In [NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors] the Constitution Bench of the Supreme Court has recently answered the reference regarding the validity and enforceability of the arbitration clause in a contract, which is required to be registered and stamped but is not. The Court held that an instrument that is exigible to stamp duty but not stamped cannot be considered a contract enforceable in law, and an arbitration agreement contained in such an instrument is also non-enforceable.
The 5-judge bench consisting of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy, and Justice C.T. Ravikumar decided the issue by a majority of 3:2. Justice Joseph, along with Justice Bose and Justice Ravikumar, stated that a stamp duty exigible instrument may contain an arbitration clause, but without stamping, it cannot be considered a contract 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.
On the other hand, Justice Rastogi and Justice Roy opined that insufficient or non-stamping of the substantive instrument would not render the arbitration agreement enforceable. The minority judgment noted that stamp deficiency is a curable defect that would not render the arbitration agreement void.
The majority upheld the view taken in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd., para 22 and 29 in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited, and Vidya Drolia And Ors. v. Durga Trading Corporation. The bench clarified that a certified copy of the arbitration agreement can be produced at the Section 11 stage only if it clearly indicates the stamp duty paid. If the same is not mentioned, the court should not act on the said certified copy.
The petitioner and the respondent in the matter had entered into a sub-contract that contained an arbitration clause, but certain disputes arose, and the respondent invoked the bank guarantee furnished by the petitioner. A suit was filed regarding the invocation, and the respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, in the suit, seeking a reference of disputes to arbitration. However, the Commercial Court rejected the application.
A revision petition was filed by the respondent before the Bombay High Court. Considering objections on maintainability, the Court granted liberty to the respondent to withdraw the review and file a writ petition. Subsequently, in the writ petition filed by the respondent, the High Court held that the Section 8 application was maintainable. One of the issues before the High Court was that the arbitration agreement was unenforceable since the subcontract was unregistered and unstamped. It noted that the said issue could be raised in an application under Section 11 or before the Arbitral Tribunal.
In conclusion, the Supreme Court has clarified that an arbitration agreement contained in an unstamped contract is not enforceable, and the Court at the Section 11 stage is bound to examine the instrument and impound it if it is unstamped or insufficiently stamped. This decision will have significant implications for parties that enter into contracts containing arbitration clauses, as they will now have to ensure that the contract is stamped before initiating any arbitration proceedings.