Judgement Pronouncement: Validity of an Unstamped Arbitration Agreement
The Supreme Court in a 3:2 split held that an unstamped arbitration agreement cannot be enforced until the stamp duty has been paid.
A 5-Judge Constitution Bench led by Justice K.M. Joseph delivered a Judgement that could have wide-ranging implications for the future of arbitration proceedings in India. The majority held that an unstamped arbitration agreement is not enforceable until the stamp duty and penalties have been paid.
Three Judges were in the majority. Justice A. Bose co-signed Justice Josephs’s decision and Justice C.T. Ravikumar wrote a concurring opinion. Justices A. Rastogi and H. Roy authored separate dissenting opinions and emphasised that the Court should limit its involvement in arbitration disputes.
Under the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), if parties cannot agree on an arbitrator they may approach High Courts or the Supreme Court to appoint one for them. At this stage, the Court can only confirm the ‘existence’ of an arbitration agreement and cannot get involved in the case any further. This restriction was imposed through the 2015 Amendment to the Arbitration Act so that arbitration disputes could be speedily disposed of.
However, the Supreme Court has gone back and forth on what constitutes a valid arbitration agreement to prove its ‘existence’. Specifically, if the parties haven’t paid stamp duty on the contents of the agreement, is it still valid?
In 2011 a Supreme Court Division Bench decided the case of SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. The Bench held that an unstamped arbitration agreement cannot be enforced. This position was restated in Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019), where the SC held that contracts (including agreements) are only enforceable if they are duly stamped.
Following a dispute over the invocation of a bank guarantee in a contract for coal transportation between Indo Unique Flame Ltd. and N.N. Global Mercantile Pvt. Ltd., the latter approached the Supreme Court and claimed the agreement was unstamped and unenforceable. In January 2021, a 3-Judge Bench disagreed with the decisions in SMS Tea Estates and Garware. However, despite overruling the two decisions the Bench also referred the case to a 5-Judge Constitution Bench to settle the debate once and for all.
Majority Opinion: Paying Stamp Duty Necessary for Valid Arbitration Agreement
Justice Joseph in his Judgement held that an unstamped agreement would not be enforceable and would be void as per Section 2(g) of the Indian Contract Act, 1872. This is in line with the SC’s reasoning in Garware. Further, as per the Arbitration Act, the SC must be provided with a ‘certified copy’ of the arbitration agreement which must indicate the stamp duty that was paid. Without this, the SC cannot entertain an application to refer the parties to arbitration.
He then highlighted the obligation of the Court under Section 33 of the Indian Stamp Act, 1899 (the Act) to ‘impound’ or take legal possession of any unstamped agreement until the stamp duty is paid. The agreement will then be inadmissible as evidence and cannot be acted upon as per Section 35 of the Act. The SC can only consider the agreement after the stamp duty and the necessary penalties for non-payment have been paid as per Section 42 of the Act.
Justice Ravikumar concurred with Justice Joseph and wished to add to the holding. Under Section 11(6)(A) of the Arbitration Act the SC must ascertain the ‘existence’ of an arbitration agreement. In order to do so, the arbitration agreement must be admissible as evidence which requires the payment of stamp duty.
Dissenting Opinion: Requiring Stamp Duty at Appointment Stage Defeats Purpose of Arbitration Act
Justice Rastogi was the first Judge to give their dissenting opinion. He emphasised that the Courts must be cautious when they are examining an arbitration agreement so that they don’t open the door to judicial intervention. This would be opposed to the purpose of the Arbitration Act, which is to ensure effective and efficient arbitration proceedings. Further, issues regarding stamp duty fall under the purview of the arbitrator as well. They can deal with these issues instead of allowing judicial intervention.
Justice Roy dissented as well and agreed with Justice Rastogi on the purpose of the Arbitration Act and how requiring stamp duty to be paid at the appointment stage would frustrate this purpose. In order to avoid stalling the proceedings, he said the decision should be deferred to the arbitrator. Finally, Justice Roy made a plea to the Legislature to amend the stamp act to address any inconsistencies between the Stamp Act and the Arbitration Act.