Over the last few years, Arbitration,a form of dispute resolution has gained immense popularity in India.Arbitration agreements are often executed as a part of commercial contracts to resolve any disputes arising out of the contract in a quick and efficient manner. However, the enforceability of such arbitration agreements has recently come under the scanner of the Indian judiciary, especially in cases where the arbitration agreement has not been stamped as per the Indian Stamp Act. In this article, we will discuss the recent judgements of the Indian courts on the enforceability of unstamped arbitration agreements and the implications of these judgements.
The first issue that needs to be addressed is whether an arbitration agreement is exigible to stamp duty. The answer to this question is a definite yes. The Indian Stamp Act, 1899 (Stamp Act) mandates that any instrument that is executed in India or that relates to any property situated in India must be stamped as per the provisions of the Act. Section 2(14) of the Stamp Act defines an 'instrument' to include every document by which any right or liability is or purports to be, created, transferred, limited, extended,extinguished or recorded. An arbitration agreement is a document in which one agrees to settle out of court, through arbitration cases, any dispute that arises with their counterpart.Hence, it is an instrument exigible to stamp duty under the Stamp Act.
The next issue that arises is whether an unstamped arbitration agreement is enforceable in law and the answer is a clear no. Section 2(g) of the Indian Contract Act, 1872 (Contract Act) defines an 'agreement' as "every promise and every set of promises forming the consideration for each other." An unstamped agreement is not a valid agreement under the Contract Act and is not enforceable in law. The same principle applies to an unstamped arbitration agreement as well. The Supreme Court of India in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Construction & Engg. Ltd. has held that any instrument that is exigible to stamp duty under the Stamp Act but has not been duly stamped and endorsed as per the provisions of the Act, is not enforceable under Section 2(g) of the Contract Act. Hence, an unstamped arbitration agreement is not enforceable in law.
The next issue that needs to be addressed is whether the Stamp Act is a substantive law that must be compulsorily adhered to. The answer to this question is also in the affirmative. The Stamp Act is a substantive law and not a mere procedural law. It creates rights and liabilities and imposes duties and obligations. Hence, it must be compulsorily adhered to. The Supreme Court of India in Vidya Drolia v. Durga Trading Corporation has held that the mandate of the Stamp Act must be read as included in Section 7 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) to form a valid arbitration agreement.Hence, an arbitration agreement that has not been duly stamped as per the provisions of the Stamp Act is not a valid arbitration agreement.
The final issue that needs to be addressed is the severability of the arbitration clause from the substantive agreement. The Supreme Court of India in M/s N.N.Global Mercantile Private Limited v. M/s Indo Unique Flame Ltd. & Ors. had held that the arbitration clause in an instrument is severable and forms a separate agreement. Hence, the invalidity of the substantive instrument due to non-payment of stamp duty would not render
The recent judgements in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.,Garware Wall Ropes Ltd. v. Coastal Marine Construction & Engg. Ltd. and Vidya Drolia v. Durga Trading Corporation has reaffirmed the position that an unstamped arbitration agreement is not enforceable in law pending non-payment of stamp duty as per the Indian Stamp Act. The courts have reiterated that the Stamp Act is a substantive law that must be compulsorily adhered to, and any instrument that is exigible to stamp duty is not enforceable until it is duly stamped and endorsed.
The courts have also clarified that an arbitration agreement is a separate agreement that is exigible to stamp duty in its own right. Therefore, any non-payment of stamp duty on the arbitration agreement would render it invalid and unenforceable under Section 2(g) of the Contract Act until it is duly stamped and endorsed. The mandate of the Stamp Act must be read as included in Section 7 of the Arbitration Act to form a valid arbitration agreement.
The judgement of the 3-judge bench in M/s N.N. Global Mercantile Private Limited v.M/s Indo Unique Flame Ltd. & Ors. has been set aside in as much as it held that the invalidity of the substantive instrument due to non-payment of stamp duty would not render the arbitration clause invalid. The constitution bench,in its judgement pronounced on 25.04.2023, has clarified that the arbitration clause cannot be considered as a separate and independent agreement from the main agreement when it comes to stamp duty.
The constitution bench has held that the arbitration clause is an integral part of the main agreement and cannot be treated as a separate agreement for the purpose of stamp duty. Therefore, the non-payment of stamp duty on the main agreement would render the entire agreement, including the arbitration clause,invalid and unenforceable. The constitution bench has overruled the judgement of the 3-judge bench in this regard.
The recent judgements of the Indian courts have confirmed the importance of stamp duty in the enforceability of arbitration agreements. It also provided clarity on the treatment of arbitration clauses in relation to stamp duty. It is essential for parties to an arbitration agreement to ensure that the agreement is duly stamped and endorsed to avoid any disputes regarding its enforceability in the future.
An arbitration agreement is a separate agreement that is exigible to stamp duty in its own right, and any non-payment of stamp duty on the arbitration agreement would render it invalid and unenforceable until it is duly stamped and endorsed. The mandate of the Stamp Act must be read as included in Section 7 of the Arbitration Act to form a valid arbitration agreement.
Furthermore, the constitution bench has clarified that the arbitration clause cannot be considered a separate and independent agreement from the main agreement when it comes to stamp duty. The non-payment of stamp duty on the main agreement would render the entire agreement, including the arbitration clause, invalid and unenforceable. This clarifies the confusion that was caused by the judgement of the 3-judge bench in M/s N.N. Global Mercantile Private Limited v. M/s Indo Unique Flame Ltd. & Ors.
