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Arbitration agreement invalid if stamp duty not duly paid: Supreme Court

By, New Delhi
Apr 26, 2023 12:57 AM IST

A constitution bench has ruled by 3-2 majority that an arbitration clause is not enforceable in law if the agreement is unstamped or insufficiently stamped

A constitution bench on Tuesday ruled by 3-2 majority that an arbitration clause is not enforceable in law if the agreement is unstamped or insufficiently stamped. The judgment is likely to create further delays in appointment of arbitrators by adding one more layer of scrutiny and may also not augur well with India’s pro-arbitration stance.

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While the majority comprising justices KM Joseph, Aniruddha Bose and CT Ravikumar relied extensively on the 1899 Indian Stamps Act requiring certain agreements to be compulsorily registrable or chargeable to stamp duty, justices Ajay Rastogi and Hrishikesh Roy highlighted the objective of the arbitration law in providing a speedy and less cumbersome resolution to disputes as they dissented.

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The five-judge bench was ruling on the correctness of a bundle of judgments since 2011, taking divergent views on the enforceability of arbitration clauses contained in unstamped or insufficiently stamped agreements.

Experts weighed in, expressing concerns over the court verdict. “The Supreme Court India has taken pro-arbitration stance in numerous cases. However, this decision missed an opportunity to enhance that image of India as arbitration-friendly jurisdiction. The hyper-technical view taken by the court will impact the speedy appointment of arbitrators by courts. Since the Arbitration Act is a special legislation, as held by the Supreme Court itself, it should have been given supremacy over the Stamp Act,” said Tejas Karia, Partner and Head -- Arbitration, Shardul Amarchand Mangaldas & Co.

Sushmita Gandhi, Partner, IndusLaw, echoed similar concerns. “The court verdict is likely to have great ramification on India’s liberal and pro-arbitration approach. It may also be at odds with the present arbitration regime and therefore, necessary amendments may have to be brought in place by parliament,” she said.

The majority judgment cited the mandate of the Stamps Act to hold that “an instrument which is chargeable to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law”.

It added that an arbitration agreement within the meaning of the 1996 Arbitration and Conciliation Act attracts stamp duty and if it is not stamped or insufficiently stamped, it cannot be acted upon in view of Section 35 of the Stamps Act which defines conditions for a valid instrument. Section 35 of the Stamp Act lays down that no instrument chargeable with duty shall be admitted in evidence for any purpose or shall be acted upon unless such instrument is duly stamped.

Justice Jospeh and Ravikumar, in their separate but concurring judgments, noted that an unstamped or insufficiently stamped instrument must be validated by payment of requisite duty before it could be adduced as evidence in an arbitration matter. According to the majority, a court is bound to examine the instrument at a pre-appointment stage and if it is found to be unstamped or insufficiently stamped, the instrument is to be impounded at this stage itself.

The majority judgment found favour with the three rulings of the top court between 2011 and 2020 which had held that an unstamped arbitration clause in an agreement that is compulsorily registrable or chargeable to stamp duty cannot be the basis for the appointment of an arbitrator. It overruled the contrary views taken by a subsequent judgment in 2021.

Justices Rastogi and Roy, however, flagged concerns that the view taken by the majority in the judgment has the propensity of frustrating the objective of the Arbitration and Conciliation Act, as a scrutiny on the stamp duty at the threshold can stall the process and will lead to procedural complexity and delay in litigation before courts.

They held that the copy or certified copy of arbitration agreement, whether unstamped or insufficiently stamped, at the pre-reference stage, is an enforceable document for the appointment of arbitrator. Once the arbitrator or an arbitral tribunal is appointed, the minority view said, validity of the agreement can be gone into for a proper decision at a later stage without impeding the process.

Justice Roy, penning his separate judgment, implored the Union government to consider amending the relevant laws so that inconsistencies between the arbitration law and the Stamps Act could be removed.

“The present five-judge bench could not provide clarity on the issue referred to us on account of a fractured verdict leading to legal uncertainty,” said the judge, pointing out it is too important an issue to be left to constitution of a larger bench and a verdict at a later stage.

Justice Roy further harped upon the 2015 amendments to the Arbitration and Conciliation Act, pointing out that the legislative intent was to restrict the court’s scope of examination to whether there exists an arbitration agreement or not, besides calling for an expeditious disposal of such applications within 60 days.

Emphasising that India is hoping to be a hub of international arbitration, the judge said that the need of the hour is to harmonise the statutory provisions to achieve the objective of the Arbitration and Conciliation Act, and not thwart speedy referral to arbitration.

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