 and observed that that the Court did not take into consideration Section 17 of the Stamp Act, which provides for the precise time, at which, the instrument is to be stamped. Equally, the Court did not bear in mind that Section 62 of the Stamp Act penalises transgression of Section 17, inter alia.
The Court said that the view taken in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66, as followed in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209 and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju & Bros., (2020) 4 SCC 612 as to the effect of an unstamped contract containing an arbitration agreement and the steps to be taken by the Court, represent the correct position in law . Further, N.N. Global (supra) was wrongly decided, when it held to the contrary and overruled SMS Tea Estates (supra) and Garware (supra).
Further, the Court said 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. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. Therefore, the Court approved paragraphs 22 and 29 of Garware (supra). To this extent, the Court approved Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 , insofar as the reasoning in paragraphs 22 and 29 of Garware (supra) is approved.
Further, it was said that the true intention behind the insertion of Section 11(6A) the Act was to confine the Court, acting under Section 11, to examine and ascertain the existence of an Arbitration Agreement. The Scheme permits the Court, under Section 11 of the Act, acting on the basis of the original agreement or on a certified copy. The certified copy must, however, clearly indicate the stamp duty paid as held in SMS Tea Estates (supra). If it does not do so, the Court should not act on such a certified copy.
The Bench further stated that if the original of the instrument is produced and it is unstamped, the Court, acting under Section 11, is duty-bound to act under Section 33 of the Stamp Act. When it does so, the other provisions, which, in the case of the payment of the duty and penalty would culminate in the certificate under Section 42(2) of the Stamp Act, would also apply. When such a stage arises, the Court will be free to process the application as per the law.
It was also viewed that an arbitration agreement, within the meaning of Section 7 of the Act, which 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 payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp Act.
Thus, the Court held that the provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the arbitration agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.
Whether, if the contract, in which, the arbitration clause is located, is unstamped but the arbitration clause is stamped, the Court can ignore the fact that the instrument containing in the Contract is unstamped?
The Court said that such an eventuality cannot arise, as unless there is misrepresentation or a fraud played, it is incomprehensible as to how, when the contract is produced, it will not be dealt with under Section 33 of the Stamp Act among other provisions.
Whether the arbitration agreement can be treated as a separate contract, and even if the main contract is not stamped, it suffices if the arbitration agreement alone is stamped?
The Court said that the Doctrine of the arbitration agreement being a distinct and a separate agreement, is well-established. The efficacy of the arbitration clause in a contract is preserved so that the extinguishing of the contractual obligations by termination or non-performance does not deprive the parties of their rights and the power of the Arbitrator to adjudicate on disputes, which, otherwise fall within the ambit of the arbitration clause. Thus, the rescission of the main contract would not result in the death of the arbitration clause.
While agreeing with the majority views, Justice CT Ravikumar added a concise addendum.
Considering whether while passing an order, the Court exercising the power under Section 11 (6) receives any evidence, for the limited purpose of ascertaining the truth of the assertion that the document thus produced is an arbitration agreement or an instrument containing arbitration clause, Justice Ravikumar concurred with the view that when the original document carrying the arbitration clause is produced and if it is found that it is unstamped or insufficiently stamped, the Court acting under Section 11 is duty bound to act under Section 33 of the Indian Stamp Act. Further, he agreed that what is permissible to be produced as secondary evidence i.e., other than the original document in terms of Section 2(a) of the scheme framed under Section 11(10) of the Act, is nothing but certified copy. But such a certified copy would not be available to be proceeded with under Section 33 of the Stamp Act, if it is unstamped or insufficiently stamped.
Justice Ravikumar further said that it cannot be presumed that despite the conspicuous difference between the ‘certified copy’ and ‘a copy certified to be true copy’, under paragraph 2 (a), ‘certified copy’ alone was permitted to be appended along with the application under Section 11 of the Act, unintentionally. It was prescribed, fully understanding the nature of exercise of power under Section 11 (6) of the Act and also the presumption of genuineness and correctness of ‘certified copy’ available by virtue of Section 79 of the Evidence Act.
Thus, it was held that an arbitration agreement, maybe a Clause in an instrument or a standalone agreement which attracts stamp duty, then the Court, acting under Section 11, is bound to act under Sections 33 and 35 of the Stamp Act, if the instrument is not stamped or insufficiently stamped.
- EXPLAINED| Stamp Act versus Arbitration Act issue on validity of an Unstamped Arbitration Agreement as Supreme Court reserves Judgment | SCC Blog (scconline.com)
- Is unstamped Arbitration Agreement enforceable? SC holds question being pending before larger Bench will not hinder arbitration proceedings unless issue indicates existence of deadwood | SCC Blog (scconline.com)
- Unstamped Arbitration Agreements: Awaiting the Light at the End of the Tunnel | SCC Blog (scconline.com)
[N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, decided on 25-04-2023]
*Judgment Authored by Justice KM Joseph
*Justice CT Ravikumar added an addendum