Enforceability of an unstamped arbitration agreement

The Supreme Court of India has settled the position on enforceability of an unstamped arbitration agreement, in the recent landmark judgment pronounced in N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited.

Background

The question of enforceability of an arbitration agreement/ clause, which is part of an unstamped or insufficiently stamped agreement, has been debated across various courts of India.

The validity of arbitration agreements was first majorly debated by the Supreme Court of India (‘Supreme Court’) in 2011 in the case of SMS Tea Estates (P) Ltd. vs. Chandmari Tea Co. (P) Ltd (‘SMS Tea’), wherein it was held that a court cannot act upon an unstamped instrument unless the required stamp duty has been paid as per Indian Stamp Act, 1899 (‘Stamp Act’). Accordingly, the arbitration agreement included in the unstamped agreement was also held to be not enforceable.

In 2015, the Arbitration Act was amended to insert section 11(6A) with an aim to restrict judicial intervention to mere examination of the arbitration agreement at the time of appointment of arbitrators. This amendment was viewed as a contradiction to the judgement pronounced in SMS Tea in terms of which the judges had the power to examine the enforceability of the agreement as regards the payment of stamp duty as well.

However, this clarity was provided by Supreme Court in the year 2019 in Garware Wall Ropes v Coastal Marine Constructions & Engineering Ltd (‘Garware’) which upheld the SMS Tea judgment and stated that section 11(6A) of the Arbitration Act did not have any impact on the judgment laid down in SMS Tea and that the procedure under the Stamp Act of impounding an unstamped agreement should be followed during the stage of examination of the arbitration agreements by courts. The decision of the Supreme Court in Garware was later upheld in the case of Vidya Drolia vs. Durga Trading Corporation (‘Vidya Drolia’).

In 2021, the Supreme Court in N. N. Global Mercantile Private Limited vs. Indo Unique Flame Limited & Ors. (‘2021 NN Global’) overruled the judgment in SMS Tea and disagreed with the judgment in Garware and Vidya Drolia. The Court was of the view that if the main contract is unstamped, the arbitration agreement contained in such contract will be valid and can be enforced due to the arbitration agreement being an independent and separate agreement. The Supreme Court iterated how non-payment of stamp duty is a curable deficit and would not invalidate the main contract.

In light of the abovementioned positions taken by different benches of the Supreme Court, the need for clarity arose and the question was finally referred to a 5 (five) judge bench of the Supreme Court in the case of N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited (‘2023 NN Global’). The ongoing debate on enforceability of arbitration agreements included in an unstamped agreement was finally adjudicated upon and settled in 2023 NN Global.

2023 NN Global – Majority view

A 5 (five) judge bench was constituted to settle the law on enforceability of unstamped arbitration agreements due to the conflicting judgments in the past.

The court in NN Global 2023, after deliberation, with a 3:2 majority, agreed with the decisions laid down in SMS Tea, Garware and Vidya Drolia with respect to unstamped agreements and 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 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 Supreme Court examined the statutory implications and background of the Stamp Act, the Indian Contract Act, 1872 (‘Contract Act’) and the Arbitration Act to arrive at its conclusion. The opinions of the court were based on the following aspects:

(a) Deliberation under Stamp Act

The Supreme Court stated that the Stamp Act is not merely a procedural law, even though it is a fiscal statute for the collection of revenue. Accordingly, an unstamped arbitration agreement cannot merely be presented as a ‘curable defect’. An agreement becomes enforceable only after it is considered as a valid enforceable contract in terms of the Contract Act and therefore an agreement, which is unenforceable on account of non-payment of stamp duty, will not be a valid contract in terms of the Contract Act.

Further, the court explained how agreements are enforced through civil courts and by public authorities, who are prohibited from giving effect to an unstamped agreement.

In light of the above, an unstamped arbitration agreement which is part of the unstamped agreement, would not be enforceable without the payment of stamp duty and would not ‘exist in law’ until it is ‘validated’ in the manner provided in the Stamp Act.

(b) Deliberation under Arbitration Act

Section 11(6A) of the Arbitration Act requires that the Supreme Court or High Court confine itself to the examination of the “existence” of an arbitration agreement. The Supreme Court in 2023 NN Global opined that the scope under section 11(6A) is not to contemplate the existence of an arbitration agreement factually, but also its existence in law. It explained that, along with fulfilling the criteria of an arbitration agreement under the Arbitration Act, essentials of a valid contract under the Contract Act will also have to be fulfilled for the agreement to be enforced and valid.

The Supreme Court emphasized how courts under the ambit of section 11(6A) cannot turn a blind eye to the injunction of the Stamp Act and allow its purpose to be defeated. It stated that the court, at the stage of appointing arbitrators, is required to examine the instrument brought forth. If the said instrument is found to be unstamped/ inadequately stamped, the court is required to impound the instrument until the stamp duty is paid.

(c) Certified copies

The Supreme Court observed that it is not mandatory for the parties to produce original instruments before the court during any proceedings, and parties are allowed to submit a certified copy of the instrument. In this regard, the Supreme Court noted that while a court cannot impound a certified copy, the certified copy must mention whether stamp duty has been paid on such instrument and the Courts may always seek further clarification to this effect.

2023 NN Global – Minority view

2 (two) out of the 5 (five) judges disagreed with the judgment given by the majority and pronounced dissenting judgments. The view taken by the dissenting judges was primarily based on the following 2 (two) aspects:

(a) Unstamped agreement not invalid

According to the dissenting judges, the Stamp Act is not a rigid legislation, and an unstamped agreement was a curable defect and could be easily rectified. Therefore, an unstamped agreement should not be rendered invalid and failure to pay stamp duty would not invalidate the transaction that is contained in the unstamped instrument.

(b) Delays in arbitration

The dissenting judges stated how the intent of section 11(6A) is to minimize judicial intervention. The issue with respect to stamp duty and impounding can be considered by the arbitral tribunal at a later stage and should not be contemplated during the stage of appointment of arbitrators as this would frustrate the objective of the Arbitration Act and delay the procedures set out therein.

The dissenting judgments will not be considered as law and will have no impact on the majority judgment.

Enforceability of an unstamped arbitration agreement – Legal Alert.

Devyani Chugh (Senior Associate) and Nishka Tyagi (Associate) from Lumiere Law Partners also contributed to the article.