Whether or not Arbitration Agreement is enforceable & can be acted upon even if the contract is unstamped under the Stamp Act?

INTRODUCTION

The Constitution Bench of the Hon’ble Supreme Court in a reference made to it in M/S N.N. Global Mercantile Private Limited vs. M/S Indo Unique Flame Ltd. & Ors. being Civil Appeal No(s) 3802-3803 OF 2020 (hereinafter referred to as “N.N. Global“) had, by a majority of 3:2, held that arbitration agreement in an unstamped contract which was exigible to stamp duty was not enforceable. However, the author most respectfully begs to differ from the view taken by the Constitution Bench and the same would be illustrated by way of the submissions made hereinafter.

Analyzing the provisions of the Stamp Act

The analysis of certain provisions of the Stamp Act contains weightage in answering the question as to whether the non-payment of the stamp duty or insufficient stamp duty on an instrument would render the instrument inadmissible or unenforceable or something which cannot be acted upon.

Section 35 of the Stamp Act provides that instruments which are not duly stamped are inadmissible in evidence and cannot be acted upon unless the instrument is duly stamped. Therefore in essence it provides that unless the instrument is duly stamped it cannot be acted upon. On further interpretation of the provision it can be seen that an instrument which by virtue of it being unstamped is otherwise defective can be cured at a later stage after the same is duly stamped as the provision uses the words “Unless such instrument is duly stamped”. This shows that if there arises any defect in an instrument by virtue of the stamp duty not being paid, the same defect can be cured by way of payment of the stamp duty. The Stamp Act also lays down the procedure for curing the said defect in view of the provisions of section 38 which provides for the procedure of dealing with the instrument when the same is impounded and section 40 which provides for the Collector’s power to stamp instruments which are impounded.

It is further stated that section 35 of the Stamp Act does not make the unstamped instrument invalid or non-existent or unenforceable. It simply states that the instrument cannot be taken into evidence or acted upon unless the same is duly stamped. Therefore, there is no absolute bar contained in section 35.

Further, the validity of the Arbitration Agreement cannot and must not be affected by the provisions of the Stamp Act as the non-payment of the stamp duty being a curable defect can be cured at a later stage as well. Moreover, the arbitration agreement is a separate agreement in itself and should not be otherwise affected by the substantive contract. In view of the same, it is important to take into consideration the law laid down by the apex court in Hindustan Steel Ltd. vs. Dilip Construction Company (1969) 1 SCC 597 which held that no bar is created by section 36 of the stamp act against an instrument insufficiently stamped for being acted upon and further it said that the provisions of the Stamp Act are not meant to arm litigant with technicalities to negate claim made by the opponent. Further, the decision of the Privy Council in Lachmi Narayan Agarwalla v. Braja Mohan Singh 1924 SCC OnLine PC 34 is of equal importance as it held that after the payment of the requisite penalty, the instrument becomes effective. Further, it is stated that failure to stamp an instrument does not invalidate the instrument.  

The Doctrine of Separability in an Arbitration Agreement and The Stamp Act

The arbitration agreement is a distinct, separate and stand-alone agreement and the same is well-established. By virtue of it being a separate and distinct agreement, section 35 of the stamp act would have no role to play as non-stamping of the instrument would not render the arbitration agreement in that instrument invalid or even ineffective. It only renders the instrument ineffective till the defect is cured.

The effectiveness of the arbitration clause in a contract is preserved so
that the breach of the contractual obligations by termination or non-performance or alleged performance does not deprive the parties of their rights and the power of the Arbitrator to adjudicate on disputes, which, otherwise fall within the ambit of the Arbitration Clause. It is submitted that treating the arbitration agreement as a separate agreement is important so that even if the contract falls, the disputes falling within the arbitration agreement are resolved. Therefore, the death of the main contract would not result in the death of the Arbitration Clause.

The Arbitration Act seeks to achieve the objective of Minimal Judicial Interference. When a party files a Section 11 application for the appointment of the arbitrator, the only thing which is required to be seen that whether the arbitration agreement exists or not. The validity of the arbitration agreement can be well left to be decided by the Arbitral Tribunal. The Doctrine of Kompetenz-Kompetenz is enshrined in section 16 of the Arbitration Act and under the said doctrine the Arbitral Tribunal is competent to rule on its own
jurisdiction, including objections with regard to the existence, validity and scope of the Arbitration Agreement.

Taking into consideration the legislative intent behind the Arbitration Act, the Doctrine of Kompetenz-Kompetenz enshrined in section 16 of the Arbitration Act, section 5 of the Arbitration Act which calls for minimal judicial interference, the doctrine of separability and the intent behind section 35 of the Stamp Act where the defect, being a curable defect, efforts must be made for smooth and unhindered passage of the Arbitration process.

In view of the above, the law laid down by SMS Tea (Supra) and Garware Wall (Supra) is incorrect. It is submitted that the effectiveness of an instrument cannot be clothed as being non-existent as the effectiveness of an instrument can be gained by removing the defect i.e., by stamping the same and by way of payment of penalty.

Conclusion

In view of the above discussion, it is stated that the law laid down by the three-judge bench of the Hon’ble Supreme Court in N.N. Global (supra) is good as the same has paved the way for a more harmonious and liberal interpretation of the Arbitration Act and the Stamp Act. It is thus stated that at a stage of section 11(6A) of the Arbitration Act, the court must strictly adhere to consider whether there exists an arbitration agreement or not. The validity of the agreement, the scope of jurisdiction, and all other preliminary objections including the non-stamping can be well decided by the Arbitral Tribunal. Thus to conclude, it is stated that in my opinion the Arbitration Agreement is enforceable and can be acted upon even if the contract is unstamped under the Stamp Act as the same is a stand-alone agreement.

AUTHOR: HITESH P VACHHANI

DISCLAIMER

The above article is for educational purposes only. It is a result of the author’s own intellect and ideas and proper references and citations have been mentioned in the article for a deeper understanding of the issue discussed above. The matter embodied has been properly referenced and acknowledged to avoid any kind of copyright issues.