Unstamped Arbitration Agreement: Incapable of Being Acted Upon?
[Divya is a student at Government Law College, Mumbai.]
On 25 April 2023, a constitution bench composed of five judges of the Supreme Court (SC), by a 3:2 majority, rendered its judgment in NN Global Mercantile Private Limited v. Indo Unique Flame Limited (NN Global), wherein it settled the law on enforceability of arbitration agreements contained in unstamped or insufficiently stamped agreements. The SC held that an agreement containing an arbitration clause is invalid and unenforceable in law if it is not stamped or is insufficiently stamped as per Section 2(g) and Section 2(h) of the Indian Contract Act 1872 thereby rendering such agreements void and incapable of being acted upon.
The enforceability of arbitration agreements contained in either unstamped or insufficiently stamped documents was discussed and decided by a number of High Courts as well as the SC, in accordance with the relevant provisions of the Indian Stamp Act 1899 (Stamp Act), which are discussed below.
The issue was first bought before a division bench of Hon’ble SC in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (SMS Tea Estates), where the SC held that the arbitration clause contained in an application cannot be enforced if the document submitted to a court in an application under Section 11 of the Arbitration and Conciliation Act 1996 (Arbitration Act) is unstamped or not sufficiently stamped. The decision in the abovementioned case was based on the reasoning that an agreement which has to be compulsorily registered or subject to stamp duty cannot be used as an evidence or relied upon for any purpose under the Stamp Act. The court further held that the agreement must first be impounded to ensure that any applicable stamp duty and penalty have been paid in accordance with Section 35 or Section 40 of the Stamp Act thereon before appointing the arbitral tribunal.
Soon after the judgment of SMS Tea Estates, Section 11(6A) and Section 11(13) were incorporated in the Arbitration Act through a legislative amendment in 2015. The said amendment introduced by Section 11(6A) limited the power of judicial authority to interfere to merely examine the existence of an arbitration agreement. Looking at Section 11(6A) of the Arbitration Act alone, it can be seen that the legislative intent was to limit the court's discretion to whether an arbitration agreement exists or not while deciding upon an application to appoint an arbitrator. Furthermore, Section 11(13) of the Arbitration Act requires that such applications should be disposed expeditiously within 60 days. Both these sections reaffirmed the legislative aim behind the 2015 amendment – which called for courts to intervene in arbitration processes as minimum as possible and speedy disposal by courts in arbitration proceedings.
The stance bought by 2015 amendment through Section 11(6A) and Section 11(13) was again changed in the case of Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited (Garware), wherein a division bench of SC reaffirmed the view taken in SMS Tea Estates and held that the findings of SMS Tea Estates will continue to be applicable even after the insertion of Section 11(6A) because an arbitration agreement that is not enforceable does not exist in law. The SC found that the arbitration clause contained in the sub-contract would not exist in law until the sub-contract was duly stamped as per the provisions of the Stamp Act. The SC determined that an agreement only becomes a contract when it is enforceable by law, and since unstamped agreements are not enforceable, even arbitration agreements contained in it are not enforceable and hence cannot exist in law.
The similar view was specifically endorsed by a three-judge bench of the SC in Vidya Drolia v Durga Trading Corporation (Vidya Drolia), wherein it was held that existence and validity are interrelated with each other therefore an arbitration agreement would not exist if it is illegal or does not satisfy the mandatory legal requirements for it to be enforceable, one of which is duly payment of stamp duty.
Contrary to the above rulings, a three-judge bench of the SC, in NN Global Mercantile Private Limited v. Indo Unique Flame Limited and Others (NN Global 2021) adopted a divergent view from the abovementioned decisions and held that since an arbitration agreement is an independent contract, it cannot be void merely because the main contract is unstamped or not sufficiently stamped. The UNCITRAL Model Law and the doctrine of severability were both widely cited by the court in NN Global 2021. The court disagreed with findings of SMS Tea Estates and Garware, stating that the lack of stamp duty payment would not render the arbitration agreement null and void. The court ruled Garware’s findings to be incorrect and noted that non-payment or deficiency of stamp duty is a fixable error. The SC referred the matter to a constitutional bench of five judges to render the verdict in NN Global because the previous Vidya Drolia judgment was also delivered by a three-member bench (bench of equal strength).
Given this difference in judgment, the three-judge bench in NN Global 2021 referred the following issue for consideration of a five-judge bench of the SC: "Whether the statutory bar contained in Section 35 of the Stamp Act 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, pending payment of stamp duty on the substantive contract/instrument?" (emphasis supplied)
The five-judge bench of SC finally ruled that an instrument which is not stamped cannot be a contract and is unenforceable. It was held that the court is legally required to impound the unstamped instrument containing an arbitration clause if it is given before the Court in a petition under Section 11 of the Arbitration Act. The court can consider Section 11 petition after duly impounding an unstamped instrument, payment of necessary stamp duty, and provision of endorsement under Section 42 of the Stamp Act. The arbitration agreement therein will not be legally enforceable until the unstamped instrument is duly stamped.
By this decision, the SC reverses the earlier ruling of the division bench in the same proceedings and upheld the observations of SMS Tea Estates and Garware which supported the position that an arbitration clause contained within an unstamped or insufficiently stamped instrument is invalid and does not exist in law, and that the court before which such agreement is presented should impound such agreement and only act upon it and appoint an arbitrator once the deficit stamp duty has been paid. The long-running dispute regarding the enforceability of an unstamped agreement and its arbitration clause has finally been resolved by the present judgment.