SUPREME COURT JUDGEMENT | UNSTAMPED ARBITRATION AGREEMENT IS ENFORCEABLE
The Supreme Court has recently passed a judgment in NN Global case, wherein it has held that the arbitration clause - of an unstamped or deficiently stamped agreement is valid and enforceable.
- In 2011, the Supreme Court in the SMS Tea case had held that an arbitration clause contained in an unstamped or deficiently stamped contract, is not valid and hence not enforceable until such deficiency is removed.
- In 2019, the Hon’ble Supreme Court in Garware Ropes case reiterated the judgment in SMS Tea and held that the non-payment of stamp duty on the commercial contract would invalidate the arbitration agreement contained therein, and render it non-existent in law, and un-enforceable.
- In the present case, a work order (`Work Order`) was issued by the Indo Unique Flame Limited (`Respondent`) in favour of NN Global Mercantile Private Limited i.e. the Petitioner. The Work Order contained an Arbitration clause.
- Thereafter, certain disputes arose inter se the parties. The Respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (`Act`) seeking reference of the dispute to arbitration. This application was rejected by the Commercial Court as the Work Order was not stamped.
- However, in appeal, the Bombay High Court held that the application under Section 8 of the Act was maintainable in view of the admitted position that there was an arbitration agreement between the parties (`Order`).
- A special leave petition, challenging the said Order was filed before the Hon’ble Supreme Court.
The Supreme Court held:
- On the basis of the doctrine of separability, the arbitration agreement is a separate and distinct agreement from the underlying commercial contract.
- 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. Thus, there is no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract.
- Further, as per Maharashtra Stamp Act, 1958 and Schedule I appended thereto, an arbitration agreement is not included in the Schedule as an instrument chargeable to Stamp Duty. In light of the above, the Supreme Court overruled the judgment in SMS Tea. However, since Garware Ropes judgment has been cited with approval by another bench of the Supreme Court, the Supreme Court now referred the question to a Constitution Bench.
- However, the Supreme Court made it clear that:
a) Where the appointment of an arbitrator takes place by the parties consensually in accordance with the terms of the arbitration agreement, or by a designated arbitral institution, without the intervention of the court, in such a case, the arbitrator / tribunal must impound the instrument, and direct the parties to pay the requisite Stamp Duty;
b) In case where an application is filed under Section 11 of the Act for appointment of an arbitrator, the High Court, or the Supreme Court, as the case may be, would impound the substantive contract which is either unstamped or inadequately stamped, and direct the parties to cure the defect before the arbitrator / tribunal can adjudicate upon the contract;
c) In a case where an application under Section 8 of the Act is filed for reference of the dispute to arbitration, the judicial authority will make the reference to arbitration. However, in the meanwhile, the parties would be directed to have the substantive contract stamped;
d) If an application for urgent interim reliefs is filed under Section 9 of the Act, the Court would grant ad-interim relief to safeguard the subject-matter of the arbitration. However, the substantive contract would then be impounded and the parties would be directed to pay the requisite stamp duty.
MHCO Comment : The judgment of the Supreme Court brings much need clarity on unstamped arbitration agreements and reiterates the doctrine of seprability i.e. the arbitration agreement and the underlying instrument / agreement are separate contracts. However, it would be interesting to see how the Constitution Bench interprets this matter.
This update was released on 12 Mar 2021.
Legal Update Team
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