Unstamped arbitration agreement not legally valid: Constitution Bench of Supreme Court holds by 3:2 majority

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A Constitution Bench of the Supreme Court on Tuesday held by a 3:2 opinion that unstamped arbitration agreements are not valid in law [NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors]
The judgment on this significant point of law was delivered by a bench of Justices KM Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and CT Ravikumar

While Justices Joseph, Bose and Ravikumar wrote the majority opinion, Justices Rastogi and Roy dissented, opining that unstamped arbitration agreements are valid at the pre-referral stage.

“Court is duly empowered to act under the Stamp Act if a document is not stamped…Arbitration agreement not validated by Stamp Act would stand non est in law,” the majority opinion held.

Summing up his dissenting opinion, Justice Rastogi said,

“Such examination should not open the door wide open for judicial examination…Existence of certified copy of Arbitration agreement whether unstamped or not is enforceable for appointment of arbitrator…All the preliminary maintainability issues of the document are referrable to the arbitrator. Decison in Tea Estates stands overruled.”

In his dissenting opinion, Justice Roy held,

“Objective behind 1996 Act was to inter alia avoid procedural complexity and litigation between courts. Impounding and stamping will frustrate the same, as enforcement will be stalled when it can be solved at a later stage.”

He went on to hold that the current position could not provide clarity on this issue, and that a larger bench reference was not common.

“But issue is much too important to leave it lingering for clarification by a larger bench. I appeal to the legislature to revisit amendments necessary in the Stamp Act to efface inconsistencies. I am of the considered opinion that statutory schemes have to be interplayed in a constructive manner if India is to become a centre for arbitration,” he concluded.

He also opined that the Court in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd had wrongly held that an arbitration agreement contained in an unstamped contract cannot be taken in evidence and invoked.

The Supreme Court had reserved its verdict in the case in January this year.

The reference to a five-judge Bench was necessitated given the decision of the top court in NN Global Mercantile Pvt Ltd v. M/s Indo Unique Flame Ltd, in which it had held,

“The arbitration 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.”

In doing so, the three-judge Bench of Justices DY Chandrachud, Indu Malhotra and Indira Banerjee had doubted the correctness of the Division Bench decision in Vidya Drolia & Ors v. Durga Trading Corporation.

Specifically, the following question was referred to a larger bench:

“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?”

The parties in the original matter had entered into a sub-contract that had contained an arbitration clause. The respondent had later invoked the bank guarantee furnished by the petitioner, leading to a suit.

The respondent then filed an application under Section 8 of the Arbitration and Conciliation Act and sought resolution of the dispute through arbitration, which a commercial court had rejected. The Bombay High Court had subsequently held that the application was maintainable, leading to the present appeal before the top court.

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