A Constitution Bench of the Supreme Court on Tuesday ruled an arbitration agreement in an unstamped contract, that is without stamp duty having been paid or paid insufficiently, was not enforceable and was not valid.
“Arbitration agreement not validated by the Stamp Act would stand non est(does not exist) in law,” the majority (three against two) verdict held.
Legal experts said while this judgment will give some clarity and predictability, the interpretation that non-payment or insufficient payment of stamp duty on a contract having an arbitration clause will make the arbitration agreement invalid will lead to a situation of no timely recourse for resolving disputes.
“This is a serious issue and will put a spanner in many ongoing arbitral proceedings with respondents taking non-payment or insufficient payment of stamp duty as a preliminary objection for delaying the process,” said Vyapak Desai, lead, international dispute resolution and investigations practice, Nishith Desai Associates.
A five-judge Bench of Justice K M Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy, and Justice C T Ravikumar decided whether the arbitration clause in a contract, which is required to be registered and stamped but has not been done, was valid and enforceable.
Justice Joseph, Justice Bose, and Justice Ravikumar ruled that “an instrument which is exigible (capable of being exacted) to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of Section 2(h) of the Contract Act (definition of contract) and is not enforceable under Section 2(g) of the Contract Act (void contracts)”.
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However, Justice Rastogi and Justice Roy said, in their dissenting opinion, that non-stamping or insufficient stamping would not render the arbitration agreement unenforceable. They said that such a defect (stamp deficiency) was curable.
In this case (NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors) the parties had entered into a sub-contract with an arbitration clause. After some dispute, the respondent had brought a suit invoking the bank guarantee furnished by the petitioner. The respondent had sought a resolution of the dispute through arbitration, which was rejected by a commercial court. Later, the Bombay High Court held the suit maintainable, which was then challenged before the apex court.
Tejas Karia, partner and head, arbitration, Shardul Amarchand Mangaldas & Co, said the decision missed an opportunity to shore up the image of India as an arbitration-friendly jurisdiction.
“It will delay the already time-consuming process of appointment of arbitrators by courts as it adds one more layer of scrutiny.”
He said that the Arbitration Act, being a special legislation as held by the Supreme Court itself, should have been given supremacy over the Stamp Act.
This issue has been a bone of contention in several arbitration matters since the judgment in the case of SMS Tea Estates in 2011, followed by Garware Wall Ropes in 2019.
The tilt of the law kept changing over time through various judgments in different contexts, leading to ambiguities and different positions taken by various courts in India.
“The judgment settles the law with respect to an un-stamped agreement containing an arbitration clause, and will give finality and closure to litigation on this aspect before various high courts wherein varying views had emerged,” said Simran Brar, partner at Karanjawala & Co.
Aslam Ahmed, partner, Singhania & Co. LLP, said the recent trend in arbitration had been minimum judicial intervention and this had consistently meant the court appointing an arbitrator had just to look at the arbitration clause. “Stamp Act is a legislation that is intended to provide revenue to the Government and should not be allowed to come in the way of judicial remedies,” he said.
Apoorva Bhadang, partner, Vesta Legal, said the decision might affect the pro-arbitration approach as well as time sensitivity in dealing with such disputes. “This decision may also have significant implications for ongoing and future arbitration proceedings in India where the validity of the arbitration agreement is in question due to insufficient stamping,” she said.
Anushkaa Arora, principal and founder, ABA Law Office, said: “The much-debated aspect and interpretation over this issue comes to a rest, enabling litigants to have a benchmark on what and what not to do when it comes to arbitration/other agreements containing arbitration clauses.”