- Sakshar Law Associates
Legality of unstamped agreement
Updated: Sep 2, 2022
Every court or arbitrator before whom an unregistered contract chargeable with duty is brought is required by Section 33 of the Indian Stamp Act, 1899 (hence referred to as the "Stamp Act") to examine the contract in order to determine whether it is duly stamped. A contract that has not been lawfully stamped is inadmissible as evidence and so cannot be acted upon under the Stamp Act. This may result in the document being seized.
When applying to the High Court for the appointment of an arbitrator, most High Court rules require that the original arbitration agreement or a fully certified copy be submitted along with the Section 11 application under the Arbitration and Conciliation Act. If the contract is a certified copy with an arbitration clause, the stamp duty paid on the original should be disclosed.
WHAT HAPPENS IF THE ARBITRATION AGREEMENT IS UNSTAMPED?
The Supreme Court had the opportunity to consider what would happen if the arbitration agreement was not properly stamped in M/S SMS Tea Estates P.Ltd v. M/S Chandmari Tea Co. P. Ltd.
The Supreme Court ruled that a court must consider all relevant factors before admitting a contract into evidence or acting on it. The contract must be examined to see if it has been properly stamped. As a result of Section 35 of the Stamp Act, if the contract is discovered to be not duly stamped, the court will be unable to act on the contract that has been submitted. As a result, despite the idea of separability, the arbitration clause cannot be enforced because the entire contract must be considered for the purpose of calculating Stamp Duty. The court can only recognize the contract as validly stamped if the deficit stamp duty and penalty are paid, either before the court or before the Collector, according to the method given down under Section 35 or 40 of the Stamp Act, and the deficiency with regard to the deficit stamp is corrected.
THE AMENDMENT OF 2015:
The Arbitration and Conciliation (Amendment) Act, 2015 (hence referred to as the "Amendment Act") went into effect on October 23, 2015, based on the 246th Law Commission Report. The Amendment Act made a number of changes, one of which was the addition of Section 11 to the Constitution (6A).
Section 11(6A) of the A&C Act - 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.
The powers conferred by Section 11 were relatively broad prior to the addition of Section 11 (6A). The appointment of an arbitrator is well established as a judicial power, not just an administrative one. In SMS Teas Estates, the Supreme Court held that where an arbitration agreement is contained in an unstamped/insufficiently stamped agreement, the provisions of the Indian Stamp Act 1899 (Indian Stamp Act) require the judge hearing the Section 11 application under the 1996 Act (Section 11 application) to impound the agreement and ensure that stamp duty and penalty (if any) are paid before proceeding with the Section 11 application.
The Supreme Court ruled on April 10, 2019, that "the introduction of Section 11(6A) does not, in any way, deal with or get over the basis of the judgment in SMS Tea Estates, which continues to apply even after the alteration of Section 11(6A)" in this case. The reasoning for this ruling was that an arbitration clause in a contract does not exist if it is not enforceable by law, that is, if the contract is unstamped/insufficiently stamped not in accordance with the Indian Stamp Act.
In the case of S.B.P. & Co. v. Patel Engineering Ltd. and Anr., the Supreme Court held that the courts had the power to "entertain the request the presence of a legal arbitration agreement, the existence of a live claim, the existence of a requirement for exercising his power, and the credentials of the arbitrator or arbitrators."
With the addition of Section 11 (6A), the court's ability to evaluate whether or not a Section 11 application should be heard was limited to the existence of an arbitration agreement. After reading Section 11 (6A), the Supreme Court decided in M/s Duro Felguera v. Gangavaram Port Ltd. that the legislature's intent was to minimize the Court's intervention at the stage of appointing the arbitrator and that as a result of Section 11 (6A), the Courts should only look into one aspect, the existence of an arbitration agreement.
FOLLOWING THE 2015 AMENDMENT, AN UNSTAMPED AGREEMENT:
The perspective of the Bombay High Court
The Bombay High Court had to decide on two issues on April 04, 2019, in the case of Gautam Landscapes Private Ltd. and Ors v. Shailesh S. Shah and Ors:
(i) Whether interim relief can be entertained or granted when a document containing an arbitration clause is unstamped or insufficiently stamped; and
(ii) Whether, in light of Section 11 (6A) of the Arbitration and Conciliation Act, 1996, inserted by the Act. Under the Arbitration and Conciliation (Amendment) Act, 2016, the Court would have to wait for the stamp authorities' adjudication before considering and passing final orders on an application under Section 11(6) of the Act, if the document objected to is not adequately stamped.
The Bombay High Court decided that the power provided under Section 9 to a party to approach the court would not be of the character of a contract right when answering the question of whether a court can grant interim relief if the contract contains the arbitration clause is unstamped. The parties must prove that an arbitration agreement existed and that the applicant was a party to it under Section 9 of the Act.
The Bombay High Court acknowledged the theory of separability and stated that failing to grant ad-interim or interim reliefs in an application under Section 9 of the Act before the start of arbitral proceedings would result in severe hardship if the Court decided to wait for the contract to be stamped before acting on the Section 9 application. Non-payment of stamp duty is not an irreparable defect under the Stamp Act. Before it is submitted into evidence, it can be healed at any time. The Bombay High Court went on to say that since the Supreme Court's decision in M/S Sms Tea Estates P.Ltd v. M/S Chandmari Tea Co. P. Ltd. involved an issue under Section 11 of the Act, the Bombay High Court had no jurisdiction. The standards established would not apply to an application under Section 9 of the Act, and a Court might provide temporary relief under Section 9 even if the contract had not been properly stamped.
The Bombay High Court focused on the legislature's intent while passing the Amendment Act when deciding the second issue. The court relied on Section 11(13) of the Act, which was added by the Amendment Act and states that an application filed under Section 11 must be resolved within sixty days of the date of delivery of notice to the opposing party. The legislature's goal, according to the Bombay High Court, was to ensure that arbitration disputes were resolved quickly and with minimal court intervention.
The Bombay High Court held that when the court hears an application under Section 11 of the Act, the scope of the inquiry is now limited to determining whether the parties have entered into an arbitration agreement, and if so, the disputes that fall within the scope of the agreement must be referred for adjudication by appointing an arbitral tribunal.
The Bombay High Court reasoned that because the Stamp Act is a fiscal act with the goal of collecting revenue, the goal could be attained by impounding the document and submitting it to the stamp authority if it is discovered to be insufficiently stamped. The court's ability to exercise their jurisdiction under the Act would be limited if they awaited the conclusion of the opinion adjudication, and the goals of justice would not be served. As a result, the Bombay High Court held that, by taking a balanced approach and keeping in mind the legislative intent and the Supreme Court's view, a party need not be put at a disadvantage simply because sufficient stamp duty was not paid on the contract before considering and passing a final order under section 11(6), and that courts do not need to wait for stamp authority adjudication to decide a Section 11 application.
The Supreme Court issued its ruling in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. little than a week after the Bombay High Court's decision.
When a court is considering a Section 11 application and discovers that the contract is unstamped, the court is obligated by the Stamp Act's requirements to first impound the contract and ensure that stamp duty and penalty (if any) be paid before the agreement as a whole may be acted upon. As a result, the arbitration clause contained in such a contract cannot be separated. The phrase "in a contract" was given as part of the definition of an arbitration agreement under Section 7(2) of the Act. Thus, determining whether an arbitration agreement exists under Section 11 would require determining whether the contract "exists," and a contract cannot exist as a matter of law until it has been duly stamped.
The Supreme Court overturned the Bombay High Court's decision in Gautam Landscapes Private Ltd. and Ors v. Shailesh S. Shah and Ors, holding that a High Court must mandatorily impound an unstamped or insufficiently stamped arbitration agreement and send it to the adjudicating authority to resolve the stamp duty and penalty issues as quickly as possible.
THE DIFFERING POSITIONS HELD BY DIFFERENT SCI BENCHES ARE OUTLINED BELOW:
i.) In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. Bench Strength Holding SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., 2 judges on the 20th of July, 2011. An unstamped arbitration clause in a contract that is required to be registered or subject to stamp duty cannot be used to appoint an arbitrator.
ii.) Coastal Marine Construction & Engineering Ltd v. Garware Wall Ropes Ltd 10.04.2019, SMS Tea Estates is upheld.
iii.) Durga Trading Corporation v. Vidya Drolia 14.12.2020. There will be three judges. Garware Wall Ropes N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. was upheld by the court on 11.01.2021. There will be three judges. Even if the underlying contract is not admissible in evidence or cannot be enforced, the arbitration agreement would not be considered invalid, unenforceable, or non-existent.
The Indian Stamp Act of 1899 (or comparable State enactments) is primarily designed to generate revenue for the government; such documents become admissible as evidence. While the court is exercising its authority under Section 11 of the Arbitration and Conciliation (Amendment) Act, 2015, any insufficient stamp payment will not be scrutinized, as the provision's narrow scope only allows them to consider the existence of an arbitration agreement prima facie.
By way of the Intercontinental Judgment, the SCI has noted that whether stamp duty is paid in a timely manner or not is a subject that can be addressed at a later time. In a case where the documents are unstamped, to begin with, the court would have looked into the concerns highlighted in N.N Global, according to the Court. Surprisingly, this finding has nothing to do with the SCI's decision in N.N Global. In light of the SCI's findings in N.N Global, it's worth noting that the SCI believed that an improperly stamped or unstamped agreement (without distinguishing between the two) would not render the arbitration agreement void. For its decision, the SCI stated the following justification: (i) stamping or absence thereof is a curable defect; and (ii) doctrine of severability enshrined under Section 16 of the A&C Act provides that the arbitration agreement is separate from the substantive contract.
In light of the foregoing, it appears that the Intercontinental Judgment has added to the ambiguity by considering a distinction based on N.N. Global between completely unstamped agreements and agreements that are insufficiently stamped. It's worth noting that in the case of N.N. Global, no such distinction was made, and the SCI's reliance on it appears to be misplaced. However, as previously stated, the SCI's distinction in the Intercontinental Judgment based on N.N. Global is likely to cause further confusion, and this judgment may be misinterpreted by unscrupulous litigants to renege on their obligations arising from an arbitration clause contained in an unstamped or insufficiently stamped agreement. Because there is no reasonable foundation for such a distinction, the current question will be resolved only when the SCI's five-judge bench issues a definitive and conclusive judgment on the legality of an arbitration clause contained in an unstamped or insufficiently stamped agreement.
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