Source: Delhi High Court

Why in News?

The bench of Justice Sachin Datta observed that the court can make time bound directions to collector of stamps to decide upon an arbitration agreement that is unstamped.

• The Delhi High Court gave this observation in the matter of Splendor Landbase Ltd. v. Aparna Ashram Society.

Background

• The Delhi HC was hearing the batch of petitions regarding the issue of unstamped arbitration agreements.
• The court was contemplating upon the question as to how the statutory mandate under Section 11(13) of the Arbitration and Conciliation Act, 1996 (A&C Act) can be harmonized with the judgement of N. Global Mercantile Private Limited v. Indo Unique Flame Ltd and Other (2021).
  • The SC in the aforementioned judgment directed the courts to act in tune with the Indian Stamp Act, 1899 while dealing with a case related to arbitration agreement.

Court’s Observation

• The HC mainly observed that an unstamped/insufficiently stamped arbitration agreement is mandatorily required to be impounded in proceedings under Section 11 of the A&C Act.

Arbitration Agreement

• Arbitration is legally recognized out of court settlement procedure governed by A&C Act, 1996.
• Under the A&C Act, an arbitration agreement is defined under Section 7 as an agreement by parties to submit their existing or future disputes to arbitration.
• This agreement can be in the form of a separate document or can be included as a clause within the original contract between the parties.
• An arbitration agreement must be in writing.
• Section 11 of the Act pertains to the appointment of arbitrators.
• Under Section 11(2) of the A&C Act, the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
• When parties involved in a dispute are unable to agree on the appointment of an arbitrator, power of appointment of arbitration shifts upon the Chief Justice of India (CJI) or the designated person(s) by the Chief Justice.

Unstamped Arbitration Agreement

• The Act does not specifically state that an unstamped agreement is void or unenforceable.
• Instead, it outlines that an unstamped agreement can be enforced upon payment of the requisite stamp duty and any penalty imposed for the delay in stamping.
• However, the Supreme Court in the N.N. Global Mercantile Case held that an unstamped arbitration agreement would be considered as an unenforceable contract.
  • The court further held in this case that Section 35 of the Stamp Act, which makes any unstamped or insufficiently stamped document inadmissible in evidence applies the same principle to arbitration agreements.

Landmark Cases

• M/S Sms Tea Estates P.Ltd vs M/S Chandmari Tea Co.P.Ltd (2011):
  • The SC in this case held that, unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the instrument.
  • It means that the court cannot act upon the arbitration agreement also which is a part of that instrument.
• Garware Wall Ropers Ltd. vs Coastal Marine Constructions (2019):
  • The SC in this case held that, when an arbitration clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law.
  • The court further noted that, under the Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped.
  • Therefore, an arbitration clause in an agreement would not exist when it is not enforceable by law.

Legal Provision

• Section 11(13) of the A&C Act, 1996 states that, an application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such Court, as the case may be, as expeditiously as possible and an endeavor shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.