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No bar under Sec 11 of Arbitration Act on appointing arbitrator even when agreement is unstamped

In M/S IMZ CORPORATE PVT LTD vs MSD TELEMATICS PVT LTD, petition was filed before the Delhi High Court appointment of a Sole Arbitrate based on an MOU signed between the parties.

Among the objections raised by the Respondents, it was argued that the MoU in question is an unstamped document. The same is therefore not a contract enforceable by law. Non-payment of stamp duty on a commercial contract would invalidate the arbitration agreement and render it non-existent and unenforceable in law. The Court cannot consider the same while exercising jurisdiction under Section 11 of the Act. Without prejudice to other contentions, the Court can impound the original MoU which does not bear stamp duty and once the issue of stamp duty and penalty is decided by the concerned authority, then IMZ must bring the MoU to the notice of the Court, whereupon the Petition can be adjudicated in accordance with law. The Respondent had further argued that notwithstanding the judgment of the Supreme Court in N.N. Global (supra), the position in law remain unchanged in light of the judgment of the Supreme Court in Vidya Drolia (supra). In N.N. Global (supra), a three- judge bench of the Supreme Court has referred the question of enforceability of insufficiently stamped instruments containing arbitration agreement to be settled by a bench of five judges. Mr. Kamat contended that till the time the law is settled by a larger bench, the ruling of a two-judge bench of the Supreme Court in Garware Wa Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd., 3 as affirmed by a three-judge bench in Vidya Drolia (supra), would continue to hold the field. In support of this contention, Mr. Kamat relied upon the decision in M. S. Bhati v. National Insurance Company.

Rejecting the argument of the Respondents, the court held that the documents in question, is titled ‘Memorandum of Understanding’. The court had initially, without going into the merits of the objection contemplated impounding the document and directing IMZ to deposit the leviable penalty, having regard to the fact that the agreement would be amenable to stamp duty in terms of Article 5 clause (c) of Schedule 1A of th Indian Stamp Act, 1899, attracting stamp duty of only Rs. 50/- and consequently under Section 35 of the of the Indian Stamp Act, 1899, the maximum penalty leviable on such a document would be ten times the stamp duty payable, which amounts to no more than Rs. 500/-. However subsequent to hearing the parties, in the opinion of the Court, such a recourse is not necessary in view of the judgment of the Supreme Court in the case of N.N Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. wherein it was held that the arbitration agreement contained in the Work Order is independent and distinct from the underlying commercial contract. The arbitration agreement is an agreement which provides the mode of dispute resolution. Section 3 of the Maharashtra Stamp Act does not subject an arbitration agreement to payment of Stamp Duty, unlike various other agreements enlisted in the Schedule to the Act. This is for the obvious reason that a arbitration agreement is an agreement to resolve disputes arising out of a commercial agreement, through the mode of arbitration. On the basis of the doctrine of separability, the arbitration agreement being a separate and distinct agreement from the underlying commercial contract, would survive independent of the substantive contract. The arbitration 33 agreement would not be rendered invalid, un-enforceable or non-existent, even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty.

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