India: N.N. Global Mercantile Private Limited vs Indo Unique Flame Limited & Ors. - A Step Forward And Then Backward!

On April 25, 2023, a constitution bench of the Supreme Court of India ("Constitution Bench"), delivered a split verdict, holding by a 3:2 majority that an arbitration agreement as well as an instrument containing an arbitration agreement, which attracts stamp duty and which is unstamped or is insufficiently stamped, cannot be acted upon, as such a document cannot be said to be a contract enforceable in law within the meaning of Section 2 (h) read with Section 2 (g) of the Indian Contract Act, 1872 ("Contract Act"). This decision revives the earlier decision of the Supreme Court in SMS Tea Estates (P) Ltd vs Chandmari Tea Co. (P) Limited ("SMS Tea")¹.

A 3-judge bench of the Supreme Court in N.N. Global Mercantile Private Limited vs Indo Unique Flame Limited & Ors.², had held that in view of the doctrine of separability, the arbitration agreement being a separate and distinct agreement from the underlying contract would survive independent of the substantive contract and the arbitration agreement would not be rendered unenforceable or non-existent, even if the substantive contract is not admissible in evidence or cannot be acted upon on account of non-payment of stamp duty. However, since a co-ordinate bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation³ had held a contrary view, the matter was referred to the Constitution Bench for consideration.

Majority Judgment ("Majority")⁴

The mandate under Section 33⁵ and 35⁶ of the Indian Stamp Act, 1899 ("Stamp Act") is clear and unambiguous and does not conflict with the legislative command under Section 11(6A) of the Arbitration and Conciliation Act, 1996 ("ArbitrationAct"), viz., to examine whether an arbitration agreement exists.

Though the Majority recognized the well-settled doctrine that the arbitration agreement is a distinct and a separate agreement, in their view, the same would have no play in the context of the duty of a Court within the meaning of Sections 33 and 35 of the Stamp Act to act in consonance therewith. The said doctrine would also be of no avail in a case where the arbitration agreement and the main agreement are both exigible to stamp duty. In view of the bar to the use of an instrument which is not stamped or insufficiently stamped for any purpose (unlike the Registration Act, 1908, which allows an unregistered document to be used to prove a collateral transaction), an unstamped instrument in which an arbitration clause is part of, cannot be allowed to be used as it would allow the instrument to be used to establish a collateral transaction.

Further, the Majority was not impressed with the argument that since cases under Section 11 of the Arbitration Act would consume more time and hinder the timely progress of arbitration, the issue of stamping must be deferred to the Arbitrator who will more suitably deal with it. Further, the Majority was also not impressed with the argument that a litigant would raise 'technical pleas' in relation to the stamp duty and the same did not justify the court ignoring the provisions under Sections 33 and 35 of the Stamp Act.

The Majority narrated two scenarios viz. (a) where no stamp duty is paid, the same paves the way for the unambiguous discharge of duty under Sections 33 and 35 of the Stamp Act i.e. to impound the document; and (b) where the instrument is stamped but the objection is taken by the party that it is not duly stamped, the court is required to examine the matter with reference to the duty under Section 33(2) of the Stamp Act. If such a claim appears to the Court to be on the face of it wholly without foundation, it may make the reference to arbitration on the basis of the existence of an arbitration agreement and then leave it open to the arbitrator to exercise the power under Section 33 of the Stamp Act. The rationale given for this by the Majority is that it does justice to the word 'examine' in Section 33(2) of the Stamp Act while not ignoring the command of Section 11(6A) of the Arbitration Act. The Majority clarified that the duty to examine the matter under Section 33(2) of the Stamp Act is not to be confused with the duty to examine whether prima-facie an arbitration agreement exists under Section 11(6A) of the Arbitration Act.

Minority Judgment ("Minority")⁷

In the Minority's view, a plain reading of Section 35 of the Stamp Act suggests that an inadmissible instrument because of being unstamped or insufficiently stamped may be made admissible if the relevant stamp duty and a penalty is paid later, which clearly indicates that the requirement under Section 35 of the Stamp Act is not rigid and can be rectified. The Minority observed that the purpose/objective of the Stamp Act is not to declare an instrument as completely invalid if it is unstamped or insufficiently stamped, but to collect the stamp duty on the instrument and secure revenue for the state.

Thereafter, the Minority said that Section 16(1) of the Act envisaged that an arbitral tribunal could rule upon its own jurisdiction, "including ruling on any objection with respect to the existence or validity of the arbitration agreement", irrespective of whether or not the arbitral tribunal was appointed through the intervention of the court. This is based on the doctrine of Kompetenz- Kompetenz and separability. The doctrine of separability severs the arbitration clause from the main contract and to determine the "existence of an arbitration agreement" under Section 11(6A) of the Act, the Stamp Act may not have a bearing owing to the reason that at the pre-referral stage, if the document is not duly stamped/insufficiently stamped, the same does not render the arbitration agreement non-existent. The only consideration that the courts/judicial authority at the pre-referral stage need to follow is the prima-facie existence of an arbitration agreement as referred under Section 7 of the Act.

In the Minority's view, the Stamp Act is a general law and Arbitration Act is a special law, and in view of the jurisprudence that general law must yield to the special law, an arbitration agreement cannot be rendered void on insufficient stamping by a general law, especially when none of the provisions of the Arbitration Act provide for stamping. The Minority observed that if an arbitration agreement remains unaffected even if the main contract is null/void on issues of fraud or misrepresentation, it should not logically render an arbitration agreement void on a technicality/formality like stamping.

The Minority recognized that impounding at the stage of Section 11 would stall arbitral proceedings right at the outset because of the statutory bar under Section 35 of the Stamp Act. The Minority said that one way to harmonise Section 35 of Stamp Act and Section 11 of the Arbitration Act is for the Section 11 judge to defer necessary stamping and impounding to the arbitrator. The primary objective of the Stamp Act being revenue generation, could still be achieved even if the collection of stamp duty is deferred to the arbitrator and not done at the stage of a judge referring the matter for arbitration. Additionally, if such a contention is raised before the referring judge, she/he can also caution the arbitrator on the aspect of no/deficient stamp duty on the concerned instrument.

Accordingly, the Minority held that all the preliminary/debatable issues including insufficiently stamped/unduly stamped or validity of the arbitration agreement etc. are referrable to the arbitral tribunal under Section 16 of the Arbitration Act, which by virtue of the doctrine of Kompetenz - Kompetenz has the power to do so.

AUTHOR'S COMMENTS

In the author's view, the judgment of the Supreme Court is in the teeth of India's objective to becoming an arbitration friendly nation. Despite Section 11(13) of the Arbitration Act providing a timeline for disposing off an application for appointment of arbitrator(s), the said timeline is not adhered to and more often than not a period of about 18 to 24 months elapse by the time the court appoints the arbitrator(s). In view of the present decision this timeline may be further extended. Thus, defeating the fundamental objective of arbitration proceedings of providing a speedy and quick dispute resolution mechanism.

The Majority could have taken a more liberal view in the spirit of favouring arbitration (as taken by the Minority), especially since the defect of stamping is curable in nature.

Thought the Supreme Court has not touched upon the effect of stamping in case of granting interim reliefs under Section 9 of the Arbitration Act, it is very likely that a litigant would raise the stamping issue at that time and if the court upholds such a defence in light of the Supreme Court's decision, the same will grossly defeat the purpose and intent of providing immediate protection under Section 9 of the Arbitration Act.

Considering that the decision has been passed by a constitution bench of the Supreme Court, it will be considered a precedent till the legislature overrules the same and sets things right. In the meanwhile, to minimize any possible delays on account of stamping, in case of existing contracts the parties should ensure that adequate stamp duty has been paid prior to initiating arbitration and in case of new contracts parties may consider executing an arbitration agreement independent of the main contract. It is to be remembered that the arbitration agreement should also be stamped.

Footnotes

1. (2011) 14 SCC 66

2. (2021) 4 SCC 379

3. (2021) 2 SCC 1

4. The majority judgement was authored by Hon'ble Justice Joseph Kurian for himself and Hon'ble Justice Aniruddha Bose, with Hon'ble Justice CT Ravikumar passing a concurring judgment.

5. Examination and impounding of instruments.

6. Instruments not duly stamped inadmissible in evidence, etc.

7. The minority judgments were authored by Hon'ble Justice Ajay Rastogi and Hon'ble Justice Hrishikesh Roy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.