Should an Unstamped or Insufficiently Stamped Arbitration Agreement be Enforceable in India?

Dalima Pushkarna
Law Student at Dr Ram Manohar Lohiya National Law University

It is a well-settled proposition of law that a document needs to be stamped to be admissible in Court and relevant in law, as mentioned in Section 35 and Section 33 of the Indian Stamp Act, 1935, respectively. Then what is the fate of the arbitration agreements which need to be sufficiently stamped? Furthermore, it also becomes essential to note that “arbitration agreements” are not listed as papers that must be stamped in Schedule I of the Stamp Act.

Recently, this issue came before the Hon’ble Supreme Court of India. Therefore, the author in this piece tries to understand the fate of such arbitration agreements and analyze the current view of the Supreme court.

Introduction

A document that needs to be correctly stamped may be impounded under the Stamp Duty Law. Furthermore, the instrument remains inadmissible as evidence until it receives a suitable stamp.

Then what happens to the arbitration agreement if it needs to be stamped or is insufficiently stamped and not registered? This question was raised before the Supreme Court in the case of M/s N.N Global Mercantile Pvt Ltd vs. M/s Indo Unique Flame Ltd. & Ors. (2021) ibclaw.in 05 SC. In this instance, the petitioner and respondent entered into a subcontract that contained the arbitration agreement. The arbitration agreement needed to be sufficiently stamped and registered. The matter reached the Supreme Court; the 3-judge bench of the Supreme court was of the view that the arbitration agreement should be considered valid. However, due to the Apex court’s previous judicial decision in the Vidya Drolia and Ors. v. Durga Trading Corporation (2020) ibclaw.in 78 SC, which is a coordinate Bench, the Apex Court 3-Judge Bench, thought it fit to refer the matter to the constitutional bench.

Conflicting viewpoints of the Indian Courts

The Supreme Court, in the case of SMS Tea Estates Pvt Ltd v Chandmari Tea (2017) ibclaw.in 476 SC, was of the view that arbitration agreements that are not stamped or are insufficiently stamped are unlawful. The Hon’ble Apex Court also took this view in the Garware Wall Ropers Ltd V Coastal Marine Constructions (2019) ibclaw.in 154 SC case. Where the Court heard a request for an arbitrator’s appointment under Section 11 of the Arbitration Act. The Supreme Court held that the separability theory, codified in Section 16 of the Arbitration Act, did not take effect before forming an arbitral panel. Hence, the Supreme Court quoted SMS Tea Estates with approval.

However, in the case of Gautam Landscapes Pvt Ltd v Shailesh S Shah (2019) ibclaw.in 120 HC, the Bombay High Court recognized the separability doctrine. It held that an instrument’s arbitration clause would not be void if there were insufficient stamp duty to cover it. The Bombay High Court stated that the impoundment of the agreement and ordering the payment of the deficit stamp duty as outlined in SMS Tea Estates, especially after the introduction of Section 11(6A), would lead to undermining the legislative intent behind the 2015 Amendment because the very purpose of filing a Section 9 application is to seek ad interim or interim reliefs. The Bombay High Court subsequently held, relying on the separability doctrine, that a shortfall in stamp duty payable on an instrument would not invalidate the arbitration clause contained in such instrument and that the Court has the authority to act both on the application for interim relief as well as the application for appointing an arbitrator.

When a few years later, this view came to be analyzed by the Supreme Court in the case of the NN Global case. The Supreme Court took a different view and upheld the separability doctrine. However, the matter was decided earlier by the coordinate bench in the Vijay Drolia case, where the Supreme Court reiterated the decision in the Garware case. Hence the apex court decided to refer this issue to the constitutional bench of five judges.

Analysis of the view taken by the Supreme Court

The view taken by the Apex Court in SMS Tea Estates can be said to be wrong, and the judgment can be said to be suffering from certain defects and overlooking certain principles of arbitration.

The Supreme Court’s decision can be said to be in clear violation of the principle of “doctrine of separability,” which is a well-recognized principle in the Court of law, i.e., a contract’s arbitration must be considered an agreement independent of the other terms of the contract, and the invalidity of the contract as determined by an arbitral tribunal shall not entail ipso jure the invalidity of the arbitration clause.

Also, the Court needs to look at the fact that section 11 of the act deals with the appointment of arbitrators, and the Court has to look at the validity of the arbitration agreement merely. Hence, it is optional to look at the issue of stamping the arbitration agreement.

The Court, while deciding the matter needs to keep the doctrine of Kompetenz in mind and should respect that doctrine. A legal entity, such as a court or arbitral tribunal, may have the competence or authority to rule as to the degree of its competence on an issue before it under the doctrine of Kompetenz-Kompetenz, often known as competence-competence. Under Section 16 of the Arbitration and Conciliation Act, the Arbitral Tribunal has the power to deal with issues related to the validity of the arbitration agreement. Therefore, it should be left to the will and decision of the arbitral tribunal to decide on the issue of stamping the arbitration agreement.

Furthermore, we must remember that the arbitration and conciliation act aims to provide a speedy trial. However, if the process reaches the Court at the beginning of the arbitration process, then the entire intent behind the act would get defeated.

Conclusion

The importance of dues owed to the exchequer is understandable and cannot be denied. However, the Supreme Court should take advantage of a chance to refrain from interfering and allow the alternate dispute resolution mechanism to deal with issues, including the short stamping of documents. As this would create a perfect balance wherein arbitration can proceed without delay while, at the same time, revenues due to the exchequer are also ensured. While revenue due to the exchequer is undoubtedly vital, so is the perception of the country in terms of ease of doing business and contract enforcement and recognising the fundamental principles of arbitration in India.

 

 

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