SUPREME COURT CONSTITUTION BENCH HOLDS UNSTAMPED ARBITRATION AGREEMENT ENFORCEABLE IN LAW BUT INADMISSIBLE IN EVIDENCE TILL PAYMENT OF STAMP DUTY
A 7-Judge Constitution Bench of the Supreme Court comprising of Chief Justice of India (CJI) Dr Dhananjaya Y Chandrachud, Justice Sanjay Kishan Kaul, Justice B R Gavai, Justice Surya Kant, Justice J B Pardiwala, Justice Manoj Misra and Justice Sanjiv Khanna passed a Judgment dated 13-12-2023 in the matter of In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020 and decided upon the issue whether arbitration agreements / clauses in underlying contracts would be non-existent, unenforceable, or invalid if the underlying contract is not stamped as per the Indian Stamp Act 1899.
i) In the said case, the Respondent No. 1-Company was awarded a Work Order dated 18-09-2015 by the Karnataka Power Corporation Ltd. (KPCL) regarding transportation of coal from washery at Village Punwat, District Yavatmal to the stockyard, coal handling, etc. The Respondent No. 1, in turn, entered into a Sub-Contract dated 28-09-2015 with the Appellant herein. Thereafter, certain disputes arose between KPCL and the Respondent No. 1, as a result of which, KPCL invoked the Bank Guarantees furnished by the Respondent No. 1 and in turn, the Respondent No. 1 invoked the Bank Guarantees furnished by the Appellant in 2017.
ii) Aggrieved, the Appellant initiated Civil Suit against the Respondent No. 1 and the latter sought for appointment of arbitrator under Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act) in accordance with the terms of the Sub-Contract, which was rejected by the Ld. Commercial Court / District Judge-I, Nagpur, vide Order dated 18-01-2018. The High Court, vide Judgment dated 30-09-2020, set aside the Commercial Court Order dated 18-01-2018 and held that Section 8 Application was maintainable as there is an arbitration agreement between the Parties.
iii) In Civil Appeal No(S). 3802-3803 of 2020, a 3-Judge Bench of the Supreme Court comprising of Justice Dr. Dhananjaya Y Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee passed a Judgment dated 11-01-2021 and held that the dispute was arbitrable, as the Parties had admitted the existence of arbitration agreement between them. But with respect to the issue whether an arbitration agreement, contained in an unstamped instrument / contract, would be rendered unenforceable, was referred to a Constitution Bench of 5 Judges of the Apex Court.
iv) The 5-Judge Bench of the Supreme Court comprising of Justice K.M. Joseph, Justice Aniruddha Bose, Justice Ajay Rastogi, Justice Hrishikesh Roy and Justice C.T. Ravikumar passed a Judgment dated 25-04-2023 in the matter 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 and by a 3:2 majority, the 5-Judge Bench 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. The observations made by the 5-Judge Bench in the aforesaid matter have been discussed in detail in the following Article:
Supreme Court Observations
The said issue that whether an arbitration agreement, contained in an underlying unstamped contract, would be rendered unenforceable, has now been dealt by a 7-Judge Constitution Bench of the Supreme Court in the Judgment dated 13-12-2023, as follows:
1) Stamp Act 1899:
1.1) That Section 3 of the Indian Stamp Act 1899 (Stamp Act) (Instruments chargeable with duty) provides that stamp-duty is liable to be paid on various instruments specified in the Schedule I of the Stamp Act.
1.2) That Section 13 of the Stamp Act (Instruments stamped with impressed stamps how to be written) and Section 14 of the Stamp Act (Only one instrument to be on same stamp) provides the mode of stamping i.e. the stamp should appear on the face of the instrument and only one instrument can be on same stamp. If the same is contravened, the instrument would be deemed to be unstamped, as per Section 15 of the Stamp Act.
1.3) That as per Section 17 of the Stamp Act (Instruments executed in India), all instruments chargeable with duty and executed by a person in India have to be stamped either before or at the time of execution.
1.4) The persons in charge of public office except police officers have the authority to impound an instrument, in the event that such instrument which is otherwise chargeable with duty, appears not to be duly charged, under Section 33 of the Stamp Act (Examination and impounding of instruments).
1.5) Further, Section 35 of the Stamp Act (Instruments not duly stamped inadmissible in evidence, etc) renders instruments which are not duly stamped inadmissible in evidence. However, the inadequately stamped instrument would be admitted in evidence upon payment of stamp duty with which the same is chargeable. “Section 35 is significant because it gives teeth to the Stamp Act by ensuring that stamp-duty is paid before rights and obligations arising from an agreement are enforced.”
1.6) That there is a distinction between ‘inadmissibility of an instrument in evidence’ and ‘invalidity / voidness of an instrument in the eyes of law’. As per Section 2 (g) of the Contract Act 1872, an agreement not enforceable by law is said to be void, whereas, instruments that may be valid in the eyes of law can still be inadmissible in evidence i.e. the court may not consider or rely upon it while adjudicating the case. For instance, the aforementioned Section 35 of the Stamp Act renders agreements which may otherwise be valid in the eyes of law, inadmissible in evidence, if they are not duly stamped. Hence, Section 35 of the Stamp Act renders an unstamped / inadequately stamped document only inadmissible in evidence and not void, as ‘non-stamping or improper stamping does not result in the instrument becoming invalid,… as the non-payment of stamp duty is accurately characterised as a curable defect.’
2) Arbitration and Conciliation Act 1996:
2.1) That the Arbitration Act is a self-contained law with respect to matters dealing with appointment of arbitrators, commencement of arbitration, passing of an arbitral award, challenges to such award and execution of arbitral awards. Hence, when a self-contained law sets out a procedure, the applicability of a general legal procedure would be impliedly excluded.
2.2) As per the law governing an arbitration agreement i.e. the Arbitration Act, an arbitration agreement is the foundation of an arbitration proceeding, as the said agreement contains the consent of the parties to submit their disputes to arbitration, to be bound by the decision of the arbitrator, etc.
2.3) Further, as per Section 7 (2) and (4) of the Arbitration Act (Arbitration agreement), an arbitration agreement can be in the form of an arbitration clause in a contract / in the form of a separate agreement / by way of exchange of letters or other means of telecommunication including electronic communication which provides a record of the agreement / in an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
2.4) As per the Concept of Separability / Severability that is incorporated in Section 16 of the Arbitration Act (Competence of arbitral tribunal to rule on its jurisdiction), an arbitration agreement is considered separate from the underlying contract, as this concept reflects the presumptive intention of the parties to distinguish the underlying contract, which deals with the substantive rights and obligations of the parties, from an arbitration agreement, which lays down a procedural framework to resolve the disputes arising out of the underlying contract.
2.5) As a result of this Concept / Presumption of Separability, the arbitration agreement survives the invalidity / termination / repudiation / frustration / breach of the underlying contract.
2.6) Hence, “when the parties append their signatures to a contract containing an arbitration agreement, they are regarded in effect as independently appending their signatures to the arbitration agreement.”
2.7) In this regard, although the 5-Judge Constitution Bench of the Supreme Court in the matter of M/s. N.N. Global Mercantile Private Limited (supra) had acknowledged the Concept / Presumption of Separability, but the Bench refused to apply it in the context of Sections 33 (Examination and impounding of instruments) and 35 (Instruments not duly stamped inadmissible in evidence, etc) of the Stamp Act. The Bench observed that an arbitration agreement that has not been adequately stamped, is not deemed to be a valid contract and hence, not enforceable under law. However, such an observation is contrary to the Presumption of Separability.
2.8) As per the positive aspects of the Doctrine of Competence-Competence as incorporated in Section 16 of the Arbitration Act, the arbitral tribunal is empowered to rule on its own jurisdiction and on the issue of existence or validity of arbitration agreement, etc. In short, by virtue of Sections 16(5) and 16(6), the Parliament has completely ousted the jurisdiction of courts to interfere during arbitral proceedings; courts can intervene under Section 34 of the Arbitration Act (Application for setting aside arbitral award) only after the tribunal has made an award. Further, as per Section 34, one of the grounds on which an arbitral award can be set aside is that the arbitration agreement is not valid under law, but there is no mention of the court determining the validity of an arbitration agreement at a pre-arbitral stage. Thus, Section 16 of the Arbitration Act is intended to give full effect to the procedural and substantive aspects of the Doctrine of Competence-Competence in respect of the arbitral tribunal.
2.9) Further, the negative aspect of the Doctrine of Competence-Competence prohibits courts from hearing disputes which the parties have mutually intended to submit to the jurisdiction of arbitral tribunal and the issue of stamping of an instrument is a jurisdictional issue. Thus, the said Doctrine also requires the courts to leave the issue of stamping of an instrument to be decided by the arbitral tribunal in the first instance.
3) Hence, in respect of the question whether an arbitral tribunal can effectively exercise its jurisdiction to settle the claims between the parties until stamp duty is paid on the underlying contract, the 7-Judge Bench of the Apex Court held that as per Sections 33 and 35 of the Stamp Act, “a person having authority by consent of parties’ to receive evidence is empowered to impound and examine an instrument. A person having authority ‘by consent of parties’ to receive evidence includes an arbitral tribunal which is constituted by consent of parties.”
4) Thus, the arbitral tribunal is empowered under Section 7 of the Arbitration Act to determine the formal validity of ‘existence’ of arbitration agreement such as the requirement that the agreement has to be in writing either in the form of a document / exchange of letters, etc. Further, the arbitral tribunal is also empowered under Section 16 of the Arbitration Act to determine the issue of substantive existence and validity of an arbitration agreement, thereby, giving a true effect to the Doctrine of Competence-Competence.
5) That the object of the Arbitration Act is to ensure an effective process of arbitration and minimize the supervisory role of courts in the arbitral process. Further, the object of the Stamp Act is to secure revenue for state. The 7-Judge Bench of the Supreme Court harmoniously interpreted both the Statutes as follows and made observations regarding the issue whether an unstamped arbitration agreement is rendered unenforceable pending the payment of stamp-duty:
i) “The Stamp Act is a law governing the payment of stamp-duty for all manner of instruments.
ii) The Contract Act, as the name suggests, sets out the rules in relation to contracts in general. An arbitration agreement is one of the many different types of contracts to which it is applicable.
iii) The Arbitration Act contains the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards, and conciliation.”
iv) Hence, the Arbitration Act is a special law in this context as it governs the arbitration agreements, whereas, the Stamp Act defines ‘instruments’ as a whole and the Contract Act defines ‘agreements’ and ‘contracts. Thus, the Arbitration Act will have primacy with respect to arbitration agreements, as it is trite law that a general law must give way to a special law.
v) Section 7 of the Arbitration Act empowers the arbitrator and not the court to test whether the requirements of a valid contract and a valid arbitration agreement are met. “If it finds that a valid arbitration agreement exists, it may assess whether the underlying agreement is a valid contract.”
vi) Further, as per Section 16 of the Arbitration Act, the arbitral tribunal will also have jurisdiction to determine all issues in dispute between the parties including the issue of realization of stamp duty in pursuance of the provisions of the Stamp Act.
vii) “The arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The interpretation of the law in this judgment ensures that the provisions of the Arbitration Act are given effect to while not detracting from the purpose of the Stamp Act.”
viii) Hence, “agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable”, as non-stamping of instrument is a curable defect as per Section 35 of the Stamp Act.
ix) In the event that any party approaches court and the court finds it a fit case to refer the parties to arbitration under Sections 8 or 11 of the Arbitration Act, the concerned court may, however, first examine whether the arbitration agreement prima facie exists, without delving into the issue / objection as to stamping of the arbitration agreement / underlying contract, as such objection falls within the ambit of the arbitral tribunal.
Thus, based on the aforesaid observations, the 7-Judge Bench of the Apex Court held that (i) the objection as to stamping of the arbitration agreement / underlying contract falls within the jurisdiction of the arbitral tribunal; (ii) the arbitrator has the power to impound and examine an instrument that is not stamped / inadequately stamped, in pursuance of the provisions of the Stamp Act and (iii) may hold it only ‘inadmissible in evidence’ and not unenforceable, till such time that it is properly stamped.
As a result, the Judgment dated 25-04-2023 passed by the 5-Judge Constitution Bench of the Supreme Court in the matter of M/s. N.N. Global Mercantile Private Limited (supra) that held that an arbitration agreement that has not been adequately stamped, is not deemed to be a valid contract and also not enforceable under law, has been overruled, in light of the observations made by the 7-Judge Bench of the Apex Court in the aforesaid matter.
This Judgment has dealt with a very important topic, namely, stamping of agreements. Many a times, agreements are entered into between parties without being stamped or adequately stamped. In such an event, the parties run into difficulty as an unstamped agreement is not admissible in evidence and as such is unenforceable. However, the 7-Judge Bench of the Supreme Court has resolved the issue by giving the parties a respite and allowing them to make amends by getting such an agreement stamped. This stamping at a subsequent date will obviously involve some amount or penalty which the aggrieved parties have to pay. However, the rights of the parties remain intact if they rectify the mistake of non-stamping by paying the necessary stamp duty.
The Indian Lawyer
Sushila Ram Varma
The Indian Lawyer
 Section 3 of the Indian Stamp Act 1899: Instruments chargeable with duty
Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—
(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;
(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and
(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India:
Provided that no duty shall be chargeable in respect of—
(1) any instrument executed by, or on behalf of, or in favour of, the Government in cases where, but for this exemption, the Government would be liable to pay the duty chargeable in respect of such instrument;
(2) any instrument for the sale, transfer or other disposition, either absolutely or by way of mortgage or otherwise, of any ship or vessel, or any part, interest, share or property of or in any ship or vessel registered under the Merchant Shipping Act 1894, Act No. 57 & 58 Vict. c. 60 or under Act XIX of 1838 Act No. or the Indian Registration of Ships Act, 1841, (CX of 1841) as amended by subsequent Acts.
 Section 13 of the Indian Stamp Act 1899: Instruments stamped with impressed stamps how to be written
Every instrument written upon paper stamped with an impressed stamp shall be written in such manner that the stamp may appear on the face of the instrument and cannot be used for or applied to any other instrument.
 Section 35 of the Indian Stamp Act 1899: 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:
(a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of any instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion;
(b) where any person from whom a stamped receipt could have been demanded, has given an unstamped receipt and such receipt, if stamped, would be admissible in evidence against him, then such receipt shall be admitted in evidence against him on payment of a penalty of one rupee by the person tendering it;
(c) 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;
(d) nothing herein contained shall prevent the admission of any instrument in evidence in proceeding in a Criminal Court, other than a proceeding under Chapter XII or Chapter XXXVI of the Code of Criminal Procedure 1898 (V of 1898);
(e) 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.
 Section 16 of the Arbitration Act: Competence of arbitral tribunal to rule on its jurisdiction
(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.
(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.
(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.
(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.
(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.