2023 (7) TMI 761 - SUPREME COURT

Enforceability of Arbitration agreement even when the Work Order is unstamped and unenforceable under the Indian Stamp Act, 1899.

Finding in N.N. GLOBAL [2021 (1) TMI 1121 - SUPREME COURT] - The Court found that an Arbitration Agreement is a distinct and separate agreement, which is independent from the substantive commercial contract in which it is embedded. Under the Doctrine of Kompetenz–Kompetenz, the Arbitral Tribunal had competence to rule on its own jurisdiction, including objections with regard to the existence, validity and scope of the Arbitration Agreement. Section 16(1) of the Act was relied upon. The Court made a copious reference to case law in support of the Doctrine of Kompetenz-Kompetenz. Section 5 of the Act contemplated minimal judicial interference. The Court referred to the Maharashtra Stamp Act, 1958. Section 34 of the said Act, essentially, is pari materia with Section 35 of the Stamp Act, 1899 hereinafter referred to as the Stamp Act. There are other provisions, which essentially follow the same pattern as is contained in the latter Act. The Court, thereafter, went on to refer to Item 63 of Schedule I of the Maharashtra Stamp Act, 1958, which dealt with ‘Works Contract’. It was found that the Stamp Act is a fiscal measure. Thereafter, the Court went on to discuss the Judgment of this Court reported in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited.

Finding in SMS TEA ESTATES [2011 (7) TMI 1289 - SUPREME COURT] - When a lease deed or any other instrument is relied upon as contending the arbitration agreement, the court should consider at the outset, whether an objection in that behalf is raised or not, whether the document is properly stamped. If it comes to the conclusion that it is not properly stamped, it should be impounded and dealt with in the manner specified in Section 38 of the Stamp Act. The court cannot act upon such a document or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act, the document can be acted upon or admitted in evidence.

Finding in GARWARE - The Bench of two learned Judges took the view that the Arbitration Clause contained in the sub-contract would not exist as a matter of law until the sub-contract was duly stamped. It was further found that Section 11(6A) deals with existence as opposed to Section 8, and Section 45 of the Act.

AS PER K. M. JOSEPH, J.

Whether the statutory bar contained in Section 35 of the Stamp Act 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, as being non-existent, pending payment of stamp duty on the substantive contract/instrument?

HELD THAT:- The view taken in SMS Tea Estates as followed in Garware and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other Charities v. Bhaskar Raju and Brothers and others [2020 (2) TMI 678 - SUPREME COURT] as to the effect of an unstamped contract containing an Arbitration Agreement and the steps to be taken by the Court, represent the correct position in law as explained by us hereinbefore. N.N. Global was wrongly decided, when it held to the contrary and overruled SMS Tea Estates and Garware.

An instrument, which is exigible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. Therefore, we approve of paragraphs-22 and 29 of Garware. To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware is approved.

The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an Arbitration Agreement.

The Scheme permits the Court, under Section 11 of the Act, acting on the basis of the original agreement or on a certified copy. The certified copy must, however, clearly indicate the stamp duty paid as held in SMS Tea Estates. If it does not do so, the Court should not act on such a certified copy.

An Arbitration Agreement, within the meaning of Section 7 of the Act, which attracts stamp duty and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp Act - the provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.

In a given case, the Court has power under paragraph-5 of the Scheme, to seek information from a party, even in regard to stamp duty.

As per RASTOGI, J.

The existence of a copy/certified copy of an arbitration agreement whether unstamped/ insufficiently stamped at the pre-referral stage is an enforceable document for the purposes of appointment of an Arbitrator under Section 11(6A) of the Act, 1996 where the judicial intervention shall be minimal confined only to the prima facie examination of “existence of an arbitration agreement” alone keeping in view the object of 2015 amendment and the courts must strictly adhere to the time schedule for the appointment of Arbitrator prescribed under Section 11(13) of the Act, 1996.

All the preliminary/debatable issues including insufficiently stamped/unduly stamped or validity of the arbitration agreement etc. are referrable to the Arbitrator/Arbitral Tribunal under Section 16 of the Act, 1996 which, by virtue of the Doctrine of Kompetenz - Kompetenz has the power to do so.

The decision in SMS Tea Estates Private Limited stands overruled. Paras 22 and 29 of Garware Wall Ropes Limited which are approved in paras 146 and 147 in Vidya Drolia and Others are overruled to that extent.

AS PER HRISHIKESH ROY, J.

Whether the statutory bar under Section 35 titled “Instruments not duly stamped inadmissible in Evidence” of the Stamp Act,1899 would be attracted when an arbitration agreement is produced under Section 11(6) of the Arbitration Act,1996?

HELD THAT:- The objective behind the enactment of the Arbitration Act,1996 was to, inter alia, avoid procedural complexity and the delay in litigation before Courts. Impounding and stamping at the Section 11 stage would frustrate the very purpose of the amended Arbitration Act,1996 as the enforcement of arbitration agreements would be stalled on an issue, which is capable of being resolved at a later stage. To defer stamping to the stage of the arbitrator would in my view achieve the objective of both the Arbitration Act, 1996 and the Stamp Act, 1899.

The contours of the jurisdiction of the judge referring matters for arbitration, cannot be permitted to suffer from confusion and ambiguity. As can be seen, the present 5 judge-Bench could not provide clarity on the issue referred to us, on account of the fractured verdict, leading to legal uncertainty. The constitution of a larger Bench in this Court is certainly not commonplace as the last occasion when 7 judges assembled was in the year 2017. Around 5 matters as I am informed, are already awaiting the attention of 7 judges Bench. In such backdrop, the interplay between the Acts and how its objective is to be achieved in the course of Arbitral proceedings either at the referral stage or thereafter is much too important to be left lingering for a clarificatory verdict by a larger Bench. Therefore, I would appeal to the legislative wing of the State to revisit the Amendments which may be necessary in the Stamp Act,1899 in its application to the Arbitration Act,1996. The State might put into place a convenient mechanism which would efface the inconsistencies in both the Arbitration Act,1996 and the Stamp Act,1899. If we look at the legislative intent of the Arbitration Act,1996 and what our country is hoping to be as the destination of choice for Arbitration, I’m of the considered opinion that it would be appropriate to interpret the statutory interplay in a constructive manner without defeating the legislative intent and thwarting the speedy referral to arbitration.

The examination of stamping and impounding need not be done at the threshold by a Court, at the pre-reference stage under Section 11 of the Arbitration Act, 1996 - Non-stamping/insufficient stamping of the substantive contract/instrument would not render the arbitration agreement nonexistent in law and unenforceable/void, for the purpose of referring a matter for arbitration. Garware wrongly applied the principle in Hyundai [2018 (8) TMI 1469 - SUPREME COURT] to hold that an arbitration agreement would not exist-in-law if it is unstamped/insufficiently stamped. An arbitration agreement should not be rendered void if it is suffering stamp deficiency which is a curable defect. To this extent, Garware and Hyundai do not set out the correct law.

AS PER C. T. RAVIKUMAR, J.

Whether the Court called upon to invoke the power under Section 11 (6) should or could exercise the power coupled with duty under Section 33 of the Indian Stamp Act, 1899, when the document carrying the arbitration agreement or arbitration clause is found unstamped or insufficiently stamped or without going into such matter, should it confine its exercise of power in the matter of appointment of Arbitrator(s) only and refrain itself from proceeding further in view of the mandate under Section 33 of the Indian Stamp Act, 1899?

The Bar under Section 35 of the Stamp Act on admission of instruments not duly stamped in evidence, as is evident from proviso (a) to it, is not permanent and is curable by following procedures provided thereunder and making an endorsement as provided under Section 42(1) of the Stamp Act. Sub-section (2) of Section 42 makes it clear that every such instrument so endorsed shall thereupon be admissible in evidence and be acted upon and authenticated as it had been duly stamped. The upshot of the discussion is that being unstamped or insufficiently stamped, the agreement would not be available to be ‘admitted in evidence’ and ‘to be acted upon’, till it is validated following the procedures prescribed under the provisions of the Stamp Act and till then, it would not exist ‘in law’.

As already found the nature of exercise of power under Section 11 (6) is ‘judicial’ and therefore, it was thought only fit to permit to exercise such power only on the original instrument or else, on its certified copy, to be understood with reference to Section 63 (1) read with Section 74 and 76 of the Evidence Act. When once the intention behind paragraph 2(a) of the scheme is understood in that manner with reference to the provisions under Section 63 (1), 74, 76 and 79 of the Evidence Act, the expression ‘certified copy’ employed in paragraph 2(a) of the scheme framed under Section 11(10) of the Act cannot be interpreted to mean any other kind of copies provided under Section 63 of the Evidence Act other than under Section 63 (1) of the Evidence Act.

It cannot be presumed that despite the conspicuous difference in the said expressions, under paragraph 2 (a) ‘certified copy’ alone was permitted to be appended along with the application under Section 11 of the Act, unintentionally. - I am of the considered view that it was so prescribed, fully understanding the nature of exercise of power under Section 11 (6) of the Act and also the presumption of genuineness and correctness of ‘certified copy’ available by virtue of Section 79 of the Evidence Act.