Enforceability of Unstamped Instruments: The Legal Perspective

20th February, 2024 - 6:51 am Categories: Legal Issues Technology 0 Comments

Abstract

In the sequence of judgements, we have witnessed the issue regarding admissibility of the instruments that are unstamped or insufficiently stamped and whether or not it can be acted upon by the courts under Section 8 and Section 11 of the Arbitration and Conciliations Act,1996. A seven judge bench of Supreme Court has brought some precision in this interplay between two crucial legislations that are Arbitration and Conciliation Act,1996 and Stamp Act,1889. The existence of an arbitration agreement was portrayed to be independent from the main contract. By the way of this article, spotlight is brought upon the question of stamping validity and distinction between inadmissibility and voidness of an agreement. This article will also analyse the flaws in the ruling of Supreme Court in N.N.Global which was further rectified by the judgement of 2023.

INTRODUCTION

The Stamp Act,1889 brings about the requirement for the instruments to be stamped and lays down the duty on the court to examine the admissibility of these instruments after checking if they are duly stamped or not. Section 8 of the Arbitration and conciliation Act,1996 limits the intervention of the court in order to preserve the main object behind the speedy justice. It talks about the power of the judicial authority to direct the parties to go for arbitration based on the fulfilment of the conditions on arbitration agreement. Though the arbitration agreement is not required to be stamped under the Stamp Act, but the problem arises because the arbitration clauses are arbitration clauses are usually a part of the substantive agreement, which are needed to be duly stamped. In the past few years, the Supreme Court has not been in favour of considering the unstamped arbitration agreement to be admissible.

CRITICAL ANALYSIS

The principle of Kompetenz-Kompetenz and seperability is used with respect to the Arbitration cases. It has been stated by the courts that the arbitral Tribunal has the authority to decide on its jurisdiction and on the matter of validity of arbitration agreement.

Addressing this issue, Supreme court has tried to examine if courts can enforce the unstamped arbitration agreement or not.

Issue Before Supreme Court

 “Whether the arbitration agreement included in an substantial contract that is not subject to stamp duty payment would likewise be deemed non-existent, unenforceable, or invalid until stamp duty on the substantive contract or instrument is paid?” 

It is essential to analyse the cases in which this issue was dealt with, by the Supreme Court before the judgement of December 2023:

1. SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd: It was held that the court cannot act upon an unstamped arbitration agreement. The decision in SMS Tea Estates (supra) was followed by the Supreme Court in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers.

2. Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd: It was stated that an arbitration agreement in an unstamped contract cannot be acted upon, if the contract is not duly signed. Thus, it will be considered as non- existent in the eyes of law.
3. NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.(NN Global I): An arbitration agreement has a separate identity and by the virtue of it being separate from the main contract, the agreement will not be non-existent just because the contract is unstamped or the stamp-duty was not paid. Therefore, it is a defect that can be corrected.
4. NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (NN Global II): The decision of the court in the case SMS Tea Estates and Garware Wall Ropes was upheld and the judgement of NN Global(I) was considered flawed and not in a right position of law. It was held by the constitutional bench that even though arbitration agreement has a separate identity, however it will not be enforceable if the contract is unstamped or insufficiently stamped. Section 11 of the Arbitration and conciliation Act, 1996 cannot disregard section 33 and 35 of the Indian Stamp Act, 1889. Hence, the court must check if the instrument is duly stamped or not.

Dissenting Opinion: While the majority of the judges in the bench were in favour of applying the provisions of Stamp Act, there were some judges having opposing opinion which targeted on the objective of the Arbitration and Conciliation Act,1996. They were in support of the fact that an unstamped arbitration agreement is curable but they believed that the same could be allowed to be done at any stage and there is no need to resolve it immediately, at the beginning stage.

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Decision of Supreme Court

Decision on doctrine of severability: It was stated that the doctrine of severability will not be impacted by the court’s role to impound the instrument if not duly stamped. While ensuring that the arbitration agreement has a separate identity from that of the principal contract, in which the arbitration clause is mentioned, it could be held that the doctrine cannot be implied when the provisions of Stamp Act are dealt. The purpose behind the implementation of the doctrine was to preserve the arbitration clause, in case the contract is rescinded due to any reason. It was done to protect the rights of the parties and powers of the arbitrator if the main contract is terminated. The Supreme Court observed that in a situation where the contract itself was unstamped, the doctrine of severability would not be applicable.

Decision on distinction between inadmissibility and voidness: Supreme court also created a distinction between voidness of an instrument and its inadmissibility. Section 35 of the Stamp Act talks about the inadmissibility of the agreement or instrument in evidence and non-stamping of the instrument will not result in it being void. There is a method provided in Stamp Act to cure this defect. Therefore, an agreement is considered as void, in context to its enforcement and when an agreement is inadmissible then it is in reference that the court may not rely on it for the adjudication of the matter.

Decision on Section 11 subsection 6A: In this landmark judgement delivered by the apex court, the court also discussed the applicability of Section 11 (6A) and held that  though this subsection has been omitted but this omission has not been modified in the official gazette, so it continues to apply till date. Therefore, while dealing with the appointment of the arbitrator the courts merely have to examine the ‘existence’ of arbitration agreement and they do not have the jurisdiction to decide the validity or invalidity of the agreement at this stage, it is the duty of the arbitral tribunal to decide on this matter.

It was further concluded by the court that unlike other acts like Stamp Act and Contract Act, Arbitration Act is a special law and hence it must have dominance over other general laws.

IMPLICATIONS OF JUDGEMENT

This long-standing issue was ultimately resolved, opening the door to a more peaceful resolution of arbitration-related problems in the future. The gaps in the interconnected structure of these two statutes, which questioned the existence of an arbitration agreement in an unstamped or inadequately stamped agreement. The 7-Judge Constitution Bench’s observations, which addressed the omission that the issues discussed in NN Global 2 should not be addressed at the pre-reference stage and should instead be reviewed by the arbitral tribunal once it is constituted, will strengthen the basis of arbitration Tribunal.

CONCLUSION

The Hon’ble Supreme Court has finally settled down the law regarding the admissibility of the unstamped documents in the evidence. The court reviewed its earlier rulings on the subject which include Chandmari Tea Co. case of 2011 and N.N. Global judgement given by the constitutional bench in the early 2023. The court discussed the reasoning and ratio of these judgements and finally overruled them.

Though the court was dealing with the interplay between the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899 but the principle of law laid down by the court goes far beyond this field of law as it essentially made out the difference between the enforceability and the admissibility of the documents.

The court held that a void agreement can be admissible in evidence which necessarily implies that every inadmissible document is not void and unenforceable in the law. It is necessary to distinguish between these two concepts and accordingly non-stamping is a curable defect and detailed procedure for the same has been given by the Stamp Act, 1899 itself.

The court further strengthened and promoted the alternative dispute resolution processes by giving an arbitration friendly judgement. It gave the real effect to the Section 5 of the Arbitration and Concialiation Act, 1996 which tries to minimise the judicial intervention in the arbitration proceedings, so that the justice may not be denied to the parties. This is also in consonance with the interests of the state as it would reduce the burden upon the courts and many disputes would be resolved without procedural and technical delays caused by the strict compliance of procedural laws like Code of Civil Procedure, 1908. It would give a real effect to the maxim “interest republicae ut sit finis litum” which implies that it is in the interest of the state to put an end to the litigation.

Author:Tanya Khanijow, a student at Symbiosis Law School, Pune, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

REFERENCES

• MS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. 2011 AIR SCW 4484.
• Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. IR 2019 SUPREME COURT 2053.
• NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. 2021 SCC OnLine SC 13.Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers AIRONLINE 2020 SC 212.