Issue of unstamped arbitration agreements still in question

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Issue of unstamped arbitration agreements still in question

The Supreme Court recently split open another issue that was previously considered settled – the enforceability of an arbitration agreement incorporated in an unstamped contract. The decision of the Supreme Court was given recently by a three-judge bench in the case of NN Global Mercantile Pvt Ltd v Indo Unique Flame Ltd & Others.

The bench disagreed with two previous judgments of the Supreme Court on the issue:

(1) SMS Tea Estates Pvt Ltd v M/s Chandmari Tea Co Pvt Ltd, where it was held that a court cannot act on an arbitration agreement forming part of an instrument unless the stamp duty has been paid on that instrument; and

(2) Garware Wall Ropes Limited v Coastal Marine Constructions and Engineering Limited, where it was held that an arbitration clause does not exist, as a matter of law, if it is in an agreement that is not duly stamped.

Both these cases were given by two-judge benches, which means that the Unique Flame case should prevail over them. However, the decision in the Garware case was subsequently approved by a three-judge bench in Vidya Drolia & Ors v Durga Trading Corporation and, therefore, the Supreme Court had to now refer the issue to a constitution bench of five judges for a decisive ruling.

Brief facts

Unique Flame was awarded a work order for beneficiation/washing of coal by the Karnataka Power Corporation. Unique Flame executed a work order on a sub-contract basis with another company, NN Global Mercantile, for transporting coal from its washery to the stockyard. The work order provided that disputes would be decided by arbitration. Disputes arose between the parties in relation to a bank guarantee submitted by NN Global to Unique Flame.

NN Global filed proceedings before a commercial court, and Unique Flame sought to refer the dispute to arbitration by filing an application under section 8 of the Arbitration and Conciliation Act, 1996. The section 8 application was rejected and an appeal was filed before the Bombay High Court. The high court allowed the section 8 application, and held that the issue of enforceability of the arbitration agreement could be considered later. Against this, NN Global appealed to the Supreme Court. A key issue before the Supreme Court was whether the arbitration agreement was enforceable in view of the unstamped work order.

The arguments

NN Global argued that the application under section 8 of the Arbitration Act was not maintainable, as the work order was unstamped and could not be received in evidence, or acted upon. It argued that the arbitration clause was unenforceable and had no existence in law unless applicable stamp duty was paid on the work order. NN Global relied on the Garware case. Unique Flame argued that non-payment of stamp duty would not make the arbitration agreement unenforceable, since this was a curable defect.

The decision

The Supreme Court held that the arbitration agreement would not be unenforceable as a result of non-payment of stamp duty on the main contract, since:

(1) an arbitration agreement is an independent agreement and has an existence of its own;

(2) an arbitration agreement is not chargeable to stamp duty; and

(3) the non-payment of stamp duty on the main contract is a curable defect.

The court disagreed with the view in the Tea Estates and Garware cases. It observed that the Tea Estates decision was given prior to the 2016 amendment, at which time courts had wider powers to examine issues in connection with an arbitration agreement (including whether a claim was time-barred or stale, etc.). But after the amendment, the power was restricted to merely examining the “existence” of an arbitration agreement. That said, given the contrary ruling of a co-ordinate bench (same number of judges) in Vidya Drolia’s case, the Supreme Court referred the issue to the constitution bench.

Analysis

The Supreme Court’s decision means fewer technical obstacles for arbitration at the pre-reference stage. Having said that, the decision proceeds on the assumption that an arbitration agreement, despite being an independent contract from the main contract, is not independently chargeable to stamp duty. This court’s reasoning for this is that arbitration agreements are not specifically stated in schedule I of the Maharashtra Stamp Act.

Even the issue referred to the constitutional bench does not consider the possibility of independent stamping of an arbitration agreement, since it asks whether an unstamped contract would “also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent…”

This view may not be consistent with stamp laws and the manner in which documents are stamped in practice. Stamp laws usually have a residuary provision that covers any instruments that are “not otherwise provided for”.

Unless the constitutional bench specifically opines on the issue of chargeability of an arbitration agreement to stamp duty, it seems that the issue of enforceability of an unstamped arbitration agreement may continue to linger on.

By Akshay Sachthey, principal associate, Maryam Naaz Quadri, associate, at Phoenix Legal.