[Arun is a student at Rajiv Gandhi National University of Law.]
The debate whether an arbitration clause in an unstamped or insufficiently stamped agreement can be enforced has been a moot question in various judicial pronouncements over the years. However, until recently, there was no settled position with regard to this point of law, as numerous High Courts (HC) and even the Supreme Court (SC) had rendered contradictory judgments on this question. Only on 25 April 2023, did a 5-judge panel of the SC in NN Global Mercantile Private Limited v. Indo Unique Flame Limited (NN Global) finally settled this position of law by holding that an unstamped/insufficiently stamped agreement could not be acted upon the arbitration agreement until such defect is cured.
Although the NN Global judgment has opened a floodgate of enforceability challenges in ongoing arbitral proceedings, it has also led to lawyers coming up with novel constructions of the Indian Stamp Act 1899 (Stamp Act) in order to bypass NN Global and act upon insufficiently stamped agreements. One such novel argument that has been raised to circumvent NN Global has been the application of Section 36 of the Stamp Act, which reads as follows:
“36. Admission of instrument where not to be questioned. —Where an instrument has been admitted in evidence, such admission shall not, except as provided in section 61, be called in question at any stage of the same suit or proceeding on the ground that the instrument has not been duly stamped.”
On the basis of the said provision, it has been broadly argued that if a challenge to the admission of an unstamped/insufficiently stamped agreement is not raised at the preliminary stage and the same is admitted as evidence, then the enforceability of the arbitration agreement cannot be questioned at a later stage of the proceedings.
This article analyzes the above proposition and contends that such an argument is bad in law and should not be entertained by arbitral tribunals so as to allow the enforcement of an unstamped / insufficiently stamped arbitration agreement. In particular, it argues on the basis of the inherent difference between the concepts of admission of a document as evidence and that of acting upon / enforcement of a document.
NN Global on Section 36 of Stamp Act: An Ambiguous Obiter
Although the SC in NN Global has discussed the relevant provisions of the Stamp Act in clinical detail, it has not directly addressed the question of the effect of Section 36, vis-à-vis challenges to enforceability, on an unstamped / insufficiently stamped agreement which has been already admitted as evidence. The only reference to this proposition has been made in paragraphs 51-52 of the judgment, that too in the form of an ambiguous obiter. In light of this, it is pertinent that we analyze both from a theoretical and a precedential standpoint.
Bare Provisions of Stamp Act: Ordinary Meaning and Theoretical Analysis
On a bare perusal of Section 35 of the Stamp Act, it is clear that the said provision not only bars any instrument chargeable with stamp duty to be admitted as evidence for any purpose but also specifically bars the right to act upon, i.e., enforce, such an instrument. On the other hand, Section 36 of the Stamp Act deals solely with the question of the admissibility of an instrument as evidence and not with the aspect of “acting upon” or enforceability of the said instrument. Thus, although Section 36 is an exception to Section 35, it is only an exception within the purview of admissibility as evidence. Consequently, theoretically speaking, even if a document is admitted as evidence, although its admission may not be challenged, the acting upon / enforceability of the same can be agitated even at a later stage in the arbitral proceedings.
Precedential Backing: Evidence May Be Admitted but Not Acted Upon
The above theoretical standpoint has been confirmed by the SC in Hindustan Steel Limited v. Dilip Construction Co. (Hindustan Steel), wherein the court has held in obiter that “... Section 36 does not prohibit a challenge against an instrument that it shall not be acted upon because it is not duly stamped.” However, to put the same in clearer words, reference can be made to the judgment of Karnataka HC in K Dinesh and Others v. Kumaraswamy and Others (K Dinesh), wherein this matter was decided as part of its ratio. Here, the Karnataka HC held that “... acting upon is not included in the admission and that a document can be admitted in evidence but not be acted upon.” and that “though the admissibility of the document in question […] cannot be raised as rightly held by the court below - however, the Court is precluded from acting upon it for any other purpose, unless duty and penalty are paid.” Thus, the theoretical standpoint that emerges from the bare reading of Sections 35 and 36 of the Stamp Act, has also been confirmed and upheld from a precedential standpoint in the Indian legal landscape. Resultantly, since acting upon or enforcing an insufficiently stamped instrument is absolutely barred even if the same evidence is successfully admitted, the parties in all circumstances have to necessarily clear all stamp dues and penalties before they can enforce an arbitral clause and continue with arbitration proceedings.
Addressing the Conflicting Stance: Erroneous Judgement of ARG Outlier v. HT Media
However, in spite of the above theoretical considerations and precedents, the Delhi HC in its recent judgment of ARG Outlier Media Private Limited v. HT Media Limited (ARG Outlier), has gone in the opposite direction to hold that by virtue of Section 36, no challenge can be made to an unstamped agreement containing an arbitral clause once the same has been admitted as evidence. Here, the court has relied on precedents inter alia Javer Chand and Others v. Pukhraj Surana, Shyamal Kumar Roy v. Sushil Kumar Agarwal, and Sirikonda Madhava Rao v. N. Hemalatha, to arrive at the aforesaid conclusion. However, what the Delhi HC completely missed was that these precedents dealt solely with the question of admissibility of an instrument as evidence, and not with question of acting upon an unstamped instrument. Indeed, the said precedents have not referred to the aspect of acting upon even in their obiters. Thus, essentially, the Delhi HC has conflated the aspects of admissibility of evidence and enforcement, and ended up arriving at a completely erroneous standpoint. On the other hand, had the Delhi HC adequately appreciated the difference between two distinct concepts, the logical conclusion would have been that the arbitral tribunal lacks jurisdiction to conduct the arbitral proceedings and render / enforce the said awards till the time the said curable defect, i.e., insufficiency of stamp duty, is cured. It is indeed regrettable that the Delhi HC has ended up creating a bad precedent, and it is hoped that when this point of law is taken up by the SC in the future, the final decision comes in line with the Hindustan Steel and K Dinesh judgments.
Conclusion
The innate purpose of the NN Global judgment was to adequately safeguard government revenue and uphold the lawful dues that parties to agreements must pay under the Stamp Act. If an improper construction of Section 36 of the Stamp Act, as in ARG Outlier, is allowed, it would defeat the original purpose of safeguarding government revenue on the simple technical premise that a party did not / failed to raise objections vis-à-vis the admission of evidence. Hence, in light of the foregoing theoretical and precedential considerations, arbitral tribunals and courts should not entertain such a misleading construction of Section 36 of the Stamp Act to circumvent the law laid down in NN Global. Further, it is hoped that the SC clarifies this point of law at the earliest to minimize the confusion stemming from the ARG Outlier pronouncement and prevent the same from negatively impacting ongoing arbitrations.