INADEQUATE STAMP ON ARBITRATION AGREEMENT: WHETHER VALID?

 

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 13^th 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

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