Validity Of An Arbitration Agreement In An Unstamped Agreement

Cause Title : M/s. N. N. Global Mercantile Private Limited vs M/s. Indo Unique Flame Ltd. & Ors., Civil Appeal No(S). 3802-3803 Of 2020, Supreme Court Of India

Date of Judgment/Order : 25/4/2023

Corum : K. M. Joseph,J.,  C.T. Ravikumar, J., Aniruddha Bose, J., Ajay Rastogi, J, Hrishikesh Roy, J.

Citied: 

1. N.N. Global Mercantile Private Limited vs Indo Unique Flame Limited and others, (2021) 4 SCC 379
2. SMS Tea Estates Private Limited vs Chandmari Tea Company Private Limited, (2011) 14 SCC 66
3. SBP & Co. vs Patel Engineering Ltd. and another, (2005) 8 SCC 618
4. Duro Felguera, S.A. vs Gangavaram Port Limited, (2017) 9 SCC 729
5. Mayavati Trading Private Limited vs Pradyuat Deb Burman, (2019) 8 SCC 714
6. Garware Wall Ropes Limited vs Coastal Marine Constructions & Engineering Limited, (2019) 9 SCC 209
7. Hindustan Steel Ltd. vs Dilip Construction Company, (1969) 1 SCC 597
8. Hariom Agrawal vs Prakash Chand Malviya, (2007) 8 SCC 514
9. Lachmi Narayan Agarwalla and Others vs Braja Mohan Singh (SINCE DECEASED), 51 Indian Appeals 332
10. Joyman Bewa vs Easin Sarkar, AIR 1926 Calcutta 877
11. Gulzari Lal Marwari vs Ram Gopal, ILR 1937 1 Calcutta 257
12. Purna Chandra Chakrabarty and others vs Kalipada Roy and another, AIR 1942 Calcutta 386
13. United Insurance Company of Pakistan Limited vs Hafiz Muhammad Siddique, PLD 1978 SC 279
14. Great Offshore Ltd. vs Iranian Offshore Engg. & Construction Co., (2008) 14 SCC 240
15. Commissioner of Income Tax vs Hindustan Bulk Carriers, (2003) 3 SCC 57
16. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v Bhaskar Raju & Bros., (2020) 4 SCC 612
17. Shin-Etsu Chemical Co. Ltd. vs Aksh Optifibre Ltd. and another, (2005) 7 SCC 234
18. National Insurance CompanyLimited vs Boghara Polyfab Private Limited, (2009) 1 SCC 267
19. Ganga Retreat & Towers Ltd. vs State of Rajasthan, (2003) 12 SCC 91
20. Mahanth Singh vs U Ba Yi, AIR 1939 PC 110
21. Dip Narain Singh vs Nageshar Prasad and another, AIR 1930 ALL 1 (FB) / 1929 SCC OnLine ALL 1
22. Dr. Chiranji Lal (D) by Lrs. vs Hari Das (D) by Lrs., (2005) 10 SCC 746
23. Mt. Bittan Bibi & Anr. vs Kuntu Lal & Anr., ILR [1952] 2 All 984
24. M.R. Engineers & Contractors Private Limited vs Som Datt Builders Limited, (2009) 7 SCC 696
25. Govind Rubber Limited vs Louids Dreyfus Commodities Asia Private Limited, (2015) 13 SCC 477

Background

The first respondent, who was awarded the Work Order, entered into a sub-contract with the appellant. Clause 10 of the Work Order, constituting the sub- contract, provided for an Arbitration Clause. The appellant had furnished a bank guarantee in terms of Clause 9. The invocation of the said guarantee led to a Suit by the appellant against the encashment of the bank guarantee. The first respondent applied under Section 8 of the Arbitration and Conciliation Act, 1996 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 Act. One of the contentions raised was that the Arbitration Agreement became unenforceable as the Work Order was unstamped. 

A three judge bench of the High Court, however, allowed the Writ Petition filed by the first respondent observing that the Work Order was chargeable to payment of stamp duty. However, non-payment or the deficiency on the Work Order did not invalidate the main contract. The Arbitration Agreement was a distinct and an independent contract. On the Doctrine of Separability, it would not be rendered invalid, unenforceable or non-existing, even if the substantive contract, in which it is contained, was inadmissible in evidence or could not be acted upon, in view of it not being stamped. The bench also overruled the judgment in SMS Tea Estates [SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 : (2012) 4 SCC (Civ) 777] where it was held that a voidable contract would not be arbitrable as it affects the validity of the arbitration agreement.

Thereafter the judge bench being of the view that the issue is required to be authoritatively settled by a Constitution Bench  of five Judges of the Supreme Court.

The specific question before the constitutional bench was 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?

Judgment

The SC held that in SMS Tea Estates (supra) it was observed that 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:

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.
2. If the document is found to be not duly stamped, Section 35 of the Stamp Act bars the said document being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The court should then proceed to impound the document under Section 33 of the Stamp Act and follow the procedure under Sections 35 and 38 of the Stamp Act.
3. If the document is found to be duly stamped, or if the deficit stamp duty and penalty is paid, either before the court or before the Collector (as contemplated in Section 35 or 40 Section of the Stamp Act), and the defect with reference to deficit stamp is cured, the court may treat the document as duly stamped.

On the issue of stamping, the SC  drew the following conclusions, as to what has been laid down by a Bench of three learned Judges in Hindustan Steel (supra):

1. The Stamp Act is a fiscal measure intended to raise revenue;
2. The stringent provisions of the Act are meant to protect the interest of the Revenue;
3. It is not intended to be used as a weapon by a litigant to defeat the cause of the opponent;
4. Upon the endorsement being made under Section 42(2) of the Stamp Act, the document would be admissible in evidence and can be acted upon.

An agreement which is unstamped or insufficiently stamped is not enforceable, as long as it remains in the said condition. Such an instrument would be void as being not enforceable [See Section 2(g) of the Contract Act]. It would not in the said sense exist in law. It can be “validated” by only the process contemplated in Section 33 and other provisions of the Stamp Act. The expression ‘validation’ used in Hariom (supra) means that the court would not view it as enforceable, and therefore, existing in law. In the sense explained, it would not be found as ‘not void’ and therefore ‘not invalid’.

The SC held that as per Section 11(6-A) an Arbitration Agreement, may be a Clause in an instrument, which attracts stamp duty. In such a case, the Court, acting under Section 11 of the Arbitration Act, is bound to act under Sections 33 and 35 of the Stamp Act, if the instrument is not stamped or insufficiently stamped. If an Arbitration Agreement is a standalone agreement and which attracts duty under the Stamp Act, then also, the same position obtains. It may not be apposite to merely describe an unstamped Arbitration Agreement as a ‘curable defect’. As long it remains an unstamped instrument, it cannot be taken notice of for any purpose, as contemplated in Section 35 of the Stamp Act. It remains unenforceable.

It is important to remember that the Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. 

In other words, proceeding on the basis that an ‘unstamped agreement’ exists, it would not deflect the court of its statutory duty to follow the regime under Sections 33 and 35 of the Stamp Act.

The interplay of the Evidence Act, the Stamp Act and the Registration Act is to be understood as follows:

In regard to an instrument, which is executed in India and which is liable to be stamped, then, stamping has to take place before or at the time of the execution of the instrument. It is after the instrument is stamped that it can be presented for registration. An instrument, which is registered, necessarily involves, it being duly stamped before it is so registered.

CONCLUSIONS DRAWN BY THE SUPREME COURT

1. The view taken in SMS Tea Estates (supra) as followed in Garware (supra) and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other Charities v. Bhaskar Raju and Brothers and others 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 as explained by us hereinbefore. N.N. Global (supra) was wrongly decided, when it held to the contrary and overruled SMS Tea Estates (supra) and Garware (supra).
2. 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, we approve of paragraphs-22 and 29 of Garware (supra). To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware (supra) is approved.
3. The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an Arbitration Agreement.
4. 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.
5. 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 as explained hereinbefore. When it does so, needless to say, 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 law.
6. 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.