Supreme Court: In an appeal against a full bench judgment primarily challenging the non-admissibility of an unstamped arbitration agreement and judicial Court’s intervention in matters of arbitration, the Constitution Bench comprising of K.M. Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and C.T. Ravikumar, JJ. by a 3:2 majority, held that unstamped arbitration agreements are not valid in law. While KM Joseph, Aniruddha Bose and C.T Ravikumar, JJ formed the majority, Ajay Rastogi and Hrishikesh Roy, JJ dissented and opined that unstamped arbitration agreements are valid at the pre-referral stage.
Background
Earlier in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., wherein the three-judge Bench of Justices DY Chandrachud (now CJI), Indu Malhotra and Indira Banerjee held that 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. In doing so, the Bench had also doubted the correctness of the Division Bench decision in Vidya Drolia v. Durga Trading Corpn., . Thus, a reference to a five- bench was made.
Issue:
Whether the statutory bar contained in Section of the applicable to instruments chargeable to Stamp Duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?
Majority view
The majority said that an instrument which is inexorable to stamp duty may contain an arbitration clause which may be non-stamped, cannot be said to be an instrument enforceable in law. It was further said that an unstamped instrument, when it is required to be stamped, not being a contract and not enforceable in law, cannot therefore exist in law. The majority approved paragraph 22, 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Limited, , and to this extent also approved Vidya Drolia (supra)
The Court said that the true intention behind the insertion of Section in the (‘the Act’) was to confine the Court acting under the act to examine and to be certain about the existence of an arbitration agreement. The certified copy must clearly indicate stamp duty as in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., , it does not be so, then the Court should not act on such certified copy. If the instrument is produced unstamped, the Court acting under Section 11(6A) of the Act is duty bound to act under Section of the
An arbitration agreement under Section 7 of the Act attracts stamp duty and if it is not stamped or is insufficiently stamped then it cannot be acted upon under Section 35 of the stamp Act, unless following inbounding and paying of the requisite duty is done.
The provisions of Section 33 and bar of Section of the applicable to instruments chargeable to stamp duty and Section 3 under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, as being non-existent in law unless the instrument is validated by Stamp Act.
Dissent:
The Court (dissenting judges) held that the existence of a certified copy/copy of an arbitration agreement whether unstamped or insufficiently stamped at the pre referral stage is an enforceable document for the purpose of appointment of an arbitrator under Section 11 of Act where judicial intervention shall be minimal and can only be allowed for the prima facie examination of existence of arbitration agreement alone keeping in view of the object of 2015 amendment.
Further, it was said that the Courts must adhere to the time schedule for the appointment of the arbitrator prescribed under Section 11(13) of the Act. All the preliminary debatable issues including insufficiently stamped, unduly stamped or validity of the arbitration agreement are referable to the arbitrator or to tribunal under Section 60 of the Act. The decision is SMS Tea Estates (P) Ltd. stands overruled, paragraphs 22 and 29 in Garware (supra), which are proved in Paragraphs 146 and 147 of Vidya Drolia (supra) are overruled to that extent.
Also read:
[N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., Civil Appeal No. 3802-3803 of 2020, decided on 25-04-2023]
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