Introduction:

In the recent case of N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd (Judgment dated 25 April 2023), the Supreme Court held that arbitration cannot be invoked when the arbitration agreement or clause is contained in an unstamped or insufficiently stamped agreement or contract. The main question of law in this case was: Whether the arbitration agreement or the arbitration clause can be considered as legally enforceable or can be lawfully invoked if the instrument, agreement, or the contract which contains the arbitration clause, or the arbitration agreement is not duly stamped as per the Indian Stamp Act, 1899.

Factual background:

The Appellant and the Respondent, in the concerned case, had a sub-contracting arrangement in the form of a Work Order. Clause 10 of the Work Order provided for an Arbitration Clause. According to Clause 9 of the Work Order, the Appellant had furnished a bank guarantee, which was invoked by the Respondent due to certain disputes arising between the parties. After the aforementioned guarantee was invoked, the Appellant filed a lawsuit against the encashment of the bank guarantee. The Respondent submitted an application for reference of the dispute to an arbitral tribunal, under Section 8 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), which had been rejected by the Commercial Court. The Respondent had thereafter filed a writ petition to contest the Commercial Court's order rejecting the application made according to Section 8 of the Arbitration Act, and the main contention raised by the Respondent was that the Arbitration Agreement become unenforceable as the Work Order was unstamped. The main issue before the Court was whether the Arbitration Agreement would be enforceable and acted upon, even if the Work Order is unstamped and unenforceable under the Indian Stamp Act, 1899 (‘Stamp Act’).

Historical background:

A 3-Judge Bench of the Apex Court in the N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.,[1] had earlier held that the Arbitration Agreement is not included in the Schedule of the Stamp Act as an instrument chargeable to stamp duty. The Court found that that there was a non-payment or deficiency on the stamping of the Work Order, which was chargeable to payment of stamp duty. The Court, however, found that such non-payment or the deficiency on the Work Order did not invalidate the contract, but merely rendered it inadmissible in evidence, until the defect is removed. It was observed that Section 35 of the Stamp Act did not make the unstamped instrument invalid, non-existent or unenforceable in law. The Court found that, that being so, the Arbitration Agreement was a distinct and an independent contract between parties. The Arbitration Agreement is also not included in the Schedule of Stamp Act as an instrument chargeable to stamp duty. On applying the Doctrine of Separability, it was held that the arbitration agreement would thus not be rendered invalid, unenforceable, or non-existing, even if the substantive contract, in which it is contained, was inadmissible in evidence or could not be acted upon, in view of it not being stamped.

A substantial question was raised while the three Judge Bench of the Apex Court were deciding the case[2], and as a consequence, the same was referred to the Constitution Bench consisting of 5. After careful deliberation of the case, a majority of 3 judges overruled the judgments passed on the position of law previously and gave a new landmark order holding that the arbitration clause cannot be invoked when the arbitration agreement or clause itself is contained in a document or contract which is not duly stamped or insufficiently stamped.

In the process, the Bench also overruled the decisions given in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited, (2011) 14 SCC 66 and Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited, (2019) 9 SCC 209 which had held that the Arbitration Agreement is an independent agreement between the parties, and it is not chargeable to payment of stamp duty, and therefore, the non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause, or render it unenforceable, since it has an independent existence of its own.

Jurisprudence on the question of law:

The Hon’ble Supreme Court of India in SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd.[3] has held that where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 require the judge hearing the Section 11 application to impound the agreement and ensure that stamp duty and penalty, if any, are paid thereon before proceeding with the Section 11 application.

Having regard to Section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the instrument, which means that it cannot act upon the arbitration agreement also which is part of the instrument. Therefore, when a lease deed or any other instrument is relied upon and contended as the arbitration agreement, the court should consider at the outset, whether an objection in that behalf is raised or not viz., whether the document is properly stamped. If it comes to the conclusion that it is not properly stamped, it should be impounded and dealt with in the manner specified in section 38 of the stamp act. The court cannot act upon such documents or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in section 35 or section 40 of the Stamp Act, the document can be acted upon or admitted in evidence. The Court in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited[4] had found an unstamped agreement to be unenforceable under section 2 (h) of the Indian Contract Act, 1872. The Judges were of the opinion that the Arbitration Clause contained in the sub-contract would not exist as a matter of law until the sub-contract was duly stamped. The same had been upheld and approved in Vidya Drolia and Ors. v. Durga Trading Corporation.[5]

In contradiction to all the above-mentioned decisions, in the case of Honey Bee Multi-trading Pvt. Ltd. v. Ruchi Soya Industries Ltd.[6], the Hon’ble Bombay High Court had directed the appointment of an arbitrator pending payment of stamp duty. It was held that at a ‘pre-appointment stage, the matters cannot be kept hanging and that there is no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantive contract.’ Since the arbitration clause contained in the lease agreement was not in dispute nor was its invocation is in dispute, it was held to be appropriate to exercise the power conferred under section 11 for the appointment of sole arbitrator by the Court.

The Hon’ble Court in the case of Weatherford Oil Tool Middle East v. Baker Hughes Singapore,[7] observed that considering the time-sensitivity while dealing with arbitration issues, and that all these matters were still at a pre-appointment stage, it cannot be left hanging until the larger bench settles the issue. It was decided that, till the constitution Bench determines the issue, the arbitration will be carried on.

Ratio decidendi:

While the minority dissenting judgement of the Hon’ble Apex Court were of the opinion that the main objective behind the enactment of the Arbitration and Conciliation Act, 1996 was to inter alia avoid procedural complexity and delay in litigation before courts. It was observed that impounding and stamping at the Section 11 stage, which is solely for the appointment of arbitrator, would indeed frustrate the very purpose of the Arbitration Act as there will be further delay and the issues would be stalled. It was also held that the preliminary issues including insufficiently/ unduly stamped, thereby questioning the validity of the arbitration agreement etc., are referrable to the Arbitrator or the arbitral tribunal under Section 16 of the Act, 1996 which, by virtue of the Doctrine of Kompetenz – Kompetenz, as per which the arbitral tribunal itself decides its jurisdiction with respect to disputes, has the power to do so.

The minority of the Constitution Bench was of the view that judicial intervention at the stage of Section 11 of the Arbitration Act should be minimal and should be confined only to the prima facie examination of ‘existence of an arbitration agreement’ alone keeping in view the object of 2015 amendment to Arbitration Act and the courts must strictly adhere to the time schedule for the appointment of Arbitrator prescribed under Section 11(13) of the Arbitration Act. Accordingly, it was recommended that the existence of a copy/certified copy of an arbitration agreement whether unstamped/ insufficiently stamped at the pre-referral stage be enough to treat it as an enforceable document for the purposes of appointment of an Arbitrator under Section 11(6A) of the Act, 1996.

However, the 3-judge majority out of Constitution Bench upheld the rationale in SMS Tea Estates Case and Garware Wall Ropes case, by considering the relevant provisions of the Stamp Act, The Registration Act and the Indian Contract Act, 1872 and reached to various conclusions, such as (a) that the Stamp Act is a fiscal enactment and the courts are duty bound to always interpret in favour of enforcement of the law in question and not its breach, (b) that the court after being presented with an unstamped/ insufficiently stamped instrument or contract ought to impound the same in accordance with Section 33 of the Stamp Act, (c) that the unstamped/ insufficiently stamped instrument would only be enforceable in law within the meaning of Section 2(h) of the Contract Act after it is validated as per the Stamp Act, and (d) that the contracts or agreements are to be duly stamped to avoid further intervention when it is not sufficiently stamped and thereby proceeding further with the arbitration process. For a detailed understanding of the various submissions in the case and the final ratio, the Ratio Decidendi portion of this Amicus below may be referred.

Conclusion:

The landmark verdict passed by the Majority Constitution Bench answered the substantial question that whether the arbitration clause can be enforceable if the underlying instrument is not stamped duly as per the provisions of the Indian Stamp Act. Even though this issue arises at the preliminary stage of the arbitration i.e., appointment of the arbitrator as per Section 11 of the Arbitration and Conciliation Act, and dealing with the same may result in the main issues being stalled and resulting in increased judicial intervention, the Apex Court had ordered to ensure sufficient stamping of the instruments, thereby reiterating the essence of provisions of the Stamp Act as laid down in the cases of SMS Estates and Garware Wall Ropes.

1. [1] N.N.Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. - (2021) 4 SCC 379.
2. [2] (2021) 4 SCC 379.
3. [3] (2011) 14 SCC 66.
4. [4] (2019) 9 SCC 209.
5. [5] (2021) 2 SCC 1.
6. [6] 2023 SCC OnLine Bom 652
7. [7] 2022 SCC OnLine SC 1464.