In a significant judgment that will have far-reaching consequences, a five-judge bench of the Supreme Court has held that an unstamped instrument (including an arbitration agreement) which is otherwise eligible for stamp duty does not exist in law and must be should be confiscated. A court if presented with it (eg, by a party seeking arbitration). This process of forfeiture is usually affected by delays under the Stamp Act, as a result of which the parties have to wait a long time before availing their remedies under the arbitration clause contained in such instruments.
In its recent judgment, the Supreme Court has affirmed the findings SMS Tea Estates Vs Chandmari Tea Company And Garware Wall Ropes Ltd. Vs. Coastal Marine Construction & Engineering and rejected NN Global Mercantile Pvt Ltd Vs Indo Unique Flame Ltd & Ors and held that an instrument eligible for stamp duty, if not a stamp, does not exist in law and cannot be relied upon to appoint an arbitrator. The judgment held that: (a) where the instrument is eligible for stamp duty and is not stamped, the court cannot appoint an arbitrator, and the instrument must be forfeited and the procedure required under the Stamp Act followed should be done; (b) where the instrument may be stamped, but an objection is raised by one party that it is not duly stamped, and where it appears that such objection is without any ground, the court shall refer the parties to arbitration and leave it open to the arbitrator to exercise the power to impound the instrument.
This issue has been the subject of debate in various judgments of the Supreme Court. In 2011, in the Supreme Court SMS Tea Garden had held that if an arbitration clause is contained in an unstamped agreement, the judge must void the agreement and ensure that stamp duty and penalty (if any) are paid before appointing the arbitrator . In 2019, in the Supreme Court mud wall agree with the conclusions of SMS Tea Garden But provided a workable solution that where the underlying agreement with arbitration clause is insufficiently stamped, the court cannot appoint an arbitrator, and must impound the agreement and hand it over to the concerned stamp authority for rectification. It clarified that the Stamp Authority should resolve issues relating to stamp duty and penalty as expeditiously as possible and preferably within 45 days from the date on which the settlement is received by the Authority. However, in the Supreme Court NN Global (in 2021) held SMS Tea Garden does not determine the correct position of Indian law and, observing that the arbitration agreement is independent and severable from the underlying contract, which has not been adequately stamped, set aside the said decision. As to their prevailing conflicting judgments, in NN GlobalThe Supreme Court referred the issue to a five-judge constitutional bench for determination.
While this decision will have wider implications and delay the appointment of arbitrators in ad hoc arbitrations, it will also cause collateral damage to the progress of institutional arbitrations or when an institution is nominated by courts for arbitration appointments. In view of the present judgment, if the arbitration agreement contained in an unsealed document refers to institutional arbitration, the parties to the dispute may have no recourse but to file an application before the courts, as per the new judgment alone The courts can confiscate such a device. , Institutions will struggle to appoint arbitrators in such cases. A high-level committee headed by retired Justice BN Srikrishna had advocated adoption of institutional arbitration in India and recommended nominating institutions for arbitration even in ad hoc cases, but the road has turned sour.
The latest decision does not deal with a situation where a document is executed outside India between an Indian and a foreign domiciled party, and where the courts in India are approached because the arbitration is either governed by the ad hoc mechanism prescribed under the Arbitration Act It exists or is situated in India.
The decision may also affect arbitrations arising under unstamped instruments sitting outside India, where the instrument is governed under Indian law, as the ruling treats instruments that are insufficiently binding as unenforceable under our law. duly stamped.
In India, where new businesses are increasingly adopting technology and conducting their communications electronically (for example, with DocuSign), the applicability of stamp duty law has not kept pace with developments. The ruling is likely to affect existing arbitrations as well as fresh arbitrations that parties to the dispute may consider filing under unstamped instruments.
In an earlier judgment in 2019, the Supreme Court had provided a time-limit of 45 days to rectify the defects, so that the rights of the parties to the dispute under the unsealed document were not substantially delayed. The present award does not set any time limit, and the parties may face considerable delay in the enforcement of the rights, as the seizure of the relevant instrument may take a long time.
The judgment also clarifies that it has not expressed its opinion on anything with regard to grant of interim relief under the Arbitration Act. Therefore, the judgment will have no bearing on the grant of interim protection, which is granted by the courts in emergency situations where the litigants need to be protected for the arbitration to serve its purpose.
Vidarbha Desai and Alipak Banerjee are the head and leader, respectively, of the International Dispute Resolution and Investigation practice at Nishith Desai Associates.
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