A constitution Bench of the Supreme Court by a 3:2 opinion concurred with the earlier view of the Supreme Court in SMS Tea Estates[1] and Garware[2] and held that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable.
A three judges’ bench in the N. N. Global[3] had doubted the ratio of SMS Tea and Garware and accordingly had referred the issue to the five judges’ bench.
The Majority held that if the Arbitration Agreement or the Agreement containing the Arbitration Agreement is not duly stamped, then, the Section 11 Court under the Arbitration Act, must impound the document and deal with it as provided in the stamp Act.
The view that if the Section 11 court starts examining the issue of stamping, cases under Section 11 of the Act would consume more time and hinder the timely progress of arbitration and that the matter must be postponed so that the Arbitrator will more suitably deal with it, did not appeal to the Majority. The Court held that any shirking of the statutory duty by the Court under Section 11 to act in tune with the peremptory statutory dictate of the Stamp Act, is unjustifiable.
Interestingly, the majority also opined that an unstamped document is void and cannot be enforced for any purpose, i.e., it is neither admissible in evidence nor can be acted upon.
The Court confined the above view only regarding S.11 of the Arbitration Act and did not pronounce on the matter with reference to Section 9 of the Act.
The Question Referred
“Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”
The Majority concluded in the following terms:
1. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law.
2. An instrument, which is exigible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act.
3. An Arbitration Agreement, within the meaning of Section 7 of the Act, which attracts stamp duty, and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp Act.
4. The 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.
5. The mandate of the Stamp Act did not conflict with the legislative command contained in Section 11(6A), viz., to examine whether an Arbitration Agreement existed.
6. If the document is unstamped, the Section 11 Court must discharge its duty under Sections 33 and 35 of the Stamp Act.
7. However, in cases, where the objection taken is of insufficiently stamped, if it appears to the Court, on the face of it, wholly without foundation, it may make the Reference on the basis of the existence of an Arbitration Agreement otherwise and then leave it open to the Arbitrator to exercise the power under Section 33, should it become necessary. This approach does justice to the word ‘examine’ in Section 33(2) of the Stamp Act while not ignoring the command of Section 11(6A) of the Act.
8. The Scheme permits the Court, under Section 11 of the Act, acting on the basis of the original agreement or on a certified copy. The certified copy must, however, clearly indicate the stamp duty paid as held in SMS Tea Estates (supra). If it does not do so, the Court should not act on such a certified copy.
Comments
Majority view is primarily guided by the fact that the Stamp Act is a fiscal enactment intended to raise revenue and therefore, the duty of a Court must be to adopt an interpretation which results in the enforcement of the law, rather than allowing the law to be flouted with impunity.
But actually, the debate before the Constitution Court was not whether a court or an arbitrator is bound by the Stamp Act enactment in case of an unstamped or insufficiently stamped instrument containing an arbitration agreement produced before it, but the real question was as regards the wisdom in relegating the issue relating to payment of stamp duty to the Arbitrator or to retain with the S.11 Court.
The Majority opinion tried to harmonise the Arbitration Act’s need to refer the matter for arbitration in a shortest possible time and the need to protect revenue of the State. For them, the courts dealing with Section 11 application cannot shirk the legislative mandate enacted in the Stamp Act.
While the minority opinion, was of the view that the issue of stamping must be left to the arbitrator in the interest of time while deciding a S.11 Application.
Experience demonstrates that a party opposing the nomination of an arbitrator will raise every objection that might be raised. Such litigants will have the stamping objection as another weapon in their arsenal. It doesn’t make a difference who impounds the unstamped or insufficiently stamped document—the court or an arbitrator if the duty is ultimately paid by the party. Therefore, the Court would have done better to unclog the dockets of Courts by leaving the issue of stamping to the Arbitrator.
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