This article is written by Bhavna Vijay, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Non-registration of agreements and payment of insufficient stamp duty often become crucial factors in arbitration disputes, affecting the scope of arbitration and creating multiple rounds of litigation. To avoid errors at the stage of registration and payment of stamp duty, parties need to be aware of the present legal position in light of relevant amendments and recent pronouncements of the Supreme Court of India.
In this article, an attempt has been made to summarise all relevant provisions of law, appropriate judgments by Indian courts and the sub-issues to be considered by parties and their counsels while navigating non-registration and insufficient stamp duty.
Legislative background and amendments
The scope of independence of an arbitration agreement as per Section 16 of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) has been discussed by various courts in a decade. In 2011, the Supreme Court in SMS Tea Estates Pvt Ltd. v. Chandamari Tea Company Pvt. Ltd (2011) 14 SCC 66 discussed issues that arose for the validity of the agreements in case of insufficient stamp duty and unregistered instrument.
Mainly, these two issues were discussed in SMS Tea Estates (supra) for the first time:
(i) Whether an arbitration agreement contained in an unregistered instrument is valid and enforceable?
(ii) Whether an arbitration agreement in an unregistered agreement that is not duly stamped is valid and enforceable?
Deciding the first issue, the Supreme Court referred to Section 49 of the Registration Act, 1908 (“Registration Act”) (in case of an agreement concerning an immovable property). It was observed by the Court that according to Section 49 of the Act if a compulsory document is not registered, that document cannot be read as evidence of any transaction related to the transfer of that property. The court further referred to Section 16(1) (a) of the Arbitration and Conciliation Act, 1996 and concluded that an arbitration agreement in an unregistered agreement can be acted upon and enforceable.
While deciding the second issue, the Supreme Court referred to Section 33 and Section 35 of the Stamp Act, 1899 (“Stamp Act”) and concluded that Section 35 of the Stamp Act is not similar to Section 49 of the Registration Act. In case an agreement is unstamped, it should be impounded as specified under Section 38 of the Stamp Act and the court cannot act upon an agreement that is unstamped and cannot invoke an arbitration clause under the agreement. If the stamp duty is paid in the manner specified under Section 35 or Section 40 of the Stamp Act, the document can be acted upon and can be read as evidence in the court.
Impact of the Arbitration and Conciliation (Amendment) Act, 2015
According to Section 11 of the Arbitration Act, the court has jurisdiction to decide the existence of an arbitration agreement. Therefore it is significant to see the impact of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”) after the insertion of sub-clause 6A under Section 11 of the Act as reproduced below:
“(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.”
Section 11 (6A) was inserted by the Amendment Act which restricts the jurisdiction of the court to examine the existence of an arbitration agreement. However, in Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Ltd (2018) 6 SCC 534 and United India Insurance Company Ltd. and Anr. v Hyundai Engineering and Construction Company Ltd. and Ors (2018) 17 SCC 607, in these cases the Supreme Court decided the existence of an arbitration clause, as well as the requirements for giving effect to the arbitration clause in the facts of the case. The Supreme Court held that Section 11 (6A) uses the term ‘examination of the existence of an arbitration agreement’. The term ‘examination’ by its definition means ‘a detailed inspection or study’. Therefore, it can be interpreted that the court has more power than deciding the existence of an arbitration agreement.
According to SMS Tea Estates (supra), if there is an agreement that is unstamped, an arbitration agreement cannot be acted upon. However, in 2019, in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd. (2019) 9 SCC 209 the Supreme Court decided whether an application under Section 11 of the Arbitration Act can be decided by the Hon’ble Court even if the agreement in which the arbitration clause exists is unstamped. In Garware wall ropes (supra) this case, the Bombay High Court held that given the Amendment Act, the SMS Tea Estates (supra) will not be applicable. Furthermore, the Bombay High Court appointed an arbitrator under Section 11 of the Arbitration Act acting against SMS Tea Estates (supra). However, when the party filed an appeal in the Supreme Court, the Hon’ble Supreme Court reaffirmed the judgment passed in SMS Tea Estates (supra) and it was held by the court that if the main contract is unstamped and unenforceable, an arbitration agreement under such contract cannot be invoked. Moreover, on account of which an arbitrator cannot be appointed by the court under Section 11 of the Arbitration Act as the insertion of sub-section 11 (6A) under the Amendment Act limited the scope of the court to decide the petition under Section 11 of the Arbitration Act.
In Vidya Drolia & Ors. v. Durga Trading Corporation (2019) 20 SCC 406 the three judges bench cited and referred to Garware wall ropes (Supra) case confirming the findings of the Supreme Court and held that an arbitration agreement under an invalid contract cannot be acted upon. It was also discussed whether the statutory bar contained under Section 35 of the Stamp Act will apply to the instruments chargeable to stamp duty under the Stamp Act. Moreover, whether this requirement renders the arbitration agreement under such instrument. It was held by the Supreme Court that an arbitration clause under an unstamped agreement is unenforceable and is invalid.
Recent clarification by the Supreme Court
After a decade, in M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd. 2021 SCC OnLine SC 13 the three-judge bench of the Supreme Court overruled the judgment passed by the Supreme Court in SMS Tea Estates (supra). The Court held that Section 49 of the Registration Act read with Section 16 of the Arbitration Act clarifies that if an arbitration agreement is a part of an unregistered agreement then the arbitration agreement shall be considered as a valid agreement and shall be enforceable by law. It was observed that non-payment of the stamp duty does not invalidate the arbitration agreement since Section 16 of the Arbitration Act makes an arbitration clause an independent agreement.
The Court further held that the Court is obligated to direct the parties to fulfil the duty as prescribed under the provisions of the Stamp Act and the court cannot act upon an arbitration agreement until the stamp duty is paid as prescribed under Section 38 or Section 40 of the Stamp Act. If the main agreement is unstamped then the arbitration clause cannot be invoked. However, the arbitration clause can be invoked if the agreement is unregistered (compulsory registrable instrument) but if the main agreement is unstamped the arbitration clause cannot be invoked. Once the stamp duty is paid by the parties obeying the directions given by the Hon’ble Court and as per the procedure prescribed under the provisions of the Stamp Act an arbitration agreement can be invoked.
However, in N.N Global Mercantile (supra), the Supreme Court observed “The non-payment of stamp duty on the substantive contract would not invalidate even the main contract. It is a deficiency which is curable on the payment of the requisite Stamp Duty”. It was further observed that there will be no legal obstruction to the enforceability of the arbitration agreement due to insufficient stamp duty. In this case, the Supreme Court recognized the law of separability and it was held that the non-payment of stamp duty cannot invalidate an arbitration clause as it is an independent agreement according to the provisions of the Arbitration Act.
Upon considering the judgment, it can be argued that the non-payment of the stamp duty is a curable defect, for this reason alone an arbitration agreement cannot be held invalid and unenforceable. The non-payment of stamp duty does not make an agreement void ab initio and can be easily cured by paying the duty. However, it will be challenging for the court to invoke arbitration when there are questions raised on the validity of the main agreement.
In the current scenario, it has been clarified by the Supreme Court that the principle of separability will be applied to an arbitration agreement and an arbitration agreement will be acted upon even if the main contract is unstamped. It further clarifies that if an arbitration agreement is a part of an unstamped agreement that should have been compulsorily stamped, as a consequence the Arbitration Act cannot restrict the court from acting upon an arbitration agreement. Furthermore, cannot defeat the intent of the parties to seek their resolution of disputes by way of arbitration. It is pertinent to note that two judgments are holding contrary views on whether an arbitration clause can be invoked if the main contract is unstamped. In Vidya Drolia (supra) and N.N Global (supra), both the matters were decided by the three-judge bench and it is necessary to seek more clarity to avoid the confusion concerning the decisions passed by the Supreme Court benches. Moreover, the arbitration has the purpose of resolving the disputes in a limited time and the requirement of stamping and registration of an agreement can delay the proceedings and will defeat the main purpose of the Arbitration Act. So, the Hon’ble Supreme Court must constitute a five judges bench to confirm the views on the unstamped agreement.
- SMS Tea Estates Pvt Ltd. v. Chandamari Tea Company Pvt. Ltd [2011 14 SCC 66]
- Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd.(2019) 9 SCC 209
- Vidya Drolia & Ors. v. Durga Trading Corporation (2019) 20 SCC 406
- M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd. (2021) SCC OnLine SC 13
- Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Ltd. (2018) 6 SCC 534
- United India Insurance Company Ltd. and Anr. v. Hyundai Engineering and Construction Company Ltd. and Ors (2018) 17 SCC 607
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