The validity of an arbitration clause in unstamped contracts has been subjected to numerous judicial discussions in different courts of law. However, all doubts related to the enforceability of arbitration clauses in such contracts were clarified by a Constitution Bench of the Supreme Court of India.
The Judgement of Constitutional Bench
In April 2023, the Constitution Bench of the Supreme Court, while hearing the matter of N.N. Global Mercantile Pvt. Ltd. vs. Indo Unique Flame Ltd. & Ors., stated that an arbitration clause in an unstamped contract is not enforceable and invalid in the law. As per the Supreme Court, if in any case a contract is not fully stamped, the contract will be deemed invalid and it will be rendered legally non-existent.
This case was previously heard by a three-judge bench, who doubted the correctness of the Supreme Court’s judgement in similar cases concerned with the same legal issue – SMS Tea Estates vs. Chandmari Tea Co. and Garware Wall Ropes Ltd. vs. Coastal Marine Constructions.
Garware Wall Ropes was quoted with approval in the matter of Vidya Drolia vs. Durga Trading Corporation by the three-judge bench and, therefore, it was essential to make a reference to the Constitution Bench of the Supreme Court.
While referring to the Constitution Bench, the question asked was – ‘whether the statutory bar mentioned in Section 35 of the Stamp Act, 1899 applicable to instruments, which are chargeable to stamp duty, be non-existent, unenforceable or invalid if the instrument is unstamped or insufficiently stamped?’
However, this question was later reformulated and developed by the Constitution Bench into “whether the statutory bar mentioned in Section 35 of the Stamp Act, which is applicable to instruments chargeable to stamp duty, would deem the arbitration agreement mentioned in such an instrument non-existent if there was any payment pending for stamp duty on the said instrument.”
Relevant Statutory Provisions
Indian Stamp Act, 1899
All provisions related to stamping of various documents are stated under the Indian Stamp Act, 1899 (‘Act’).
As per Section 2(11) of the Act, ‘duly stamped’ means a document that has an impressed or adhesive stamp of not less than the proper amount and such stamp has been affixed or used in accordance with the law in India.
Section 17 of the Act mentions that all instruments, which are chargeable with duty, should surely be stamped before or during the execution.
Furthermore, Section 18 allows for instruments that are implemented outside India to be stamped within 3 months after it is first received in the country.
According to Section 35, if any instrument that is chargeable with duty is to be produced as evidence, it shall not be admitted to evidence unless it has been duly stamped.
Furthermore, Section 33 grants any individual who is legally authorized to receive the evidence, the right to impound any instrument that has not been duly stamped.
Arbitration and Conciliation Act, 1996
As per Section 5 of the Arbitration and Conciliation Act, a Court may only have a limited interference, unless it has been stated otherwise by the Act.
| Section 16A mentions that while giving a consideration to an application to appoint an arbitrator, the Court must confine to the ‘examination of the existence’ of the arbitration agreement. |
Analysing Constitution Bench’s Judgement
The Constitution Bench, with a majority in the ratio of 3:2, opined that by virtue of Section 33 and 35 of the Indian Stamp Act, instruments which have not been duly stamped as such and instruments that are chargeable with stamp duty shall result in invalidating the arbitration clause in the agreement. It will continue to remain non-existent till the time it is duly stamped.
- In the matter of SMS Tea Estates, a 2-judge bench of the Supreme Court stated that if a document has not been duly stamped, it cannot be acted upon, and the arbitration clause in such an instrument will be deemed invalid.
- This decision was also followed by the Apex Court in Garware Wall Ropes case, where a 2-judge bench ordered that unless the sub-contract is duly stamped, the arbitration clauses mentioned in it shall be invalid.
This decision was referred to and specifically approved by a 3-judge bench in the matter of Vidya Drolia.
- However, the 3-judge bench hearing the matter of N.N. Global Mercantile challenged the above-mentioned judgements.
Most of these judgements were passed while taking the aspects of the Contract Act and its relationship with the Arbitration Act and Stamp Act. Furthermore, it is observed that although the Stamp Act may be a financial measure, it cannot be considered as a procedural law.
The Constitution Bench further stated that agreements which are invalid as per any substantive law (in this case, the Stamp Act), shall not be considered as a contract. Only when an agreement is enforceable, it will be considered as a contract. It is only a ‘contract’ which would be the ‘Arbitration Agreement’ as contemplated under Section 11(6A) of the Arbitration Act.
In addition, the Constitution Bench held that the provisions of Section 11(6A) that demand Courts to limit themselves to the existence of the arbitration agreement would not mean ‘only existence in terms of fact’. Documents must be existent in law as well. Therefore, if any document that requires it to be stamped is not stamped, it shall not exist in law.
When asked about whether the Court, during a Section 11 application, had to analyse if an agreement had been duly stamped or to be assigned to the arbitrator, the Constitution Bench ordered that this depends on Court’s discretion. Nonetheless, the following guidelines were also laid down by the Constitution Bench:
- If the stamp duty is not paid, the Court should make sure to impound the document and should carry out its responsibilities u/s 33 and 35 of the Stamp Act.
- In cases wherein the stamp duty is duly paid but the Respondent claims it as unpaid or it is not stamped sufficiently, it is Court’s responsibility to judge whether the stamp duty has been paid or not. However, if it is found that the Respondent’s claim of it being insufficiently stamped is not based on concrete foundation, it may refer the parties to arbitration and permit the arbitrator to make use of his powers u/s 33 of the Stamp Act, if required. The Constitution Bench ordered that the SMS Tea Estates and Garware Wall Ropes represent the right position of law as they related to the effect of an unstamped contract which contains an arbitration agreement. Further, it was added that during a Section 11 application, if the Court observes an insufficiently stamped instrument with an arbitration clause, it shall confine the document and consider the application as per law after stamp duty is duly paid.
| Note: The Constitution Bench mentioned that Section 9 of the Arbitration Act was not taken into consideration during this ruling. |
Conclusion
The judgement of Constitution Bench to consider arbitration clauses in unstamped contracts to be ‘invalid’ finally provided a thorough answer to a controversial question since time immemorial. By attaining more knowledge about the legal provisions related to insufficiently stamped contracts, people are expected to pay more consideration while submitting any instrument that requires it to be duly stamped.
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