The Supreme Court of India recently held that an arbitration clause has no existence until the contract containing the arbitration clause is duly stamped.
“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. Under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped”, the Court said.
The Court further laid down the following procedure, for cases where the contract is not sufficiently stamped:
1. While proceeding with the Section 11 application, the Court must impound the instrument, which is not adequately stamped.
2. The instrument must be handed over to the Authority under the Stamp Act. The Authority will then adjudicate the stamp duty and penalty (if any). The Authority need to expedite the adjudication as possible, preferably within a period of 45 days from the date on which the Authority receives the instrument.
3. After stamp duty and penalty (if any) are paid on the instrument, any of the parties can bring the instrument to the notice of the Court.
4. The Court will then proceed to expeditiously hear and dispose of the Section 11 application. This will also ensure that once a Section 11 application is allowed and an arbitrator is appointed, then the arbitrator can then proceed to decide the dispute within the time frame provided under section 29A of the Arbitration Act.
The Court clarified that an arbitration clause contained in an agreement does not have an independent existence. Therefore, it is not possible to bifurcate the arbitration clause contained in such an agreement or the underlying transaction so as to give it an independent existence. Hence, the Stamp Act applies to the agreement or transaction as a whole.