Inadequate stamp on Arbitration
agreement: whether valid?
NN Global decision of Constitution Bench is revisited by Seven (7) Judge
bench of Supreme Court
In the backdrop of judgment rendered by a Three (30 Judge bench bench
of Supreme Court in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2021) 4 SCC 379 (In short referred to by the
Supreme Court as NN Global 1) The reference is made to Five (5) Judge
Constitution bench of Supreme Court for resolving an issue which arose in the
context of three statutes – the Arbitration and Conciliation Act 19961, the Indian Stamp Act 18992, and the Indian Contract Act 1872. As per the
provisions of The Stamp Act “instruments”
which is unstamped or insufficiently stamped is inadmissible in evidence and cannot
be acted upon in terms of its provisions. The Arbitration agreements are often
embedded in underlying instruments or substantive contracts. When an
application is made for the appointment of an Arbitrator, an objection is
raised on the ground that the arbitration agreement is inadmissible, because it
is in an instrument which is
unstamped or inadequately stamped. The reference to Supreme Court revolved
around as to whether such arbitration agreements would be non-existent,
unenforceable, or invalid if the underlying contract is not properly stamped.
The reference to Five (5) judge bench and decision thereto is referred to as NN
Global 2.
Background:
In N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2021) 4 SCC 379 (hereinafter referred
to as “N N Global 1”) a Three judge bench of Supreme Court has held that the enforceability of an
arbitration agreement contained in an unstamped
work order being separate and distinct from the underlying commercial
contract, would not be rendered invalid, unenforceable, or non-existent for
that reason. The Court held that the non-payment of stamp-duty would not
invalidate even the underlying contract because it is a curable defect. In the
process, the Supreme Court adopted a view at variance with SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd (2011) 14 SCC 66 and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd (2019) 9 SCC 209. In SMS Tea Estates (supra), a two-Judge Bench of the
Supreme Court held that an arbitration agreement in an unstamped contract could
not be acted upon.
Then came, Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 and Supreme court, then, had doubted the correctness of the view
adopted in paragraphs 22 and 29 of Garware Wall Ropes (supra) and referred the following
issue to a Bench of Five (5) Judges:
“58. […]
Whether the statutory bar contained in Section 35 of the Stamp Act, 1899
applicable to instruments chargeable to stamp duty under Section 3 read with
the Schedule to the Act, would also render the arbitration agreement contained
in such an instrument, which is not chargeable to payment of stamp duty, as
being non-existent, unenforceable, or invalid, pending payment of stamp duty on
the substantive contract/ instrument?”
The Five (5) Judge Constitution
Bench in N
N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2023) 7 SCC 1
(hereinafter referred as “N N
Global 2”) answered the reference, by a majority of 3:2. It was held that NN Global 1 (supra) does not represent the
correct position of law and upheld the view taken by the Supreme Court in SMS Tea Estates (supra) and Garware Wall Ropes (supra).The conclusions of the
majority can be summarized in the following terms:
a.
An unstamped instrument containing
an arbitration agreement is void under Section 2(g) of the Contract Act;
b. An
unstamped instrument, not being a contract and not enforceable in law, cannot
exist in law. The arbitration agreement in such an instrument can be acted upon
only after it is duly stamped;
c. The
“existence” of an arbitration agreement contemplated under Section 11(6A) of
the Arbitration Act is not merely a facial existence or existence in fact, but
also “existence in law”;
d. The
Court acting under Section 11 of the Arbitration Act cannot disregard the mandate of Sections 33 and 35 of the
Stamp Act requiring it to examine and impound an unstamped or insufficiently
stamped instrument; and
e. The
certified copy of an arbitration agreement must clearly indicate the stamp duty
paid.
Significantly, the minority
judgment differed with the majority and was of the opinion that the scope of
the referral court under Section 11 of arbitration & Conciliation Act is
limited to the examination of the “existence” of an arbitration agreement and that
all other issues, including the issue of stamping, must be left for the Arbitral
Tribunal to decide, in view of mandate of Section 16 of the Arbitration Act. It
was held that an unstamped or insufficiently stamped document is not rendered
invalid or void ab initio, because,
failure to pay stamp duty is a curable defect. Moreover, it was observed that
the object of Arbitration Act has minimal judicial interference in the process
of arbitration and that section 11 of the Arbitration & Conciliation Act
should be harmonized with section 35 of the Stamp Act and the issue should be
left to be decided by Arbitrator. Thus, according to minority judgment in NN
Global 2 the SMS Tea Estate
(Supra) & Garware Wall Ropes (Supra)
did not set out the correct position of law.
The Constitution Bench in N N Global 2 (supra) has thus answered the
reference and delivered its verdict on 25 April 2023. In view of prospect of
large ramification of decision of NN Global 2 (Supra), the matter was
referred to a Seven (7) judge constitution bench as per following term:
“Having
regard to the larger ramifications and consequences of the view of the majority
in N N Global Mercantile Private Limited vs Indo Unique Flame Limited
and Others, we are of the considered view that the proceedings
should be placed before a seven-Judge Bench to reconsider the correctness of
the view of the five-Judge Bench.”
The Seven (7) Judge Bench of hon’ble
Supreme Court in Curative Petition (C) No. 44 of 2023 in Review Petition (C) No.
704 of 2021 in Civil Appeal No. 1599 of 2020 IN RE: INTERPLAY BETWEEN
ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT 1996 AND THE
INDIAN STAMP ACT 1899 And With Arbitration Petition No.
25 of 2023 on 13th December 2023, was pleased to set aside the ratio in NN Global 2 ( the particulars shall follow below).
It is held in para 74 as under:
74. One of the main objectives of the Arbitration Act is to
minimize the supervisory role of courts in the arbitral process. Party autonomy
and settlement of disputes by an arbitral tribunal are the hallmarks of
arbitration law. Section 5 gives effect to the true intention of the parties to
have their disputes resolved through arbitration in a quick, efficient, and
effective manner by minimizing judicial interference in the arbitral
proceedings.( Food Corporation of India v.
Indian Council of Arbitration, (2003) 6 SCC 564) Parliament enacted Section 5 to
minimize the supervisory role of courts in the arbitral process to the bare
minimum, and only to the extent “so provided” under the Part I of Arbitration
Act. In doing so, the legislature did not altogether exclude the role of courts
or judicial authorities in arbitral proceedings, but limited it to
circumstances where the support of judicial authorities is required for the
successful implementation and enforcement of the arbitral process(Union of India v. Popular Construction Co., (2001) 8 SCC 470) . The Arbitration Act envisages the
role of courts to “support arbitration process (Swiss Timing Ltd. v. Commonwealth Games 2010 Organising
Committee, (2014) 6 SCC 677) by providing necessary aid and assistance when required by law
in certain situations”.
In para 88 it is held:
An arbitration agreement is the
foundation of arbitration as it records the consent of the parties to submit
their disputes to arbitration. In Bihar State Mineral Development Corporation v. Encon Builders,( (2003) 7 SCC 418) the Supreme Court
enlisted the essential elements of an arbitration agreement as follows:
a. There must be a present or future difference in
connection with some contemplated affair;
b. There must be the intention of the parties to settle
such disputes by a private tribunal;
c. The parties must agree in writing to be bound by the
decision of such tribunal; and
d. The parties must be ad idem.
As per the judgment of Seven (7) Judge
Bench of Supreme Court, It is sufficient for the purpose of reference of the
dispute to arbitration, if an arbitration agreement or its certified copy
existed and at that stage whether it is insufficiently stamped shall not render
the agreement void or Unenforceable. A referral court, therefore, at the stage
of Section 11 or under section 8 of the Act may refer the matter to Arbitral Tribunal
for decision by the Tribunal on all aspects.
The Para 81 of the Seven (7) Judge bench judgment is worthy of
reference, a sit sets out the very basis of the conclusion arrived at by the
Supreme Court. The Para 81 of the judgment are referred to as under:
81. One of
the main objectives behind the enactment of the Arbitration Act was to minimize
the supervisory role of courts in the arbitral process by confining it only to
the circumstances stipulated by the legislature. For instance, Section 16 of
the Arbitration Act provides that the arbitral tribunal may rule on its own
jurisdiction “including ruling on any
objection with respect to the existence or validity of the arbitration
agreement.” The effect of Section 16, bearing in view the
principle of minimum judicial interference, is that judicial authorities cannot
intervene in matters dealing with the jurisdiction of the arbitral tribunal.
Although Sections 8 and 11 allow courts to refer parties to arbitration or
appoint arbitrators, Section 5 limits the courts from dealing with substantive
objections pertaining to the existence and validity of arbitration agreements
at the referral or appointment stage. A referral court at Section 8 or Section
11 stage can only enter into a prima facie determination. The legislative
mandate of prima facie determination ensures that the referral courts do not
trammel the arbitral tribunal’s authority to rule on its own jurisdiction.
The para 201 of the Supreme Court judgment (7 judge
bench) is worthy of reference:
201. Pursuant to the
recommendations of the Law Commission of India, Parliament incorporated Section
11(6A) which clarified that the scope of judicial intervention was limited to
the examination of the existence of an arbitration agreement. The legislative
note on Clause 11(6A) states that “[s]ub-section (6A) is inserted to provide that the Supreme Court
or the High Court while considering applications under sub-section (4) to (6)
shall confine to the examination of an arbitration agreement.” More importantly, the said provision
contains a non-obstante clause which reads: “notwithstanding any judgment, decree or order of any Court.”
The Seven (7) Judge bench in para 218 has further held as under:
218. The discussion in preceding segments indicates that the
referral court at Section 11 stage should not examine or impound an unstamped
or insufficiently stamped instrument, but rather leave it for the determination
by the Arbitral Tribunal. When a party produces an Arbitration Agreement or its
certified copy, the referral court only has to examine whether an arbitration
agreement exists in terms of Section 7 of the Arbitration Act. The referral
court under Section 11 is not required to examine whether a certified copy of
the agreement/ instrument/ contract discloses the fact of payment of stamp duty
on the original. Accordingly, we hold that the holding of this Court in SMS
Tea Estate (supra), as reiterated in N
N Global 2(supra), is no longer valid in law”.
224. The conclusions reached by the
Seven (7) Judge in judgment are summarized below:
a. Agreements
which are not stamped or are inadequately stamped are inadmissible in evidence
under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
b. Non-stamping
or inadequate stamping is a curable defect;
c. An
objection as to stamping does not fall for determination under Sections 8 or 11
of the Arbitration Act. The concerned court must examine whether the
arbitration agreement prima facie exists;
d. Any
objections in relation to the stamping of the agreement fall within the ambit
of the Arbitral Tribunal; and
e. The
decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) are overruled to that extent.
The aforesaid Seven Judge (7) judge constitution bench therefore
has set at rest the issue as regards the validity of unstamped or inadequately
stamped agreement containing Arbitration agreement and that aspect has now been
relegated to the Arbitral Tribunal to
decide and thus it is categorically held that u/s 11 of Arbitration &
Conciliation Act 1996, the High Court and Supreme Court (in apt cases) has to see merely the existence of Arbitration
agreement and issue of stamp duty, inadequate stamp duty paid on the instrument
is left for the Arbitral Tribunal that may be constituted for the purpose of adjudication
of disputes.
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Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
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