SUPREME COURT HOLDS THAT AN UNSTAMPED ARBITRATION AGREEMENT IS NOT ENFORCEABLE UNDER LAW

In a recent case of M/S. N.N. Global Mercantile Private Limited Vs M/S. Indo Unique Flame Ltd. & Ors. Civil Appeal No(s). 3802-3803 of 2020, a five Judge Bench of the Supreme Court comprising of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar passed a Judgment dated 25-04-2023 in a 3:2 majority and observed that an arbitration agreement that has not been adequately stamped as required under the Maharashtra Stamp Act, 1958 (Stamp Act), is not deemed to be a valid contract and also not enforceable under law.

Facts

(i) In the present case, one, M/s. Indo Unique Flame Ltd. & Ors., the Respondent No. 1 herein, was awarded a Work Order for beneficiation / washing of coal by the Karnataka Power Corporation Ltd. (KPCL) vide Letter of Award No. A1M1B3/Washed Coal/1052 dated 18-09-2015 (Work Order). In pursuance of the said Work Order, the Respondent No. 1-Company furnished Bank Guarantees for Rs. 29.29 Crores in favor of KPCL through its Banker, State Bank of India (SBI), the Respondent No. 2 herein.

(ii) The Respondent No. 1-Company entered into a Sub-Contract dated 28-09-2015 (Sub-Contract) with one, M/s. N.N. Global Mercantile Private Limited, the Appellant herein for (a) transportation of coal from its washery at Village Punwat, District Yavatmal to the stockyard, (b) siding, (c) coal handling and (d) loading into the wagons at Pandharpaoni siding, District Chanderpur, Maharashtra.

(iii) As per the Sub-Contract, the Appellant furnished a Bank Guarantee for Rs. 3,36,00,000/- on 30-09-2015, in favour of SBI.

(iv) The Sub-Contract also incorporated an Arbitration Clause as follows:

10. Arbitration: In case of any dispute due to difference of opinion in interpretation of any clause or terms and conditions or meaning of the work or language the decision of the arbitrator appointed with mutual consent shall be treated as final and binding on both the parties.

(v) Thereafter, certain disputes arose under the Work Order between the Respondent No. 1 and KPCL, as a result of which, KPCL invoked the Bank Guarantees on 06-12-2017 and in turn, the Respondent No. 1 invoked the Bank Guarantees furnished by the Appellant on 07-12-2017.

(vi) Aggrieved, the Appellant filed Civil (Commercial) Suit No.62 of 2017 against the Respondents before the Commercial Court / District Judge-I, Nagpur (Commercial Court) seeking declaration that the Respondent No. 1 was not entitled to invoke the Bank Guarantees furnished under the Sub-Contract, as (i) the Respondent No. 1 had failed to perform under the principal agreement i.e. the Work Order, (ii) the Respondent No. 1 had not done any work under the Work Order, not raised any invoices and not made any payments, hence, the Respondent could not have suffered any losses. Thus, the Respondent No. 1 was not justified in invoking Bank Guarantees.

(vii) The Ld. Commercial Court vide ex parte ad interim Order dated 15-12-2017 directed status-quo to be maintained with respect to the enforcement of the Bank Guarantee.

(viii) Meanwhile, the Respondent No. 1 filed an Application under Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act) (Power to refer parties to arbitration where there is an arbitration agreement) in the aforesaid Suit, seeking reference of the disputes to arbitration, in accordance with the terms of the Sub-Contract.

(ix) The Ld. Commercial Court, vide Order dated 18-01-2018, held that (a) the Arbitration Clause in the Work Order would not govern the Bank Guarantee, as the Bank Guarantee is a separate and independent contract between the Respondent No. 2 and 3 i.e. SBI and Union Bank of India (UBI) respectively, which did not have any arbitration clause, (b) thus, the jurisdiction of the Commercial Court is not ousted by the Arbitration Agreement between the Parties. Therefore, the Section 8 Application filed by the Respondent No. 1 was rejected by the Commercial Court.

(x) Aggrieved by the Commercial Court Order dated 18-01-2018, the Respondent No. 1 filed Civil Revision Petition No.9 of 2018 before the Bombay High Court, which was later withdrawn with a liberty to file fresh writ petition.

(xi) Thus, the Respondent No. 1 filed P. No.1801 of 2020 before the High Court seeking setting aside of the Commercial Court Order dated 18-01-2018. The High Court, vide Judgment dated 30-09-2020, held that Section 8 Application would be maintainable as there is an arbitration agreement between the Parties. Further, the disputes were not pertaining to any criminal offence(s), hence, they can be resolved through arbitration. Further, the Commercial Court was not justified in restraining the invocation of the bank guarantee in the absence of any finding on fraud or special equities. Thus, the Commercial Court Order dated 18-01-2018 was set aside.

Supreme Court Observations:

Aggrieved by the High Court Order dated 30-09-2020, the Appellant filed Civil Appeal No(s). 3802-3803 of 2020 before the Supreme Court and contended that the Section 8 Application was not maintainable on the ground that as per Section 34 of the Maharashtra Stamp Act, 1958[1] (Stamp Act) (Instruments not duly stamped inadmissible in evidence, etc), the Work Order is an unstamped document and hence, cannot be received in evidence for any purpose, unless it is duly stamped. Therefore, the Arbitration Clause incorporated in the unstamped Work Order, also cannot be enforced, unless the applicable stamp duty and penalty, if any, is paid on the Work Order.

1) Initial Observations of a three Judge Bench of the Supreme Court:

Initially, the matter was listed before a three Judge Bench of the Apex Court, who made the following observations in this case, vide Judgment dated 11-01-2021:

(i) That the stringent provisions of the Stamp Act have been framed to protect the interest of the revenue of the State. Section 34 of the Stamp Act operates as a statutory bar against admissibility as evidence of an unstamped instrument. The Proviso to Section 34, however, states that upon payment of the requisite stamp duty, the instrument may be admitted in evidence. Further, as per Section 41 of the Stamp Act, once the instrument is duly stamped, the same has to be endorsed by the Collector, after which the defect of admissibility and legality of such instrument would stand cured.

(ii) However, an arbitration agreement is distinct and independent from the underlying principal contract. Hence, such an arbitration agreement can be acted upon, irrespective of the alleged invalidity of the underlying commercial contract.

(iii) But the arbitrator is still empowered to direct the parties to have the substantive / principal contract stamped in accordance with the Stamp Act within a time-bound manner, so that the rights and obligations stemming from the substantive contract can be adjudicated upon.

(iv) That until the stamping is duly complied with, the Court may grant interim reliefs under Section 9 of the Arbitration and Conciliation Act 1996 (Interim measures, etc., by Court) to safeguard the subject-matter of the arbitration.

(v) The Court, may, however, refuse to refer the dispute to arbitration only in cases where there are serious allegations of fraud, forgery or fabrication of documents, bribery, corruption, matrimonial disputes, child custody, testamentary matters, insolvency and bankruptcy, oppression and mismanagement, and other allegations that may have penal consequences, etc, as it may result in a conviction, which is in the realm of public law.

(vi) But in the present case, the allegations of fraud with respect to the invocation of the Bank Guarantee was held arbitrable, (a) as it arises out of disputes between Parties inter se, and is not in the realm of public law and (b) as the Parties have admitted the existence of arbitration agreement between them.

(vii) Accordingly, the High Court directed the Secretary General of the Supreme Court to impound the Work Order and forward it to the concerned Collector for assessment of stamp duty, to be completed within 45 days from receipt of the same. The Appellant was further directed to pay such stamp duty.

(viii) Further, with regard to the invocation of Bank Guarantee, the Parties were directed to seek interim relief under Section 9 of the Arbitration Act.

(ix) However, the issue pertaining to rendering of arbitration agreement, contained in an unstamped instrument / contract, as unenforceable was referred to a Constitution Bench of 5 Judges of the Apex Court.

2) Final Observations of a five Judge Bench of the Supreme Court:

Accordingly, a Constitution Bench comprising of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar of the Apex Court was constituted, that made the following observations, vide Judgment dated 25-04-2023:

(i) The observations rendered by Justice K.M. Joseph and Justice Aniruddha Bose, as concurred by Justice C.T. Ravikumar are as follows: (Majority View)

a) That as per Section 7(2) of the Arbitration Act (Arbitration agreement), an arbitration agreement may be in the form of an arbitration clause in a principle contract or in the form of a separate agreement.

b) That as per Section 7 (3) of the Arbitration Act, an arbitration agreement shall be in writing. The same harmonises with Section 10 of the Contract Act (What agreements are contracts) which also provides that any particular law may require an agreement / contract to be in writing.

c) That as per Section 2 (h) of the Contract Act 1872, only those agreements that are enforceable under law would be deemed to be a contract.

d) Applying the said principle to the present case, if the principal contract i.e. the Work Order is not sufficiently stamped, the same is deemed to be unenforceable under Section 34 of the Stamp Act and hence, the Work Order being unenforceable under law.

e) Accordingly, when the Arbitration Clause in the underlying Contract / Work Order, which is deemed to be an independent agreement in terms of Section 7 of the Arbitration Act, is not sufficiently stamped, the same would be deemed to be unenforceable under Section 34 of the Stamp Act.

f) Further, as per Section 17 of the Stamp Act (Instruments executed in State), all instruments / agreements that are chargeable with stamp duty and are executed on a particular day, shall be stamped before or at the time of execution or immediately thereafter on the next working day following the day of execution.

g) If the same is not complied with, then the Court or Arbitrator or any other public officer cannot allow the person to act upon such unstamped / insufficiently stamped instrument or receive it as evidence.

h) In fact, the Authority concerned is empowered to impound such instrument under Section 33 of the Stamp Act (Examination and impounding of instruments), until the requisite stamp duty is paid by the concerned party. Once the same is complied with, the bar against admissibility as evidence of such instrument under Section 35 of the Stamp Act (Admission of instrument where not to be questioned) is removed.

i) Hence, applying the aforesaid principles of law to the present case, the aforesaid Bench concluded as follows and observed that the Court acting under Section 11 of the Arbitration Act (Appointment of arbitrators), is empowered to exercise its aforesaid powers under Sections 33 and 35 of the Stamp Act to impound the Arbitration Agreement, if not adequately stamped, until such time that proper stamping under the Stamp Act is complied with.

We further hold that the provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.

(ii) The observations of Justice Ajay Rastogi are as follows:

92…the limited scope of the Court under Section 11(6A) at the pre-referral stage is to examine whether the arbitration agreement, prima facie, exists

97. (i)… and the courts must strictly adhere to the time schedule for the appointment of Arbitrator prescribed under Section 11(13) of the Act, 1996.

(ii) All the preliminary / debatable issues including insufficiently stamped / unduly stamped or validity of the arbitration agreement etc. are referrable to the Arbitrator…

(iii) The dissenting opinion and observations of Justice Hrishikesh Roy are as follows:

88. (ii) Non-stamping / insufficient stamping of the substantive contract / instrument would not render the arbitration agreement non-existent in law and unenforceable / void, for the purpose of referring a matter for arbitration…. An arbitration agreement should not be rendered void if it is suffering stamp deficiency which is a curable defect.

Conclusion

Thus, based on the Majority View of the Supreme Court, it is established that in the manner in which an arbitration agreement, which is unstamped, would not exist in law, similarly, an unstamped contract, containing an arbitration clause, would also not exist, as it has no existence in law. Hence, the Court acting under Section 11 of the Arbitration Act, is empowered to impound such inadequately stamped arbitration agreement, until such time that proper stamping as required under the Stamp Act is complied with.

Therefore, the reference to the Constitution Bench of 5 Judges to determine the issue pertaining to rendering of arbitration agreement, contained in an unstamped instrument / contract, as unenforceable, stood answered accordingly.

Sushila Ram Varma

Chief Consultant

The Indian Lawyer

 

[1] Section 34 of the Maharashtra Stamp Act 1958: Instruments not duly stamped inadmissible in evidence, etc:

No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer unless such instrument is duly stamped or if the instrument is written on sheet of paper with impressed stamp such stamp paper is purchased in the name of one of the parties to the instrument:

Provided that,—

(a) any such instrument shall, subject to all just exceptions, be admitted in evidence on payment of—

(i) the duty with which the same is chargeable, or in the case of an instrument insufficiently stamped, the amount required to make up such duty, and

(ii) a penalty at the rate of 2 per cent. of the deficient portion of the stamp duty for every month or part thereof, from the date of execution of such instrument:

Provided that, in no case, the amount of the penalty shall exceed four times the deficient portion of the stamp duty;

(b) where a contract or agreement of any kind is effected by correspondence consisting of two or more letters and any one of the letters bears the proper stamp, the contract or agreement shall be deemed to be duly stamped;

(c) nothing herein contained shall prevent the admission of any instrument in evidence in any proceeding in a Criminal Court, other than a proceeding under Chapter IX of Part D of Chapter X of the Code of Criminal Procedure, 1973;

(d) nothing herein contained shall prevent the admission of any instrument in any Court when such instrument has been executed by or on behalf of the Government or where it bears the certificate of the Collector as provided by section 32 or any other provision of this Act;

(e) nothing herein contained shall prevent the admission of a copy of any instrument or of an oral admission of the contents of any instrument, if the stamp duty or a deficient portion of the stamp duty and penalty as specified in clause (a) is paid