India: "Non-Existence" Of Unstamped Arbitration Agreements: Cascading Effects?

In N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd.¹ ("N.N. Global II"), a constitutional bench of five judges of the Supreme Court of India has held with a majority of 3:2 that the competent court cannot proceed with the appointment of arbitrator(s) under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") where the arbitration agreement, or, as the case may be, the underlying agreement containing the arbitration clause is unstamped or insufficiently stamped.

The effect of an arbitration agreement not being duly stamped has been subject to a long saga of litigation and various High Courts have taken differing stances. This article examines the scope of this judgment as well as the larger intersections of the Stamp Act, 1899 ("Stamp Act") and ("Arbitration Act"), and any changes therein considering the judgment in N.N. Global II.

I The Stamp Act, 1899

Section 3 of the Stamp Act provides that every instrument mentioned in the Schedule to the Stamp Act shall be chargeable with duty of the amount indicated in the Schedule. Under Section 33 of the Stamp Act, every person having by law or consent of the parties, the authority to receive evidence, and every person in charge of public officer, except the police, shall impound an instrument produced before him if it is not duly stamped. Thus, this duty is imposed on any court of law before whom an unstamped agreement may be produced, as well as an arbitrator, being a person having the authority to receive evidence with the consent of the parties. Further, under Section 35 of the Stamp Act, such an unstamped or insufficiently stamped instrument cannot be admitted in evidence for any purpose unless it is duly stamped. This defect would be curable, and such an instrument shall be admitted in evidence upon payment of the duty applicable along with a penalty.

II. N. Global Mercantile

The constitutional bench delivered a fractured verdict, with the majority of three judges finding that an unstamped arbitration agreement would be non-existent in case of pending payment of stamp duty. Answering the reference made to it by the three-judge bench of the Supreme Court in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Others² ("N.N. Global"), in the affirmative, the majority took the view that an unstamped arbitration agreement could not be said to be in "existence" in law.

A. Facts and Background

The first Respondent in the present civil appeal, i.e., Indo Unique Flame Limited (IUFL) was awarded a work order (Work Order) and thereafter, entered into a sub-contract with N.N. Global Mercantile Private Limited (Appellant). The Work Order provided for arbitration as the dispute resolution mechanism. Due to disputes arising between the parties, IUFL sought invocation of the bank guarantee furnished to IUFL by the Appellant under the Work Order. The Appellant filed a suit against such invocation. In view of the arbitration clause in the Work Order, IUFL approached the Commercial Court under Section 8 of the Arbitration Act seeking reference of the dispute to arbitration. Upon rejection of this application by the Commercial Court, IUFL filed a writ petition challenging the Work Order before the Bombay High Court. Before the Bombay High Court, it was, inter alia, contended that the arbitration agreement was unenforceable as the Work Order was unstamped. The Bombay High Court allowed the writ petition.

Subsequently, an appeal was filed from this decision of the Bombay High Court before the Supreme Court, leading to the judgment in N.N. Global. In the judgment, the Supreme Court found that an arbitration agreement is a distinct and separate agreement independent of the substantive commercial contract in which it is embedded and held that non-payment or deficiency of stamp duty would not render the agreement invalid, unenforceable, or non-existent even if the substantive contract could not be acted upon on account of such non-payment. In the decision, the Supreme Court also doubted the correctness of its decision in SMS Tea Estates v. Chandmari Tea Co., (2011) 14 SCC 66 ("SMS Tea Estates"), as well as the decision in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., (2019) 4 SCC (Civ.) 324 ("Garware") which was approved by a coordinate bench in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 ("Vidya Drolia") – necessitating the reference.

By way of background, in SMS Tea Estates, the Supreme Court considered the issue of unstamped arbitration agreements under the Arbitration Act as it stood prior to the 2015 amendment which inserted Section 11(6-A) under the Arbitration Act. In this case, the Supreme Court held that Section 35 of the Stamp Act requires that unless stamp duty and penalty in respect of the instrument is paid, the court cannot act upon it, or even use it to establish a collateral transaction such as the arbitration agreement thereunder. In Garware, which was decided under the amended Arbitration Act, the Supreme Court followed the reasoning in SMS Tea Estates and upheld the decision. Further, in Garware, the Supreme Court specifically noted that Section 11(6-A) of the Arbitration Act does not in any manner detract from the basis of the judgment in SMS Tea Estates, as an unstamped arbitration agreement or an arbitration clause in an unstamped agreement would not become a contract enforceable in law and accordingly, could not be said to be in 'existence' for the purpose of Section 11(6A). This decision was cited in Vidya Drolia, where the three-judge bench of the Supreme Court upheld the reasoning in Garware, finding that the existence of an arbitration agreement presupposes a valid agreement that is enforceable and binding upon the parties.

In N.N. Global II, the Supreme Court noted that Schedule I of the Stamp Act contains a residuary entry that deals with an agreement or memorandum of agreement "not otherwise provided for" that was apparently overlooked in N.N. Global. The judges in both the majority and minority were therefore in agreement that the reference question in N.N. Global be reframed to whether the statutory bar contained in Section 3 of the Stamp Act "would also render the arbitration agreement contained in such an instrument as being non-existent, pending payment of stamp duty on the substantive contract/instrument".

B. Reasoning and Findings

To answer the reference, the Supreme Court examined the statutory scheme and background of the Stamp Act, the Indian Contract Act, 1872 ("Contract Act"), and the Arbitration Act.

Section 11 (6A) of the Arbitration Act requires that the Supreme Court or High Court, while considering any application under Section 11 of the Arbitration Act, confines itself to the examination of the "existence" of an arbitration agreement. Under Section 2(h) of the Contract Act, a contract is defined as an agreement enforceable by law. Accordingly, an arbitration agreement exigible to stamp duty or an arbitration agreement contained in a larger contract exigible to stamp duty would not be enforceable without the payment of stamp duty under the Stamp Act and would be void, not amounting to a contract. The Supreme Court held that the reference to an 'arbitration agreement' in Section 11 of the Arbitration Act is a reference to a valid contract. As any sanction in law through a civil action on an unstamped instrument is impermissible, an unstamped arbitration agreement is invalid, even though it is not null and void as such an arbitration agreement may be validated through compliance with the Stamp Act.

The Supreme Court noted that the existence of an arbitration agreement means an agreement that satisfies the requirements of both the Arbitration Act and the Contract Act. Further, the Supreme Court held that such agreement must be enforceable in law, negativing the contention that the 2015 amendment to the Arbitration Agreement indicates a legislative intent that the Court may not consider such issues at the reference stage. The Supreme Court also held that Section 5 of the Arbitration Act cannot bar the operation of the Stamp Act and the court's statutory duty to follow the regime thereunder.

Therefore, the Supreme Court concluded that an instrument which must be stamped under the Stamp Act but is not duly stamped cannot be said to be a contract within the meaning of Section 2(h) of the Contract Act and an unstamped arbitration agreement being unenforceable, will be non-existent in law.

The Supreme Court further held that a court cannot act upon an agreement that is not stamped or certified copy of such agreement which does not indicate the stamp duty paid to appoint an arbitrator under Section 11 of the Arbitration Act. Such an agreement may only be acted upon once it is impounded, and the necessary duty is paid under Section 42 of the Stamp Act.

Additionally, in response to the contention that the Supreme Court, going through the Arbitration Act, does not require the production of the original instrument, and parties seeking reference may submit a certified copy of the agreement, the Supreme Court held that while a court cannot impound a certified copy under Section 33 of the Stamp Act, the bar under Section 35 of the Stamp Act would nevertheless operate, as the court may always seek clarification that the stamp duty has been paid. The court can enquire as to the stamping of the agreement even in respect of certified copies under the Appointment of Arbitrators by the Chief Justice of India Scheme, 1996 ("1996 Rules").

In conclusion, the Supreme Court held that the view taken in SMS Tea Estates followed in Garware and approved in Vidya Drolia represents the correct position in law and approved the reasoning therein.

C. The Minority View

While the Bench agreed that arbitration agreements must be stamped under the Stamp Act, the judges in the minority diverged in their ultimate decision. The minority judgments rendered in the case took the view that the decision in SMS Tea Estates should be overruled and the decisions in Garware and Vidya Drolia should be overruled to the extent that they rely on and approve the decision in SMS Tea Estates.

The minority judgements hold that the plain legislative intent and a plain reading of the provisions of the Stamp Act clearly indicate that non-payment of stamp duty is a curable defect which does not affect the enforceability of a document or render it invalid / void ab initio. The minority judgments further hold that the Stamp duty is levied on the instrument and not the transaction.

Further, in line with the principle of minimal judicial intervention being the legislative intent of the Arbitration Act and the amendments thereto, issues of non-stamping / deficiency in stamping are referrable to the arbitral tribunal under Section 16 of the Arbitration Act who may adjudicate the same by virtue of the doctrine of kompetenz-kompetenz.

In a separate minority judgment, J. Rastogi, disagreeing with the majority judgment, has also held that Sections 33 and 35 of the Stamp Act are not concerned with any copy of the instrument. In reference to a certified copy under the schemes framed for appointment of an Arbitrator by various High Courts and the Supreme Court, it was noted that the arbitration agreement is not required to be compulsorily registered as referred to under Section 17 of the Registration Act, 1908 and therefore, certified copy appears to be of an authenticated copy of the arbitration agreement that qualifies the requirement of Section 7 of the Arbitration Act at the pre-referral stage for the purposes of appointment of an Arbitrator under Section 11(6A) of the Arbitration Act.

III. EFFECT OF STAMP DUTY VIS A VIS ARBITRATION

The judgment clearly concludes that payment of stamp duty upon an arbitration agreement is mandatory, and the Court will refuse to appoint an arbitrator and impound the instrument when an unstamped arbitration agreement is brought before it in a Section 11 of the Arbitration Act proceeding. It is also clear that once the required duty is paid as provided under Section 42(2) of the Stamp Act, the court will be free to process the application as per law. However, several other aspects pertaining to the arbitration process remain unclear.

This section explores the questions regarding the interplay of the Stamp Act and the Arbitration Act that the judgment does not clarify.

Section 11

While the Supreme Court came to the clear conclusion that an unstamped agreement would not be in 'existence' if not duly stamped and the court cannot appoint an arbitrator thereunder, the Supreme Court has not clarified the status of proceedings that are presently underway based on arbitration agreements wherein the extant stamp duty is not paid.

Further, the Supreme Court caveated its judgment (specifically in Paragraph 107) by referring to cases where the appointment of an arbitrator is resisted on the ground of insufficient stamping (as opposed to non-stamping). In such cases, the Supreme Court held that if the claim of insufficient stamping appears to the court to be wholly without foundation, the court may make reference to arbitration based on the existence of the arbitration agreement and leave it open to the arbitrator to take the necessary steps under the Stamp Act. The said principle was followed by the single judge bench of Calcutta High Court in Chandan Chatterjee v. Gita Sundararaman[3].

This caveat somewhat echoes the observations of the Supreme Court in Intercontinental Hotels Group v. Waterline Hotels Private Limited⁴ which was rendered in the interim period after the reference was made to the Constitutional Bench by the bench in N.N. Global, where the Supreme Court had held that the issue of insufficient stamping would not render the arbitration agreement 'deadwood.' In fact, the matter could be referred to arbitration and the issue of stamping could be decided at a later stage. In the said judgment, the Supreme Court had observed that if the question was of 'complete non-stamping' the Court might have had occasion to examine the concern raised in N.N. Global. It remains to be seen whether this caveat in N.N. Global II forms part of the ratio of the decision and what impact this will have in practice.

Section 9

Section 9 of the Arbitration Act deals with an application preferred to the courts for interim measures at any point before the enforcement of the arbitral award under Section 36 of the Arbitration Act. The issue relating to interim measures to be granted in proceedings where the arbitration clause is part of an unstamped or insufficiently stamped agreement has been raised in the past.

Notably, in Gautam Landscapes v. Shailesh Shah[5] (Gautam Landscapes), a full bench of the Bombay High Court decided upon the question of appointment of arbitrator and grant of interim relief upon an arbitration agreement that was not duly stamped. Applying the principle of separability later espoused by the Supreme Court in N.N. Global, the Bombay High Court held that the arbitration clause would be separable and not affected by the failure to pay the requisite stamp duty on the main contract. Further, the Bombay High Court held that the legislative intent of the Arbitration Act would be defeated if the court were to postpone adjudication of an application under Section 9 of the Arbitration Act until the instrument was impounded and the defect cured the issue of payment of stamp duty at the interim relief stage as was noted in N.N. Global. However, the decision of the Bombay High Court in Gautam Landscapes was partially overruled by the Supreme Court in Garware, which held that an arbitrator could not be appointed under Section 11 of the Arbitration Act where the arbitration agreement is not duly stamped. However, the Bombay High Court has continued to grant interim relief in applications filed under Section 9 of the Arbitration Act regardless of whether the arbitration agreement is duly stamped, holding that only the portions relating to Section 11 of the Arbitration Act in Gautam Landscapes were overruled by the Supreme Court in Garware.⁶ Further, as the intersection of Section 9 of Arbitration Act and the Stamp Act has not been discussed in N.N. Global II, the position espoused in N.N Global would continue to hold sway at the present juncture.

While the judgment in N.N. Global II expressly does not decide upon Section 9 of the Arbitration Act, its rejection of the application of the separability presumption as raised in N.N. Global strikes at the heart of the reasoning behind the decision in Gautam Landscapes and the decisions that have followed it in holding that an arbitration agreement is exigible to stamp duty and therefore the court would be under a duty to impound it and await the payment of requisite stamp duty before taking any action under such an instrument. The requisite qualification to obtain relief under Section 9 of the Arbitration Act requires that the party invoking jurisdiction be party to the arbitration agreement.⁷ If the arbitration agreement itself is considered non est in law prior to stamping as per the decision in N.N. Global II, it may be a ground to refuse interim relief under Section 9 of the Arbitration Act as the party invoking jurisdiction under Section 9 of the Arbitration Act based on being a party to an unstamped or insufficiently stamped arbitration agreement could not claim to be a party to a validly concluded arbitration agreement that has existence in the eyes of the law. It thus remains to be seen how the Supreme Court and other competent courts will deal with cases under Section 9 of the Arbitration Act in the aftermath of this judgment.

Stamping of Arbitral Awards

Another important facet of the intersection of the Stamp Act and the Arbitration Act is the question of whether unstamped arbitral awards would be enforceable in law. Under Section 17 of the Stamp Act, all instruments chargeable to duty, executed in India must be stamped at the time of execution. Awards are enumerated in Article 12 of Schedule I to the Stamp Act. Notably, however, foreign awards need not be stamped, as affirmed by the Supreme Court's ruling in Shriram EPC Limited v. Rioglass Solar SA.⁸

Notably, in M. Anasuya Devi v. M. Manik Reddy ("M. Anasuya")⁹, the Supreme Court held that an arbitral award not being duly stamped would not be a ground to challenge the award under Section 34 of the Arbitration Act as the issue of stamping falls within the ambit of Section 47 of the Code of Civil Procedure, 1908. The question of whether the award is stamped and registered would only be relevant in enforcement proceedings under Section 36 of the Arbitration Act. The M. Anasuya decision has been considered by the Delhi High Court in Eider PW1 Paging Limited v. Union of India,¹⁰ where the single judge questioned the correctness of the decision in M. Anasuya on the ground that it had not considered the mandatory provisions of Section 33, 38 and 40 of the Stamp Act and sought to refer these issues to a larger bench. However, a later judgement¹¹ by a single judge bench of the Delhi High Court found that the decision in M. Anasuya could not be considered per incuriam as the approach laid down by Supreme Court is pragmatic in nature as the common thread running through the 1996 Act is of expediency. Thereafter, in a 2021 judgement in the matter of NCS Sugars Ltd. v. PEC. Limited[12], a single judge bench of the Delhi High Court held that an instrument that requires to be stamped does not cease to be one if it is not stamped. Under Section 33 of the Stamp Act, an instrument which is insufficiently stamped is required to be impounded, it does not cease to be an instrument and finally concluded that notwithstanding that an arbitral award may be insufficiently stamped it is an arbitral award nonetheless.

Pertinently, neither the decision in M. Anasuya nor the aspect of stamping of arbitral award was considered by the Supreme Court in NN Global II. Even though M. Anasuya is only relevant in enforcement proceedings, considering the judgment in N.N. Global II, it would serve well for parties to also consider the effect of non-stamping on arbitral awards and the challenge thereto, if any, under Section 34 of the Arbitration Act.

Interestingly, in a recent decision of the Delhi High Court in ARG Outlier Media Private Limited v. HT Media Limited,¹³ the Hon'ble Delhi High Court held that the question of proper stamping of the arbitration agreement was a mixed question of facts and law and could not be a ground to interfere with the award in exercise of the limited jurisdiction under Section 34 of the Arbitration Act. While in terms of the judgment in N.N. Global II, an agreement which was not properly stamped could not have been admitted in evidence, once having been admitted in evidence by the arbitrator, the award passed by relying on such an agreement could not be faulted on this ground. However, it remains to be seen how cases where the issue of stamping has not been considered at the stage of the arbitration, are dealt with in the future.

Conclusion

While N.N. Global II is restricted to Section 11 of the Arbitration Act, making it imperative that parties duly stamp the arbitration agreements or the main contract containing the arbitration clause, the judgment is likely to have even wider consequences. It is possible that the issue of unstamped arbitration agreements may be relitigated in applications for interim relief considering N.N. Global II's reading down of the separability presumption. The lack of clarity on the highlighted aspects of the intersection of the Stamp Act and the Arbitration Act is likely to impact commercial contracts, significantly.

Footnotes

1 N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd., Civil Appeal No(s). 3802-3803 of 2023.

2 in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Others, (2021) 4 SCC 379.

3 Chandan Chatterjee v. Gita Sundararaman, 2023 SCC OnLine Cal 1407

4 Intercontinental Hotels Group v. Waterline Hotels Private Limited, 2022 SCC OnLine SC 83.

5 Gautam Landscapes v. Sailesh Shah, 2019 SCC OnLine Bom 563.

6 Saifee Developers v. Shanklesha Constructions, 2021 SCC OnLine Bom 515, IREP Credit Capital v. Tapaswi Mercantile Private Limited, 2019 SCC OnLine Bom 5719, Vidya Amin Tata Capital Financial Services v. Kunal Structure (India) Pvt. Ltd., 2022 SCC OnLine Bom 1020.

7 M/s Sundaram Finance Limited v. NEPC India Limited, AIR 1999 SC 565.

8 Shriram EPC Limited v. Rioglass Solar SA, (2018) 18 SCC 313.

9 M. Anasuya Devi v. M. Manik Reddy, (2003) 8 SCC 565.

10 Eider PW1 Paging Limited v. Union of India, 2010 SCC OnLine Del 422.

11 M. Sons Enterprises Pvt. Ltd. v. Suresh Jagasia, 2011 SCC OnLine Del 82.

12 NCS Sugars Ltd. v. PEC. Limited, 2021 SCC OnLine Del 4826.

13 ARG Outlier Media Private Limited v. HT Media Limited, O.M.P. (Comm.) 161/2023 & IA 8019/2023, Decision dated 4 July 2023.

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