The Constitutional Bench of the Supreme Court, comprising of 5 Judges, has on 25 April 2023, answered in affirmative the question as to 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 an instrument, as being non-existent, pending payment of stamp duty on the substantive contract/instrument.
The Apex Court was of the view that an Arbitration Agreement, which is unstamped, does not exist and an unstamped contract, containing an Arbitration Agreement, would not exist as it has no existence in law.
Observing that an Arbitration Agreement, in its own right, is exigible to stamp duty, the Court held as incorrect the findings in its earlier decision, by a 3-Judge Bench, which had held that the Arbitration Agreement being an independent contract is not chargeable to payment of stamp duty and absence of stamp duty on the substantive contract would not invalidate the Arbitration Clause or render it unenforceable, since it had an independent existence of its own.
The Court in the case N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd. observed that an agreement, which is unenforceable on account of a substantive law, which would include the Stamp Act, would not be a ‘contract’ (applying Section 2(h) of the Contract Act), while it held that it is only a ‘contract’ which would be the ‘Arbitration Agreement’ as contemplated in Section 11(6A) of the Arbitration and Conciliation Act, 1996. The Court held that what Section 11(6A) contemplates is a contract and it is not an agreement which cannot be treated as a contract, despite the use of the words ‘arbitration agreement’.
Answering the reference, the Court also noted that it may not be apposite to merely describe an unstamped Arbitration Agreement as a ‘curable defect’. According to the Court, as long it remains an unstamped instrument, it cannot be taken notice of for any purpose, as contemplated in Section 35 of the Stamp Act as it remains unenforceable. The 5-Judge Bench hence approved the opinion of the Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., as reiterated in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. and approved in Vidya Drolia v. Durga Trading Corpn.