A Frisson of Schadenfreude: The Harmonious Construction of the Arbitration Act, the Stamp Act, and the Contract Act

Article by Saima Mahmood

The recent judgment of  7 Judge Bench in the In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, the Court has extensively dealt with the overall harmonious play of Arbitration Act, Stamp Act and the Contract Act. The Court’s purpose to dwell in this aspect was the Five-Judge Bench in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[1] which directly impacts the business and commercial transaction in the country as it has raised a vital question to the entire interpretation and application of the Arbitration Law in India.

Position of Law prior to In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899:

A Division Bench of the Supreme Court in SMS Tea Estates vs Chandmari Tea Co (P) Ltd[2] had held that if any document is found to be unstamped/insufficiently stamped then even the arbitration clauses shall become invalid as per Section 35 of the Stamp Act.

After this judgement, a legislative amendment was inserted as Section 11(6) of the Arbitration and Conciliation Act which limited the scope of judicial intervention to merely “examine” the existence of arbitration agreement. The Supreme Court further clarified that the role of Courts under Section 11 of the Arbitration Act shall confine to analyzing the existence of arbitration agreement at the stage of appointment of Arbitrator(s).

Subsequent to the insertion, a Three-bench judge in Vidya Drolia v. Durga Trading Corpn.[3],held that the existence and validity of an arbitration agreement would not exist if it were illegal or does not satisfy the mandatory legal requirements for it to be enforceable which includes a stamp duty.

Subsequent to this position, a Three-judge Bench of the Supreme Court, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited[4] doubted this position and observed that since arbitration agreement is an independent agreement, it cannot be invalidated merely on insufficiently stamped main contract.

Since both the judgments were passed by 3-judge Bench, the Supreme Court referred the issue to a larger bench to render the verdict of this issue. Thereafter, a Five Judge Bench decided the reference by a 3:2 majority summarizing as below[5]:

1. An unstamped instrument containing an arbitration agreement is void under Section 2(g) of the Contract Act;
2. An unstamped instrument, not being a contract and not enforceable in law, cannot exist in law. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped;
3. The “existence” of an arbitration agreement contemplated under Section 11(6A) of the Arbitration Act is not merely a facial existence or existence in fact, but also “existence in law”;
4. The Court acting under Section 11 of the Arbitration Act cannot disregard the mandate of Sections 33 and 35 of the Stamp Act requiring it to examine and impound an unstamped or insufficiently stamped instrument; and the certified copy of an arbitration agreement.

Thereafter, The Supreme Court has meticulously dealt with every aspect of Stamp Act, Arbitration Act and Contract Act to in the 7-judge bench judgement in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

The scope and effect of Stamp Act:

The court discussed the procedure envisaged in the Stamp Act regarding failure to stamp an instrument. Section 17 of the Stamp Act provides that all instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. Further, section 62 penalizes any failure to comply with Section 17 of the Stamp Act. The Court further discussed other ways vide which an instrument may not be properly stamped including the following[6]:

1. The duty may have been paid under an incorrect description under Schedule I;
2. The duty paid may be of a sufficient amount but of improper description;
3. The provisions of Section 5 which govern instruments relating to several distinct matters may not have been complied with; or
4. The instrument may be written in contravention of Sections 13 and 14, and thereby deemed to be unstamped in terms of Section 15.

The court observed that the legislature realized that the mandate of Stamp Act maybe not be complied for reasons as mentioned and thus Sch IV was enacted. Further, Section 35 of the Stamp Act provides that instruments which are not duly stamped are inadmissible in evidence and it shall not be acted upon, registered, or authenticated[7]. The Court also explained that Clause (a) of the proviso to Section 35 stipulates that the bar contained in the provision is removed upon the payment of duty and the penalty. Thus, the party or parties may pay the duty chargeable to the person who has the authority to receive evidence by law or by consent of parties. Further under Section 38 of the Stamp Act, the Collector is granted with power to impound an instrument under section 33 of the Stamp Act. In terms of Section 42 of the Stamp Act, an instrument is admissible in evidence once the payment of duty and a penalty is complete. It is clear that section 38 of the Stamp Act stipulates that either the person admitting the instrument in evidence or the Collector, as the case may be, shall certify by endorsement that the proper duty has been paid.

The procedure contemplated by the Stamp Act facilitates the collection of revenue. It permits instruments to be impounded not only by persons in charge of a public office or those who are empowered by law to receive evidence but also by any person who is empowered to receive evidence by consent of parties. The statute then sets out the procedure to be followed upon impounding a document. This procedure ensures that stamp-duty is paid. After the payment of the appropriate amount under the appropriate description in Schedule I and the penalty (if any), the Stamp Act provides for the certification of such payment by an endorsement by the appropriate authority. Once an instrument has been endorsed, it may be admitted into evidence, registered, acted upon or authenticated as if it had been duly stamped.

Distinctiveness between inadmissibility and voidness of arbitration agreements

The next question that emanated from the above observation of the Court is the distinctiveness between inadmissibility (Stamp Act) and voidness (As per Contract Law) of an agreement. Whether the impact of an inadmissibility of documents hold the same weightage as voidness of contract. This question was also answered by the Court, wherein the Court concluded that in essence the difference is that when an agreement is void, it raises the question of enforceability of the agreement before the Court of Law whereas when the question of inadmissibility arises, it raises the issue whether such a document maybe considered by the court while adjudication of the case.

Therefore, the Court held that paying inadequate duty or not paying it, would only render an instrument inadmissible in evidence and not void.

Harmonious Intent under Indian Laws

The Court further analyzed the scope of Harmonious Intent under Indian Laws. While going into the harmonious construct, the Court defined that the cardinal principle of interpretation of statutes is to discover and give effect to the legislative intention. If a statute is susceptible to two interpretations, the court will have to reject the construction which will defeat the plain intention of the legislation[8]. The purpose of judiciary is to not only truly interpret the clause but the entirety of a statute. The Court relied on Sultana Begum v. Prem Chand Jain[9],  to enumerate the principles pertaining to harmonious construction of statue which includes that an interpretation which reduces one of the provisions to a “dead letter” or “useless lumber” is not harmonious construction; and to harmonize is not to destroy any statutory provision or to render it otiose[10].

It is clear understanding that the challenge before the Court is to harmonize the provisions of the of the Arbitration Act and the Stamp Act. The object of the Arbitration Act is to inter alia ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. On the other hand, the object of the Stamp Act is to secure revenue for State. It is a cardinal principle of interpretation of statutes that provisions contained in two statutes must be, if possible, interpreted in a harmonious manner to give full effect to both the statutes[11].

The Court discussed the primacy of Arbitration Act for arbitration agreements over Contract Act and Stamp Act. The reasons opined by the Court were as follows:

1. Arbitration Act is a special law and the Indian Contract Act, and the Stamp Act are general laws.
2. Scope of Section 5 of the Arbitration Act restricts the scope of judicial intervention in the Arbitration Act. The courts can only intervene if the same is provided in the Arbitration Act. The Court further observed that one of the primary objectives of the Arbitration Act was to minimize the supervisory role of the courts in the arbitral process[12] and therefore, dissented from the N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[13] view that effect of Sections 33 and 35 of the Stamp Act shall prevail despite the interdict in Section 5.
3. Parliament was aware of the Stamp Act when it enacted the Arbitration Act, thus despite being aware of the mandate of Section 33 of the Stamp Act, the Parliament at the time of enactment of Arbitration Act, did not specify stamping as a pre-condition to the existence of a valid arbitration agreement.

Upon establishing the primacy of Arbitration Act for arbitration agreements over Contract Act and Stamp Act, the Court further enumerated the Harmonious construction of the three statutes.

1. Effect of competence-competence doctrine: the effect of the principle of competence-competence is that the arbitral tribunal is vested with the power and authority to determine its enforceability. The question of enforceability survives, pending the curing of the defect which renders the instrument inadmissible. By appointing a tribunal or its members, this Court is merely giving effect to the principle enshrined in Section 16. The Court further observed that Arbitration requires to provide “a one-stop forum” for resolution of all disputes and held:

(a) Courts must give effect to the commercial understanding of parties to arbitration agreements that arbitration is efficacious; and

(b) This can be done by minimizing judicial intervention[14]

2. Scope of Arbitral Tribunal: The Court goes on to say that issues which concern the payment of stamp-duty fall within the remit of the arbitral tribunal and it is understood from the legislative intent that courts are not required to deal with the issue of stamping at the stage of granting interim measures under Section 9.
3. Scope and interpretation of word “shall” in Section 33 and 35 of Stamp Act: The Court while interpreting the term shall has expressly stated that while ordinarily term “shall” is mandatory, however sometimes it may be read directory which depends on the intent of the legislature. Therefore, it is pertinent that the interplay of the three statutes and the intent of the legislature must be evaluated in the context of interpreting “shall”.
4. Fourthly, another important aspect which the Court discussed was the interpretation of the law must give effect to the purpose of the Arbitration Act in addition to Stamp Act.

Conclusion:

For the above observation, the Court concluded as follows:

1. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
2. Non-stamping or inadequate stamping is a curable defect;
3. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
4. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and
5. The decision in SMS Tea estates vs Chandmari Tea Co (P) Ltd[15] and N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[16] are overruled.

The aforementioned detailed observations of the Supreme Court makes it clear that any non-payment or incorrect or inadequate stamp duty will not render an instrument invalid or void. Further it was highlighted the objective of the Arbitration Act is to reduce the judicial intervention or supervisory role in arbitration mattes. This judgment has brought immense clarity to the Arbitration Laws in India, it is a perfect epiphany to the harmonious intent in Indian Laws. This ruling brings great relief to parties entering commercial contracts and other business related transactions.

[1] (2023) 7 SCC 1

[2] (2011) 14 SCC 66

[3] (2021) 2 SCC 1

[4] (2021) 4 SCC 379

[5] Para 5 of the judgment

[6] Para 38 of the judgment

[7] Subject to the proviso to Section 35

[8] CIT v. Hindustan Bulk Carriers, (2003) 3 SCC 57

[9] (1997) 1 SCC 373

[10] (1997) 1 SCC 373

[11] Jagdish Singh v. Lt. Governor, Delhi, (1997) 4 SCC 435

[12] Statements of Objects and Reasons, Arbitration Act

[13] (2023) 7 SCC 1

[14] (2016) 10 SCC 386

[15] (2011) 14 SCC 66

[16] 2023) 7 SCC 1