Unstamped Arbitration Agreement Is Valid, Though Not Admissible As Evidence : Amicus Tells Supreme Court Constitution Bench

A Constitution Bench of the Supreme Court, on Thursday, continued hearing submissions made by the Amicus Curiae, Senior Advocate, Mr. Gourab Banerji in a 3-Judge reference which raised 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 had appointed an Amicus to assist it, because, at present, there is no contesting respondent in the matter. The Bench commenced hearing the matter on 17th Jan, 2023 (Tuesday). Taking it through the judgments mentioned in the reference order and citing other relevant case laws and statutory provisions, the Amicus concluded his submissions on Thursday. The petitioner and the respondent in the matter has 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, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract / instrument ? "On the previous occasion, the Amicus essentially argued that while exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996, the Court should confine itself to the examination of the existence of an arbitration agreement. He submitted that the ambit of Section 16, which deals with the competence of an arbitral tribunal to rule on its jurisdiction, was wide enough to allow the arbitrator to make considerations with respect to the stamping of the document. In view of the submission of the Amicus, on Thursday, Justice Ravikumar enquired whether Section 11(6) would have full play only if it is found that the arbitration agreement is not valid and the Court would refuse to appoint an arbitrator? In case the Court finds the agreement to be valid it would only take a prima facie view? He was of the opinion that if the Legislature intended the same, it would have been categorically mentioned. However the provision does not say so. But, the Judge agreed that harmonised interpretation ought to be resorted to. The Amicus reckoned that in the present case the Bench was considering a situation where the Court has to look beyond the existence and into the stamping aspect of the agreement.Justice Bose pointed out that the concern is not about the existence of the agreement, but about enforceability of the document which contains the arbitration clause. Justice Joseph observed, “Why do you mean by enforceability/unenforceability of an instrument? How do you enforce a contract…Suppose there is an unstamped document. Parties oblige to the contract, in that sense it continues to exist. When they go to Court and seek sanction of the law, it would be a problem because you cannot enforce it.”The Amicus submitted - “Under Stamp Act, as I have sought to demonstrate to your lordships, unstamped agreement is a valid contract, valid under law, maybe admissible in evidence. It is not a S. 2(g) (Indian Contract Act) situation where agreement is void...

Unstamped Arbitration Agreement Is Valid, Though Not Admissible As Evidence : Amicus Tells Supreme Court Constitution Bench

Sohini Chowdhury

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