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2021 SCC OnLine Blog Exp 39

Stamping of Substantive Agreement : Better Late than Never

STAMPING OF SUBSTANTIVE AGREEMENT : BETTER LATE THAN NEVER

by
Hiroo Advani†, Tariq Khan†† and Mahi Mehta†††
Introduction
Nearly after a decade the Indian arbitration regime has come in consonance with
the western world and settled the long due controversy on stamping of arbitration
agreement. A Bench comprising of Dr Justice D.Y. Chandrachud, Justice Indu Malhotra
and Justice Indira Banerjee in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame
Ltd.1 has held that since the arbitration agreement is an independent agreement
between the parties, and is not chargeable to payment of stamp duty, the non-
payment of stamp duty on the commercial contract, would not invalidate the
arbitration clause, or render it unenforceable, since it has an independent existence of
its own.
Existence and Validity : Finding of Garware Ropes Referred to A Larger Bench
At the outset, the Court first addressed the issue regarding validity of an arbitration
agreement in an unstamped agreementextensively in the two landmark judgments,
namely, SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (SMS Tea Estates)2
and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.3 (Garware
Ropes). The Supreme Court in SMS Tea Estates4 observed that an arbitration clause is
independent of the other terms of the contract and held that
(i) an unstamped arbitration agreement cannot be acted upon; and
(ii) an arbitration agreement would be invalid where the contract is voidable at the
option of a party.
Further, in 2019 the Supreme Court while deciding the case of Garware Ropes5
again reverted to the position taken in 2011 in SMS Tea Estates6 which held that an
arbitration clause contained in a contract would exist as a matter of law only if the
underlying contract is duly stamped. Garware Ropes7 also held that it is not possible to
bifurcate the arbitration clause contained in the arbitration agreement so as to give it
an independent existence.
In the instant case, the Court held that Garware Ropes8 does not lay down the
correct position of law by opining that “existence” and “validity” are intertwined, and
arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal
requirements. Invalid agreement is no agreement.
The Court overruled the decision of Garware Ropes9 and gave a clear and reasonable
finding that that an arbitration agreement is distinct and independent from the
underlying substantive contract and once the arbitration agreement is held to have an
independent existence, it can be acted upon, irrespective of any technical defects.
Despite the coherent ruling given by the Supreme Court, the decision in Garware
Ropes10 was affirmed by a three-Judge Bench of the Supreme Court in Vidya Drolia v.
Durga Trading Corpn.11 at para 92 of the judgment. The Court in instant case
specifically held that the finding in Garware Ropes12 is erroneousand has rightly
referred the issue “whether non-payment of stamp duty on commercial contract will
invalidate an arbitration agreement” to the Constitution Bench for an authoritative
determination.
Scheme of the Stamp Act, 1899
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Before analysing the findings of the Court, it is important to note that the aim of
the Stamp Act is to secure the revenue of the State. To briefly highlight, Section 33
casts a statutory obligation on every person empowered by lawto examine the
instrument presented before them, and ascertain whether the instrument is duly
stamped, failing which the relevant authority can impound the instrumentand direct
the parties to pay the requisite stamp duty along with a penalty of five rupees orten
times the amount of the proper duty or of the deficient portion thereofand obtain an
endorsement from the Collectorconcerned.
Section 35 of the Stamp Act operates as a bar to an unstamped instrument being
admitted in evidence or being acted upon. Furthermore, Section 40 of the Stamp Act
provides the procedure for instruments which have been impounded, and sub-section
(1) of Section 42 requires the instrument to be endorsed after it is duly stamped by
the Collectorconcerned before expiration of one month from the date of impounding.
Section 42(2) provides that after the document is duly stamped, it shall be admissible
in evidence, and may be acted upon.
In the present case, the Supreme Court held that on a harmonious reading of the
provisions of the Stamp Act with the Arbitration and Conciliation Act, 1996,it is
suggested that even if the underlying contract was not sufficiently stamped, the
arbitration agreement, which survives independently shall not be rendered invalid in
law. Upon curing the defects as prescribed above the document would be admissible in
evidence and could be acted upon.
Interplay between Stamp Act and Arbitration and Conciliation Act
Given that an arbitration agreement is distinct and independent from the
underlying substantive contract and the same can be acted upon once the technical
defects are cured, it is important to determine which authority would exercise the
power of impounding the instrument in a case where the substantive contract contains
an arbitration agreement.
1. Cases where arbitrator is appointed by parties’ consent : In such a case, the
arbitrator is obligated by Section 33 of the Stamp Act. This section casts a
statutory obligation on every person empowered by law to examine the
instrument presented before him, and ascertain whether the instrument is duly
stamped, failing which the arbitrator can impound the instrument, and direct the
parties to pay the requisite stamp duty (and penalty, if any), and obtain an
endorsement from the Collectorconcerned.
2. Applications under Section 11 : In such a case, the relevant court, while
exercising jurisdiction under Section 11, would impound the substantive contract
which is either unstamped or inadequately stamped, and direct the parties to
cure the defect before the arbitrator/tribunal can adjudicate upon the contract.
3. Applications underSection 8 : In such a case, the judicial authority will make the
reference to arbitration. However, in the meanwhile, the parties would be
directed to have the substantive contract stamped in accordance with the
provisions of the relevant Stamp Act, so that the rights and obligations
emanating from the substantive contract can be adjudicated upon.
4. Applications under Section 9 : When it is brought to the attention of the court
that the substantive contract is not duly stamped under a Section 9 petition, the
court would grant adinterim relief to safeguard the subject-matter of the
arbitration. However, the substantive contract would then be impounded, and
the party concerned be directed to take the necessary steps for payment of the
requisite stamp duty, within a time-bound period. The Full Bench of the Bombay
High Court in Gautam Landscapes (P) Ltd. v. Shailesh S. Shah13 also held that
the Court may grant any interim or adinterim reliefs in an application under
Section 9 of the Arbitration and Conciliation Act when a document containing
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arbitration clause is unstamped or insufficiently stamped.

After analysing the above provisions of the Stamp Act along with the provisions of
the Arbitration and Conciliation Act, the Court clearly held that non-payment of stamp
duty on the substantive contract would not invalidate the main contract as this is a
deficiency which is curable on the payment of the requisite stamp duty at any
prescribed stage.
Conclusion
This judgment reaffirms the position given in Section 7 of the Arbitration and
Conciliation Act, 1996 that requires an arbitration agreement to be in black and white
in order for it to be enforceable. It is opined that Garware Ropes14 might have
hampered the arbitration mechanism from the start by expanding the extent of
judicial interference in the appointment of arbitrators, as well as delaying the issuance
of interim relief, effectively declaring the arbitration process null and void. However,
this lacuna has been now rectified by the judiciary and a pro- arbitration stance has
been taken by the Court.
More importantly, a requirement of stamping of an arbitration agreement would
have aided in delay in the dispute resolution mechanism in India and hence we look
forward to the Constitution Bench reaffirming this decision as such decisions are being
lauded in the arbitration fraternity.
———
† Hiroo Advani, Senior Managing Partner at Advani & Co.
†† Tariq Khan, Principal Associate at Advani & Co.
†††
Mahi Mehta, Associate at Advani & Co.
1 2021 SCC OnLine SC 13.
2 (2011) 14 SCC 66.
3
(2019) 9 SCC 209.
4 (2011) 14 SCC 66.
5
(2019) 9 SCC 209.
6 (2011) 14 SCC 66.
7 (2019) 9 SCC 209.
8 Ibid.

9 Ibid.
10 Ibid.
11
(2021) 2 SCC 1 : 2020 SCC OnLine SC 1018.
12 (2019) 9 SCC 209.
13 2019 SCC OnLine Bom 563 : (2019) 3 Mah LJ 231.
14 (2019) 9 SCC 209.

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