India: Invalidity Of Unstamped Arbitration Agreements - A Critique Of The N.N. Global Judgment

INTRODUCTION

Recently, a Constitution Bench of the Supreme Court in N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd & Ors. [2023 SCC OnLine SC 495] (hereinafter "Judgment"), vide a 3:2 majority has ruled that any unstamped instrument, exigible to stamp duty, and containing an arbitration agreement cannot be said to be a contract within the meaning of Section 2(h) of the Indian Contract Act, 1872. The Court further held that the provisions of Section 35 of the Indian Stamp Act ("Stamp Act"), would bar the admission of an unstamped or insufficiently stamped arbitration agreement unless a necessary certificate is provided under Section 42 of the Stamp Act.

Through this article, we seek to analyse the impact of the Judgment on unstamped/insufficiently stamped arbitration agreements.

BACKGROUND AND FACTUAL MATRIX

In the case at hand, the arbitration clause was contained in an unstamped work order, which was placed on one of the parties to the dispute. An application filed under Section 8 of the Arbitration and Conciliation Act (hereinafter "Act") seeking reference to arbitration, before the Commercial Court, was rejected on the ground that the arbitration agreement was not enforceable in law as the work order was unstamped. Subsequently, a writ petition, challenging the order of the Commercial Court, was filed by the aggrieved party before the High Court and the same was allowed. Thereafter, an appeal was preferred before the Hon'ble Supreme Court.

The issue was initially decided by a three-judge bench of the Supreme Court in N.N. Global Mercantile Pvt. Ltd. vs M/s Indo Unique Flame Ltd & Ors. [2021 4 SCC 379] (hereinafter "NN-1"), wherein the Supreme Court had held that the non-payment of stamp duty on the commercial contract would not invalidate the entailing arbitration agreement and render it non-est in law. In doing so, the Court had overruled the findings of the Court in SMS Tea Estates (P) Ltd. v Chandmari Tea Co. P Ltd [2011 14 SCC 66], ("SMS Tea") wherein the Court had ruled to the contrary and opined that the non-payment of stamp duty would render the arbitration agreement not existent in law and not enforceable. Moreover, the Court also dissented with opinion of the Court in Garware Wall Ropes Ltd v Coastal Marine Constructions & Engg. Ltd [2019 9 SCC 209], ("Garware") that an arbitration agreement contained in an unstamped agreement could not be read in evidence and, therefore, invoked. The Court had also doubted the correctness of the findings rendered by the Coordinate Bench of the Supreme Court in Vidya Drolia v Durga Trading Corporation [2021 2 SCC 1]. In light of the contradictory judgments and opinions of the co-ordinate bench, the issue was referred the matter to the above Constitutional Bench.

ISSUE

The Supreme Court was posed with the question regarding the validity of an arbitration agreement contained in an instrument which is insufficiently stamped, in accordance with the Stamp Act. The Court was further referred to decide the applicability of the statutory bar contained in Section 35 of the Indian Stamp Act to such unstamped/insufficiently stamped instruments.

JUDGMENT AND ANALYSIS

The Supreme Court in the Judgment has overruled NN-1 and has held the findings of the Court in SMS Tea and Garware to be the correct positions in law. The Supreme Court in its Judgment has held that "an instrument, which is exigible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot therefore, exist in law."

The Court clarified that the powers of the Court while deciding a Section 11 Petition, includes the power to examine and ascertain the existence and validity of the arbitration agreement. Therefore, under a Section 11 application, the courts would be within their jurisdiction in acting against the arbitration clause contained in an insufficiently/unstamped instrument.

The Judgment clarified that while determining an application under Section 11 of the Act, the Court is duty-bound to act in accordance with Section 33 of the Stamp Act and impound the insufficiently stamped/unstamped instrument. The Court, further held that in light of Section 35 of the Stamp Act, the arbitration agreement cannot be acted upon by the Court. The Court however clarified that it could proceed further with the Section 11 Application if the defect in payment of stamp duty is cured as per the provisions of the Stamp Act.

The Judgment also discussed the circumstances in which the exchange of letters, telex, telegrams or other means of communication between the Parties in writing would amount to an arbitration agreement in accordance with Section 7(3)(b) of the Act. The Court referred to sub-section (c) of the proviso to Section 35 of the Indian Stamp Act to hold that,

"80. Thus, the Stamp Act does contemplate a contract or agreement being formed through correspondence through two or more letters. It then suffices that any one of the letters bears the proper stamp. Even proceeding on the basis that an Arbitration Agreement is contained in letters and it is signed and, therefore, executed within the meaning of the Stamp Act, then it would fall within the four corners of Sections 33 and 35 of the Stamp Act."

The Supreme Court's Judgment pertains to the status of arbitration proceedings at the reference stage i.e., Section 11 and the Judgment has not clarified the status of arbitration proceedings which are already underway based on arbitration agreements that are insufficiently stamped or unstamped. However, the Supreme Court relying on Section 36 of the Indian Stamp Act (which deals with the stage at which the admission of an instrument can be questioned), has opined that,

Section 36 of the Indian Stamp Act provides that if an instrument has been admitted in evidence, the same cannot be called in question at any stage of the same suit or proceeding except as provided under Section 61 of the Indian Stamp Act. The Delhi High Court while adjudicating upon the issue of the objection of insufficiency of stamp duty made at the stage post admission and denial of documents, in in SNG Developers Limited v Vardhman Buildtech Private Limited [2022 SCC OnLine Del 3273] had ruled that, "the view, therefore, taken by the learned Arbitral Tribunal that having admitted the copy of the Agreement to Sell dated 04.04.2011 without any reservation at the stage of admission/denial, it is not open to the objection under Section 35 of the Indian Stamp Act, 1899, cannot be faulted. The view taken is plausible view and cannot be interfered with in exercise of jurisdiction under Section 34 of the A&C Act".

In light of the above, we infer that if the document is admitted without any objection raised by the parties with respect to the insufficient stamping, then no such objection can be made by the parties at a later stage of the proceedings and the said arbitration agreement would be admissible as per Section 36 of the Indian Stamp Act.

CONCLUSION

The Judgment has brought the arbitration agreements within the four-corners and the rigours of the Indian Stamp Act. Henceforth, the parties will have to be cautious with reference to the stamp duty payable while executing the arbitration agreements.

In our opinion, the Judgment has certain implications which may require another interference by the Courts. The Supreme Court's Judgment pertains to the status of arbitration proceedings at the reference stage i.e., Section 11 and the Judgment has not clarified the status of arbitration proceedings which are already underway based on arbitration agreements that are insufficiently stamped or unstamped. The Judgment has not been pronounced with reference to Section 9 of the Act. Therefore, a clarification to this end may be required from the judiciary. We further believe that a clarification, in regards to the parties pre-emptively curing the impending defect, should be awaited by the Parties.

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