In continuation to the previous article titled “Supreme Court to decide on the validity of Arbitration Clause in an unstamped contract”¹.

Supreme Court in a judgement² delivered on 25th April 2023 finally settled the ongoing legal conundrum revolving around the enforceability of an Arbitration Agreement in an unstamped contract. A Constitution Bench of the Supreme Court in a 3:2 majority held that unstamped or insufficiently stamped agreement is not enforceable in law. Therefore, an Arbitration Agreement within the meaning of Section 7³ of the Arbitration and Conciliation Act, 1996 (“the Act”) which attracts stamp duty if not stamped or insufficiently stamped, cannot be acted upon unless it is validated under the Stamp Act.

Whereas the dissenting minority held that the existence of an Arbitration Agreement whether unstamped or insufficiently stamped at the pre-referral stage is an enforceable document under Section 11 of the Act. Non-stamping of the substantive contract would not render the Arbitration Agreement non-existent in law and unenforceable for the purpose of referring a matter for arbitration.

FACTUAL MATRIX OF THE DISPUTE
Indo Unique Flame Ltd. [Respondent] was awarded a work order from Karnataka Power Corporation Ltd. (KPLC). In pursuance of the said work order Indo Unique furnished a bank guarantee in favour of KPLC. Subsequently, Indo Unique entered into a sub-contract work order with the N.N Global Mercantile Pvt. Ltd. [Appellant] for the transportation of coal. The Arbitration Agreement was embodied under Clause 10. A series of proceedings commenced before the Commercial Court Nagpur which later got challenged before the Bombay High Court by Indo Unique lame Ltd. by way of a Writ Petition. Thereafter, the Bombay High Court rejected the findings of the Commercial Court and allowed the application under Section 8 of the Act by holding that there was a valid Arbitration Agreement thereby, rejecting the contention that the alleged fraudulent invocation of a bank guarantee under the contract could not be resolved through arbitration. Further, the Bombay High Court held that the issue of non-stamping of the work order can be raised at the stage of Section 11 of the Act⁴ or before the Arbitral Tribunal at any other appropriate time.

Aggrieved by the decision of the Bombay High Court, N.N Global Mercantile Pvt. Ltd. filed an appeal before the Supreme Court of India contending that since the sub-contract was not stamped under the Maharashtra Stamp Act, 1958, the Arbitration Agreement would be rendered ‘unenforceable’. The three-judge Bench of the Supreme Court held that in case of an application filed under Section 9 of the Act⁵ praying for urgent ad interim reliefs with respect to the substantive contract not duly stamped, the court would grant ad interim relief to safeguard the subject matter of the Arbitration.

Further, the substantive contract would be seized, and the party concerned would be directed to take the necessary steps for payment of stamp duty as per the provisions of the relevant Stamp Act in a time-bound period. The Supreme Court (3-Judges bench in N.N Global⁶) had doubted the suitability of the previous decisions in Garware⁷ judgment cited (which took the view that unless the sub-contract was stamped, the Arbitration clause contained therein would not exist as a matter of law) and referred the matter to the Constitution Bench of the Supreme Court.

ANALYSIS BY THE COURT
The majority opinion in the present matter held that 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. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot exist in law. The Court upheld the Vidya Drolia judgment⁸ and the reasoning of the Garware judgment.

The majority opinion further upheld the law affirmed in Garware judgement as to the effect of an unstamped contract containing an Arbitration Agreement and the steps to be taken by the Court and opined that N.N Global (3-judge bench) was erroneously decided since it held contrary to the Garware judgment.

The Court further held that the Doctrine that the Arbitration Agreement being a separate agreement (Doctrine of Kompetenz- Kompetenz) is well-established. The efficacy of the arbitration clause in a contract is preserved so that extinguishing the contractual obligations by termination or non-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. The underlying principle behind treating the Arbitration Agreement as a separate agreement is to create a mechanism, which survives the contract so that disputes, falling within the Arbitration Agreement, are resolved.

Thus, the rescission of the main contract would not result in the death of the Arbitration clause. However, proceeding on the basis that an Arbitration Agreement contained a clause in the main contract is a separate agreement and it can exist independently, the fallacy behind such a line of argument is that there is a bar to the use of an instrument, which is not stamped or insufficiently stamped for any purpose (unlike Section 49 of the Registration Act, which allows an unregistered document to be used to prove a collateral transaction), an unstamped instrument, in which, an Arbitration Clause is part of, cannot be allowed to be used, as it would be allowing the instrument to be used to establish a collateral transaction.

Further, the majority opined that at the stage of Section 11 of the Act, the Court is bound to examine the instrument and if found to be unstamped or insufficiently stamped, the instrument is not to be acted upon. If a certified copy is produced at this stage, it must clearly indicate the stamp duty paid; otherwise, the Court should not act on the said certified copy.

In conclusion, the present judgement in finality, settled the dispute around the legality and the enforceability of an Arbitration Agreement in an unstamped or insufficiently stamped contract. Though the Court also observed in the concluding paragraph of the judgement that the legal dispute revolving around the scope and ambit of Section 9 of the Act has been left unanswered and it still stands referred to a Constitution bench for adjudication.

By - Prachi Pandey