Enforceability Of An Unstamped Arbitration Agreement

Author - Shikhar Khare

Arbitration is known to be a form of Alternative Dispute Resolution (ADR), which is essentially a way to resolve disagreements most preferably outside the courts. It can be used to resolve any dispute related to rights about something particular; however, arbitration is often used to resolve commercial disputes predominantly in the international business transactions context. The disagreement, in arbitration, is decided by one or more persons (as needed) called adjudicator by rendering the Arbitration Award. An arbitration award legally binds on both the parties of the dispute and stands enforceable in the courts.

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Arbitration Agreement

The arbitration agreement is a contract between two or more parties agreeing upon settling a dispute, which may arise in future, without going to the court. It may be an ordinary clause of a more massive contract as well and acts as a prerequisite to opt for arbitration. Mostly, the arbitration agreement is signed at the beginning of a business alliance as a preparation. {The Article elaborates on - arbitration clause, arbitration clause in agreement, arbitration clause in contract } 

There may be no arbitration in the absence of an arbitration agreement. It is always advised in a business relationship to have an arbitration agreement in place. {The Article elaborates on - arbitration clause, arbitration clause in agreement, arbitration clause in contract } 

Benefits Of The Arbitration Agreement

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It is essential to understand the direct and indirect benefits of the arbitration agreement and to decide upon the need for an arbitration agreement in any business relationship. The best advantage of an arbitration agreement is that it enables to resolve the dispute outside of court. Here are a few top benefits of an arbitration agreement:

●        Faster 

●        Less expensive

●        Confidentiality

●        Choice of arbitrator

●        Avoids a jury

●        Avoids hostility

There are also some disadvantages with those definitive benefits that you should know. Indeed,  knowing both sides helps make the right decision for a business. {The Article elaborates on - arbitration clause, arbitration clause in agreement, arbitration clause in contract } 

Stamping Of Arbitration Agreement

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The Supreme Court of India, in its recent judgement, in Garware Walls Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd held that in a case of an unstamped or deficiently stamped arbitration agreement, the court must first impound the arbitration agreement and send for payment of applicable stamp duty and penalty be paid, and proceed further only when these have been paid. It clearly brings at fore the importance of the Stamp Law and Stamping. {The Article elaborates on - arbitration clause, arbitration clause in agreement, arbitration clause in contract } 

Stamp Law

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Stamp duty is a kind of mandatory tax in Indian law required to be paid for every document or instrument concerning rights or obligations. It is necessary to be paid to the government or authority of the jurisdiction where document or instrument is executed. Calculation of Stamp duty depends upon the nature of the document and varies across states. It is governed by the provisions of either or both of Central stamp legislation and State-specific legislation. It clearly states that and unstamped document or instrument cannot be considered or acted upon as evidence.

Enforceability Of An Unstamped Arbitration Agreement

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The Supreme Court of India in the same judgement which overruled a Bombay High Court judgment Coastal Marine Constructions & Engineering Ltd. v. Garware Walls Ropes Ltd held that an arbitration clause in an agreement which is not stamped as per law could not be given effect if and until the agreement is duly stamped. therefore answering the question of  are unstamped documents enforceable?

In the particular case, the Supreme Court was requested or appealed to decide against the Bombay HC Judgment which meant that a court is only to examine the existence of an arbitration agreement according to Section 11(6) of the Arbitration Act. In case if the arbitration agreement existed but the agreement containing it was unstamped, such unstamped arbitration agreement was to be impounded by an arbitrator appointed under Section 11 of the Arbitration Act,  and not by a judge hearing the aforementioned application.

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In a way, the question before the Hon'ble Supreme Court was on the effect of the arbitration clause contained in a contract, but the contract was not stamped so the question was are unstamped documents enforceable?. Also, another question was whether the court could order the appointment of an arbitrator concerning such an arbitration clause.

The Supreme Court observed during hearings that the first part of Section 7(2) of the Arbitration Act makes available that the arbitration agreement may be as an arbitration clause in a given contract. As per Indian contract law, Section 2(h) of the Indian Contract Act, 1872, a contract is an agreement enforceable by law. Further, as per the Stamp Law, an agreement does not become a contract or enforceable in law unless it is duly stamped. Based on the above observation, the Supreme Court further held that the said provisions clarify that an unstamped arbitration agreement clause in a broader agreement would not exist when it is not enforceable.

Conclusion

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This particular judgment highlights the importance of the need for serious consideration on payment of stamp duty on instruments. This decision may immediately insinuate as the delayed beginning of arbitration while pursuing an arbitration clause confined in an unstamped arbitration agreement meanwhile. The purpose of stamp duty is to create revenue for the state, and now it may pause proceeding with the appointment of arbitrators or any other matter for stamp duty. This particular judgment is now a law and must be adhered to; it does leave specific questions like are unstamped documents enforceable unanswered.

{The Article elaborates on - arbitration clause, arbitration clause in agreement, arbitration clause in contract }