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Calcutta High Court's Stamp of Approval: Clarity on Arbitration Clauses

In a recent legal development, the High Court of Calcutta has rendered a significant judgment, clarifying the stamping requirements for contracts formed through correspondence. According to the verdict delivered by Justice Moushumi Bhattacharya, if a contract consists of a series of letters, and at least one of these letters bears the necessary stamp, the entire contract is considered to be properly stamped. This ruling is in accordance with proviso (c) of Section 35 of the Indian Stamps Act.

The case at hand involved the issuance of a Notice Inviting Tender (NIT) on April 19, 2014. Subsequently, a Letter of Intent (LOI) dated August 21, 2014, Order contained identical arbitration clauses, while the final agreement did not. Importantly, the agreement dated October 15, 2015, was appropriately stamped, but the previous documents were not.

A dispute arose between the parties concerning payment for services provided under the Work Order. Consequently, the petitioner invoked the arbitration clause present in the NIT and LOI. When the parties could not resolve the dispute through arbitration, the petitioner sought the Court's intervention for the appointment of an arbitrator.

The respondent raised objections to the petition's maintainability:

  • The agreement dated October 15, 2015, lacked an arbitration clause and did not satisfy the test for incorporation by reference, making it unfit for and a Work Order dated November 17, 2014, were issued to the petitioner. An agreement was executed on October 15, 2015. Notably, both the LOI and the Work arbitration.
  • The LOI, NIT, and Work Order, which the petitioner relied upon to incorporate the arbitration clause, were not stamped and should thus be deemed inadmissible as evidence.

In response, the petitioner made counter-arguments:

  • The contract explicitly referred to the LOI and Work Order, stating that they should be considered part of the agreement, thereby incorporating the arbitration clause contained in those documents by reference.
  • The contract was duly stamped, and as per proviso (c) of Section 35 of the Indian Stamps Act, the stamp duty paid on one document within the same transaction would render the rest admissible as evidence.

The Court's analysis of the case began with addressing the objection related to the lack of stamping on the NIT, LOI, and Work Order. The Court emphasized that the final contract dated October 15, 2015, was appropriately stamped and that the NIT, LOI, and Work Order were integral to the same transaction, which eventually led to the execution of the final contract. Consequently, the Court ruled that if even one letter within the correspondence forming the contract was adequately stamped, the entire contract was deemed to be duly stamped.

Furthermore, the Court underscored that when a contract or agreement is established through correspondence involving multiple letters, the stamping requirement is satisfied if any one of the letters is properly stamped. This interpretation was based on proviso (c) to Section 35 of the Indian Stamps Act, which relieves a party from the statutory obligation of stamping each and every letter or document forming part of the correspondence if one of the letters is adequately stamped.

Turning to the objection regarding the absence of an arbitration clause in the October 15, 2015 contract, the Court noted that the contract explicitly referenced the LOI and Work Order and stated that they should be considered integral to the agreement. Consequently, the arbitration clause contained in these earlier documents was effectively incorporated by reference into the main contract. The Court emphasized that the absence of an arbitration clause in the primary agreement was inconsequential, as long as it specifically incorporated another agreement containing the necessary arbitration clause. This interpretation was consistent with Section 7(5) of the Arbitration and Conciliation Act, which allows for the incorporation of arbitration agreements by reference.

In light of these findings, the Court ruled in favor of the petitioner and appointed Justice (Retd) S. Muralidhar as the sole arbitrator in the case.

Case Title: Power Mech Projects Limited v. BHEL, AP 444 of 2023 Date: October 17, 2023