Arbitration Agreement In Unstamped Contract Which Is Exigible To Stamp Duty Not Enforceable: Supreme Court Holds By 3:2 Majority

A Constitution Bench of the Supreme Court, on Tuesday, answered the reference, which pertains to the issue - whether the arbitration clause in a contract, which is required to be registered and stamped, but is not registered and stamped, is valid and enforceable.A 5-Judge Bench, comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar decided the issue by 3:2 majority. Justice Joseph in concurrence with Justice Bose and Justice Ravikumar decided 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 enforceable in law within the meaning of S. 2(h) of the Contract Act and is not enforceable under S 2(g) of the Contract Act”. Justice Rastogi and Justice Roy concluded that non-stamping or insufficient stamping of the substantive instrument would not render the arbitration agreement unenforceable. The minority judgment noted that stamp deficiency being a curable defect would not render the arbitration agreement void. The majority concluded that - "An arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act 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 paying requisite duty...the provisions of Section 33 and the bar under Section 35 of the Stamp Act...would render the arbitration agreement contained in such instrument as being non-existent in law until the instrument is validated under the Stamp Act."Moreover, the majority opined that the Court at the Section 11(Arbitration and Conciliation Act) stage is bound to examine the instrument and if found to be unstamped or insufficiently stamped the instrument is to be impounded at this stage itself. However, the minority was of the view that the examination of the stamping and impounding may not be done at the threshold, i.e., at the pre-referral stage under Section 11. As per the minority view the copy or certified copy of arbitration agreement whether unstamped or insufficiently stamped, at the pre-reference stage, is an enforceable document for the appointment of arbitrator. It also noted that deciding on the stamp duty at the threshold also stalls the process, leading to procedural complexity and delay in litigation before the Courts. The majority upheld the view taken in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd.; that in para 22 and 29 in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited and Vidya Drolia And Ors. v. Durga Trading Corporation to the extent it follows Garware. The majority clarified that certified copy can be produced at the Section 11 stage only if it clearly indicate the stamp duty paid. If the same is not mentioned, the Court should no act on the said certified copy. The Bench had appointed Senior Advocate, Mr. Gourab Banerji, as the Amicus Curiae to assist it as there is no contesting respondent in the matter.The petitioner and the respondent in the matter had entered into a sub-contract which contained an arbitration clause. Certain disputes arose and the respondent invoked the Bank Guarantee furnished by the petitioner. A suit was filed regarding the said invocation. The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 in the suit and sought for reference of disputes to arbitration. However, the Commercial Court rejected the application. A revision petition was filed by the respondent before the Bombay High Court. Considering objections on maintainability the Court granted liberty to the respondent to withdraw the review and file a writ petition. Subsequently, in the writ petition filed by the respondent, the High Court held that the Section 8 application was maintainable. One of the issues before the High Court was that the arbitration agreement was unenforceable since the sub-contract was unregistered and unstamped. It noted that the said issue can be raised in application under Section 11 or before the Arbitral Tribunal. In appeal, the Apex Court noted that the view taken in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd. and Garware Wall Ropes Limited v. Coastal MarineConstructions and Engineering Limited that non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable, is not the correct position in law. Considering that Garware was affirmed by Vidya Drolia And Ors. v. Durga Trading Corporation, which is a coordinate Bench, the 3-Judge Bench of the Apex Court thought it fit to refer the matter to a Constitution Bench. The issue framed is as under -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,...

Arbitration Agreement In Unstamped Contract Which Is Exigible To Stamp Duty Not Enforceable: Supreme Court Holds By 3:2 Majority

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Arbitration Agreement In Unstamped Contract Which Is Exigible To Stamp Duty Not Enforceable: Supreme Court Holds By 3:2 Majority

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