1. Introduction
On
This newsletter focuses on the distinct views taken by the constitution bench and what it means for parties executing arbitration agreements.
2. Factual Background
Thereafter, IUFL filed a writ petition before the
3. Jurisprudential Evolution
Prior to NN Global, a division bench of the SC in
This position was questioned by a three-judge bench of the SC in
4. The Views of SC
Both the views - majority and dissent - of the SC are discussed below.
4.1 Majority: The majority decision of Justices
(a) Intertwining of Contract & Stamp Act: Before discussing the majority view, it is important to explain the statutory provisions regarding contracts. The Contract Act contains conditions regarding void and unenforceable contracts. Section 2(h) provides an agreement enforceable by law is a contract. This implies there must be an agreement and it must be enforceable. Only a valid contract is enforceable by law, and a contract must fulfil certain conditions to be valid. If any condition is not fulfilled that contract is deemed void. Section 10 addresses enforceability and provides that all agreements are contracts made by free consent of parties competent to contract, for a lawful consideration, with a lawful object and which are not expressly declared to be void. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
The majority noted that sections 2(g)8 and 2(j)9of the Contract Act and sections 3310 and 35 of the Stamp Act are intertwined with each other. This means that if a contracting party discovers that the necessary stamp duty has not been paid on the agreement, it can rectify the defect by paying the stamp duty and penalty, as may be determined by the concerned officials. If this is not done, the contract would be unenforceable and void under the Contract Act. Thus, SMS Tea Estate and
(b) Section 11(6A) of the Act:11 Section 11(6A) of the Act contains a restriction where the court is empowered to examine the existence of an arbitration agreement and not determine stamping. But the majority held that where an unstamped contract is produced in section 11 proceedings, the court is duty bound to examine the agreement and consider the stamping aspect as well. At the same time the SC stated that, if a party objects to an agreement being insufficiently or not duly stamped, and the court deems the objection to be baseless then it may refer the stamping issue to the arbitral tribunal.
4.2 Minority: The dissenting bench of Justices
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the court cannot void an arbitration agreement on account of insufficient stamping since section 11 limits the scope of examination to the existence of an arbitration agreement and not its validity.
- section 35 of the Stamp Act allows the parties to correct the stamping deficiency. An instrument which is unstamped or insufficiently stamped may be admissible if the relevant stamp duty and a penalty is paid later.
- the issue of stamping should be decided by the arbitral tribunal.
The dissent emphasised the Act's objective which is to avoid procedural complexity and delay in litigation. Impounding an arbitration agreement at the pre-referral stage by the court could frustrate this very purpose.
5. Conclusion
The conclusive determination by the SC establishes that parties executing agreements on plain paper could run into challenges when disputes arise. An arbitration clause is a common provision in all contracts and for it be enforceable, the entire agreement must be stamped. This will minimize the risk of technical challenges and corresponding delays by raising the question of existence or adequacy of the stamp duty paid. It is also necessary that parties remain cognizant of the exact value of the stamp duty to be paid on the entire contract, in accordance with the Stamp Act. In case of deficiency, they must cure the defect, pay the remaining amount and corresponding penalty to minimize and avoid judicial delays. Hence, it is best to re-assess the practice of executing agreements on plain paper and, instead, pay the necessary stamp duty.
Footnotes
1
2 This provision states the power of the court to refer parties to arbitration where such a contract exists
3 This clause provides for appointment of arbitrator by court where parties fail to agree
4
5 This provision does not allow an instrument chargeable with the duty to be admitted as evidence if it is not duly stamped
6 Vidya Drolia and Others v. Durga
7
8 This section provides if an agreement is not enforceable by law, then it is void
9 This section stipulates where a contract, which ceases to be enforceable by operation of law, becomes void when it ceases to be enforceable
10 This section provides that public officials are obligated to examine every instrument chargeable with stamp duty which comes before them and to impound any instrument which appears not to be duly stamped
11 This provision envisages that court while appointing an arbitrator should confine their examination to the existence of an arbitration agreement
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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