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  • Sidhant Singh

Resolving Stamp Duty Dilemma: Section 9 Applications in Indian Arbitration Law

[Sidhant is a student at Hidayatullah National Law University.]


The issue of whether a court should consider the adequacy of stamp duty paid on an arbitration agreement while deciding on a Section 9 application under the Arbitration and Conciliation Act 1996 (ACA), has been a subject of diverse judicial opinions. The momentous event underscoring the law discourse occurred when the Constitutional bench pronounced its judgment in NN Global Mercantile Private Limited v. Indo Unique Flame Limited (NN Global). In this case, a three-judge bench of the Supreme Court (SC) held that the non-payment of stamp duty, which can be rectified subsequently, does not invalidate an arbitration agreement. This decision was based on the doctrine that an arbitration agreement is independent of the main commercial contract. Regarding interim relief under Section 9, the bench clearly stated that the court can still grant an injunction to protect arbitration subject matter even if the main contract is unstamped while directing the parties to pay the stipulated stamp duty within a specified time frame.


Subsequently, a Constitutional Bench of five judges reconsidered this issue in the same case and overturned the previous three-judge ruling by a 3: 2 majority. The majority view was that “even an arbitration agreement on its own may be required to be stamped”, considering the provisions of the Indian Contract Act 1872 (Contract Act), the Indian Stamp Act 1899 (Stamp Act), and the ACA, it can be concluded that unstamped arbitration award has no legal validity and non-payment of stamp duty would make the arbitration agreement unenforceable. Therefore, such an agreement cannot be decided by courts under Section 11 petitions. However, it is notable that the court specifically stated its ruling was limited to the scope of Section 11. The judgment did not specify its position regarding Section 9 when clarifying its stand stating “We make it clear we have not ruled on this issue in respect of Section 9 of the Act.” This points to the possibility that the court may approach interim relief under Section 9 for unstamped arbitration agreements.


After the judgment of the Constitutional Bench, in L&T Finance v. Diamond Projects, the Bombay High Court (Bombay HC) did a detailed analysis of it in its decision. The implications of unstamped documents were carefully analysed based on precedents and statutory provisions. The judgment creatively finds a way to traverse the thin line between evidentiary and non-evidentiary stages, especially regarding unstamped documents' admissibility in Section 9 applications. The Bombay HC's decision has been implicitly affirmed in the recent judgment by a 7-judge Bench of the SC in the case In Re: Interaction between the Arbitration Agreements under Arbitration and Conciliation Act 1996 and Indian Stamp Act 1899. This SC judgment marks a drastic change in the legal world as it categorically resolves the legal question concerning the stamping of arbitration agreements.


Section 9 of the ACA empowers parties to seek interim relief from the court at any stage – before, during, and after the initiation of arbitral proceedings but before enforcement of an arbitral award. These measures play a key role as protective mechanisms under the ACA which attempts to protect claims through securities, guarantees, or other measures determined by the court. It is essential to understand the precise scope of Section 9, especially after the judgment of the Bombay HC that highlights the different scopes of Sections 9 and 11 and different treatment for applications over these sections. Given the immediate nature of reliefs sought before the courts, an equally prompt intervention by the judiciary is required to ensure consistency with legislative intent.


This article delves into the evolution of the legal landscape surrounding Section 9 applications and stamp duty requirements for arbitration agreements in India. It analyses the previous position of Section 9 applications before the NN Global judgment, delves into the Bombay HC ruling, and compares the Bombay HC decision with the 7-judge SC verdict. In doing so, we aim to resolve a complex legal issue that has confounded both practitioners and the court.


Position of Section 9 Applications Preceding NN Global Judgement


Before the 7-judge bench ruling became an integral part of the broader legal landscape, assuming a definitive verdict on the legality of these unstamped agreements concerning interim reliefs under ACA would be risky. Although many judgments had dealt with stamping concerning Section 11 of the Act, it could not be similarly said about Section 9. To fill this lacuna in the legal precedent, the Bombay HC referred to a chronological overview of Indian court decisions. This review demonstrated the clear domains in which Sections 11 and 9 operate.


These decisions can be traced to a landmark ruling by the Full Bench of the Bombay High Court in the case of Gautam Landscapes v. Shailesh S Shah. (Gautam Landscapes), where the court placed both Sections 9 and 11 on parity as the legislative intent of enactment would be defeated if the matter raised under the Stamp Act were to await resolution in either of the provisions. However, this decision was partially overturned in Garware Wall Ropes v. Coastal Marine Constructions & Engineering (Garware Wall Ropes) regarding an application under Section 11.


The matter was further discussed by the Bombay HC in Saifee Developers v. Shanklesha Constructions, where the court distinguished from Garware Wall Ropes decision highlighting that Garware Wall Ropes does not take a definitive position on the legal status of an unstamped agreement, particularly in the context of Section 9 application. The court reiterated that Garware Wall Ropes mainly addressed concerns regarding the Section 11 application.


Consequently, in the case of Gautam Landscapes, the High Court partially approved the application seeking interim relief under Section 9. Interestingly, the court categorized Garware Wall Ropes as a precedent and permitted the continuation of a Section 9 petition even without an express legal principle to such effect.


Ruling of the Bombay High Court


Justice Bharati Dangre provided an extensive analysis considering the effect of unstamped documents. She looked into previously settled cases, provisions in the Maharashtra Stamp Act and Stamp Act, and relevant ACA sections. Her nuanced perspective relies heavily on reasoning about the admissibility of documents and the stage at which this must occur. Justice Dangre supports the argument that even in the Stamp Act itself, there is a clear line drawn between evidentiary and non-evidentiary stages. In particular, Sections 33 and 34 relate to the authority having the power to receive and admit unstamped documents in evidence.


When the validity of a document under Section 11 is under question, a line of cases starting with SMS Tea Estates v. Chandmari Tea held that unstamping is not a curable defect insofar as the validity of an agreement in Section 11 is concerned. When the instrument is unstamped, it will assumed to be “stillborn” – an arbitration clause contained in such an instrument cannot come into force. The court will seal the document and proceed under the provisions of the Stamp Act until proper stamping is done before allowing it for any purpose.


However, this principle does not apply to Section 9 petitions for interim relief. These inherently expedited applications help the final relief. Section 9 unstamping is a curable defect, which should be recognized from the need to dispose of interim orders quickly in support of the final award. Unlike Section 11 validity questions, the urgency of Section 9 justifies giving time to repair defective stamping while granting interim safeguards.

 

Harmonizing Legal Principles: Stamp Act Distinctions and Supreme Court's Endorsement


Relying on principles from the Contract Act and the ACA, the court distinguished inadmissibility from void-ness, and its relation to the Stamp Act. A breach of the Stamp Act renders an agreement inadmissible, not void with the defect being curable. Additionally, the Stamp Act's purpose as a fiscal measure is to generate state revenue from certain instruments, not to provide litigants a "weapon of technicality" that impedes judicial determinations of rights.


The SC has revived the reasoning of the three-judge bench citing fundamental principles such as minimal judicial intervention, separability of arbitration agreements, and kompetenz-kompetenz, which justifies harmoniously construing the statutes in question. The court ruled that ACA’s Section 8 and 11 and their underlying principles will take precedence over other statutes, ACA being a special statute. The SC explained Section 9 as a stage in which the law specifies limited judicial intervention in substantive disputes. However, the court relied on the same principles used in other provisions indicating that consideration of the stamping issue is not mandatory to grant interim measures under Section 9. Thus, the court endorsed and accepted the reasoning and conclusions put forth by the Bombay HC.


Conclusion


The law relating to stamp duty adequacy for arbitration agreements in Section 9 applications has become significantly clearer. Initially, the Constitutional Bench in NN Global judgement set a precedent that non-payment of stamp duty makes agreements unenforceable. Subsequently, the nuanced L&T Finance v. Diamond Projects analysis of Bombay HC and the 7-judge SC decision clarified that stamping does not need to be addressed under Section 9. The emphasis on limited judicial intervention, the importance of interim relief, and the preservation of the subject matter of arbitration collectively provide a clearer picture of this complex legal dilemma.


The two conflicting viewpoints are now in favour of delaying stamping disputes to a later arbitral stage. This provides clarity and consistency away from NN Global judgement. The existing framework appropriately focuses on fast interim relief with minimal court involvement, while letting stamping issues be resolved separately without delaying emergency measures.

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