Validity of arbitration agreement in unstamped contract: Constitution Bench of Supreme Court reserves judgment

The Supreme Court on Wednesday reserved its verdict in the case concerning the legal validity of an arbitration agreement in an unstamped contract. (NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors).A Constitution Bench of Justices KM Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and CT Ravikumar finished hearing arguments in the matter on Wednesday. The case deals with the following question of law:Is an arbitration agreement embedded in an unstamped document valid and enforceable?.The reference to a five-judge Bench was necessitated given the decision of the top court in NN Global Mercantile Pvt Ltd v. M/s Indo Unique Flame Ltd, in which it had held,"The arbitration agreement would not be rendered invalid, un-enforceable or non-existent, even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty."In doing so, the three-judge Bench of Justices DY Chandrachud, Indu Malhotra and Indira Banerjee had doubted the correctness of the Division Bench decision in Vidya Drolia & Ors v. Durga Trading Corporation.Specifically, the following question was referred to a larger bench:“Whether the statutory bar contained in Section 35 of the Indian 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, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”.The parties in the original matter had entered into a sub-contract that had contained an arbitration clause. The respondent had later invoked the bank guarantee furnished by the petitioner, leading to a suit.The respondent then filed an application under Section 8 of the Arbitration and Conciliation Act and sought resolution of the dispute through arbitration, which a commercial court had rejected. The Bombay High Court had subsequently held that the application was maintainable, leading to the appeal before the top court..Senior Advocate Gourab Banerji was Amicus Curiae in the matter. He submitted that in an application under Section 11 of the Arbitration Act, the role of the courts is limited to examining the existence of the agreement. The issue of stamp duty is to be decided by arbitrators who have powers under Section 35 of the Stamp Act to impound if needed, he added.The reference order erroneously holds that an arbitration agreement is not liable to stamp duty, he contended. Further, Section 16, which deals with the competence of arbitral tribunals to rule on their jurisdictions, is wide enough to allow arbitrators to consider the aspect of the agreement's stamping. If it is found that there was no arbitration agreement, courts do not proceed on appointing arbitrators, he pointed out. Banerji argued that the statutory bar, as provided under Section 35 of the Stamp Act, is only triggered when there is a finding that a document is not duly stamped. In this scenario, he added that unstamped agreements are valid and their admissibility is to be left to the adjudicator.Making the aspect of stamping central to the determination of whether an arbitrator can be appointed would defeat the object of arbitration by causing delays, he stressed. Counsel for the petitioners argued that stamping can be determined at the threshold, pointing out that an instrument would exist in law only when the same is enforceable. Any statutory bar under the Stamp Act applies both on courts and arbitrators, it was submitted. .Advocate Gagan Sanghi appeared for the appellants. Senior Advocates K Ramakanth Reddy and Malvika Trivedi represented the respondents..[Read order].[Read written submissions by Amicus Gourab Banerji]