Approximately a year back, Delhi High Court took a decisive stride towards settling the conundrum surrounding the stamping of arbitration agreements in Religare Finvest Ltd. v. Asian Satellite Broadcast (P) Ltd.1 According to the Delhi High Court, the “doctrine of severability” of the arbitration clause, which was cited by Religare (appellant), could not be interpreted to suggest that the issue of insufficient stamp duty must be completely disregarded during arbitration proceedings. It was stated that the issue of stamping being a jurisdictional issue, and that the arbitrator in the said case had correctly considered and decided it as a preliminary issue under Section 16 of the Arbitration and Conciliation Act, 1996 (A&C Act). Non-payment or deficiency in stamp duty may not invalidate the loan agreements, but this shortcoming renders such documents to be inadmissible in evidence and liable to be impounded, until the necessary stamp duty is paid.
The Supreme Court judgment in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.2(Reference judgment) referred the matter to a 5-Judge Bench to authoritatively settle—
“58. … 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?”
The 5-Judge Bench judgment in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.3 (5-Judge Bench judgment) shall be discussed/analysed by the authors in this article.
(i) Brief factual overview in Reference judgment
After being awarded a work order, the first respondent entered into a sub-contract with the appellant. Clause 10 of the said work order provided for an arbitration clause. The appellant furnished a bank guarantee in consonance with the work order. The invocation of the said guarantee resulted in a suit by the applicant against the encashment of the bank guarantee. The first respondent applied under Section 8 of the A&C Act, seeking reference. A writ petition was filed by the first respondent challenging the order of the commercial court rejecting the application under Section 8 of the A&C Act. The relevant issue was whether the arbitration agreement was enforceable and acted upon, even if the work order is unstamped and unenforceable under the Stamp Act, 1899.
(ii) The kompetenz-kompetenz factor
Section 16 of the A&C Act lays down that an Arbitral Tribunal is empowered and competent to rule on its own jurisdiction, including the existence and validity of an arbitration agreement. This kompetenz-kompetenz provision would come into full effect when the arbitrator was chosen by agreement of the parties, in accordance with the arbitration agreement’s terms, or by a recognised arbitration institution, without the need for court involvement. When the procedures outlined in the arbitration agreement have failed, however, a request is made to use the court’s authority to appoint the arbitrator(s), the provision under Section 11(6) of the Act comes into play.
(iii) The judicial aspect
In SBP & Co. v. Patel Engg. Ltd.4 the seven-Judge Bench has beyond a shadow of doubt settled that the power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the A&C Act is not an administrative, but a judicial power. The court thus has to first be amply satisfied that all preconditions exist for the initiation of arbitration.
In the next step, it is inevitable that the arbitration clause is an instrument executed between the two parties concerned. So, the power enshrined in Section 11(6) of the A&C Act is going to be utilised in deciding this “asserted factum of existence of arbitration agreement or arbitration” within this purported instrument. However, the instrumentality of the arbitration clause within it is to be thereafter decided upon, — as to whether it exists in reality or not.
(iv) The evidentiary question
The next question is — while deciding upon the existence of said arbitration clause, what is considered as evidence? UNCITRAL Model Law on International Commercial Arbitration provides the following:
“19. Determination of rules of procedure
* * *
(2) Failing such agreement, the Arbitral Tribunal may, subject to the provisions of this law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the Arbitral Tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.”
The 5-Judge Bench judgment5 has relied on a fairly liberal definition of evidence as well “material which tends to persuade the court of the truth or probity of same fact asserted before it”.
Now, one needs to take a step back and note the judgment in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.6 that is extensively discussed in the Reference judgment7. The following is provided:
“22. We may therefore sum up the procedure to be adopted where the arbitration clause is contained in a document which is not registered (but compulsorily registerable) and which is not duly stamped:
22.1. The court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/document is duly stamped and whether it is an instrument which is compulsorily registerable.”8
The 5-Judge Bench judgment9 notes that this “acting upon” by the court is the pivotal point at which the court would decide upon the valid existence of an arbitration clause. At the risk of affording an even wider purport to the meaning of “acting upon” said “evidence” the Bench relies upon the judgment in Bittan Bibi v. Kuntu Lal10 where it was held that “acting upon is not included in the act of admitting an instrument, though it can be acted upon, later, subject to permissibility in law therefore”.
Section 33 of the Stamp Act, 1899 provides the following:
“33. Examination and impounding of instruments.— (1) Every person having by law or consent of parties authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.
(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain whether it is stamped with a stamp of the value and description required by the law in force in India when such instrument was executed or first executed: Provided that—
(a) nothing herein contained shall be deemed to require any Magistrate or Judge of a criminal court to examine or impound, if he does not think fit so to do, any instrument coming before him in the course of any proceeding other than a proceeding under Chapter XII or Chapter XXXVI of the Code of Criminal Procedure, 1898 (5 of 1898);
(b) in the case of a Judge of a High Court, the duty of examining and impounding any instrument under this section may be delegated to such officer as the court appoints in this behalf.”
The 5-Judge Bench judgment11 observes that the power under Section 11(6) of the A&C Act automatically becomes complementary to the duty in the abovementioned provision. The two things can only mutually coexist by their very definition.
Section 79 of the Evidence Act, 1872 provides the following:
“79. Presumption as to genuineness of certified copies.— The court shall presume [to be genuine] every document purporting to be a certificate, certified copy, or other document, which is by law declared to be admissible as evidence of any particular fact and which purports to be duly certified by an officer [of the Central Government or of a State Government, or by any officer [in the State of Jammu and Kashmir] who is duly authorised thereto by the Central Government]:
Provided that such document is substantially in the form and purports to be executed in the manner directed by law in that behalf.
The court shall also presume that any officer by whom any such document purports to be signed or certified held when he signed it, the official character which he claims in such paper.”
The principle that emanates from this provision is expressed in the 5-Judge Benh judgment12 by the maxim— “omnia praesumuntur rite esse acta i.e. all acts are presumed to be done rightly and regularly”. To illustrate the same point emphasis is drawn on the judgment of Manoj v. State of Haryana13 where it was observed that:
“37. … The certified copy of these documents is admissible in evidence under Section 77 of the Evidence Act and carry presumption of correctness under Section 79 of the Act. The High Court held that in the absence of any evidence to prove that it was incorrect, its correctness is liable to be presumed under Section 79 of the Evidence Act, 1872.”
The 5-Judge Bench judgment14 observed that the court, operating under Section 11 is required to take action under Section 33 of the Stamp Act, as held in the Reference judgment15, where the original document containing the arbitration clause is provided and it is discovered that it is unstamped or is not stamped adequately.
Additionally, in K.M. Varghese v. K.M. Oommen16 the maxim was discussed and it was observed that it is a succinct expression of an appropriate probability and the legality of acting on that likelihood. When an intention to perform some formal act is established, when the evidence is consistent with that intention having been carried out in a proper manner, and when the actual observance of all due formalities can only be inferred as a matter of probability, the maxim expresses an inference that may reasonably be drawn.
While the CB judgment17 has laid down the last word with respect to the elusive validity of an arbitration clause, there is a possibility of a roundabout process setting into the aspect of the validity of an arbitration clause. However, in the present case, it is needless to say that the verdict is fractured. Be that as it may, the emergent dictum of the judiciary in the present case pretty much puts to rest any conundrum regarding the much-deliberated issue of stamping of arbitration agreements. The minority view is that unstamped, or rather, incorrectly/ inadequately stamped arbitration agreements shall be valid till the stage of Section 9 of the A&C Act. The majority view however yields such arbitration agreements as completely inefficacious moot.
† AoR, Supreme Court of India
†† Associate – Chambers of Swarnendu Chatterjee.
8. SMS Tea Estates (P) Ltd., (2011) 14 SCC 66, 74.
13. (2022) 6 SCC 187, 204.