Today in high octane and complex business relationship
runs on contractual relationship and at times the strain on such relationship
results in disputes among the parties in commercial relationship which makes it
difficult to continue together in business. Arbitration is an efficient and
effective manner to resolve such disputes among the parties.
Arbitration often try to preserve or protect the
existing relationship amongst the parties, unlike court procedures where
sometimes the final outcome can result in the relationship coming to an end
between both parties. To protect their rights, the parties enter into
agreements and include the arbitration agreement /clause as part of their commercial
transactions. In recent few years, the enforceability of such agreements had
been challenged on ground of no-payment of stamp duty or insufficient stamp
duty.
In 2021, in the matter
N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited
& Ors.[1] (“NN
Mercantile Case”), it was been held by the hon’ble Supreme
Court that- “that
the non-payment of stamp duty on the commercial contract would invalidate even
the arbitration agreement, and render it non-existent in law, and
unenforceable, is not the correct position in law” and
the matter was referred to While in NN Mercantile Case, it was been held by
Hon’ble Supreme Court that – “non-payment
of stamp duty would not invalidated the arbitration agreements and are
enforceable”, where as in its earlier judgements in SMS Tea Estates (P)
Ltd. v. Chandmari Tea Co. (P) Ltd.[2] (“SMS Tea Case”) where it was been held
by the hon’ble Supre Court 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” and the same was
upheld in the matter of Garware Wall Ropes Ltd v. Coastal Marine Construction
& Engineering Ltd.[3] ("Garware
Case"), and Vidya Drolia v. Durga Trading Corporation[4] (“Vidya Drolia Case”).
Due to such conflicting judgements by the Apex Court,
the NN Mercantile matter was been referred to the constitutional bench of the
Supreme Court for final adjudication of the burning issue- “Enforcement of arbitration agreement
without payment of stamp duty?”
This review was necessitated to address the court's
jurisdiction to adjudicate issues at the pre-appointment stage, which has been
the subject matter of numerous cases before the hon’ble Supreme Court as well
as various High Courts in India. Different benches of the Supreme Court have
rendered conflicting decisions on this issue.
The constitutional bench
of the Supreme Court which has ruled in 3:2
that – “an instrument which is exigible to stamp duty may contain an arbitration
clause and which is not stamped cannot be said to be a contract enforceable in
law within the meaning of S. 2(h) of the Contract Act and is not enforceable
under S 2(g) of the Contract Act”, which
in essence means that- If
an Agreement is unstamped or insufficiently stamped, the arbitration clause is
not enforceable.
With the ramifications and impact on the future
arbitrations as it’s now a settled law that any agreement without payment of
stamp duty or insufficient stamp are not enforceable, there are few issues which need to review by
the parties, litigants etc. to avoid any future settlement of conflict among
the commercial transactions via arbitration :
a. The impact on ongoing arbitration with unstamped
agreement?
b. The parties who already have an arbitration agreement/clause
but no stamp duty has been paid on such agreements? Would their disputes to be
settled through civil court or is there any way for them to enforce the arbitration
agreements?
c. Are there any precautionary measures which the parties
should opt for it, to avoid any non-enforcement issues w.r.t. arbitration
agreements/clause in future?
This article is for information purpose only and
should not be taken as legal advice.
To know further details, clarification, assistance or any
advice on arbitration or legal issues on
arbitration, you may connect with us at admin@equicorplegal.com /
08448824659 and visit www.equicorplegal.com .
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