Contributed by Vismita Rathi

Introduction

Over the years, several legal proceedings have focused on the question of whether an arbitration clause in an unstamped or inadequately stamped agreement can be enforced. Conflicting decisions have been delivered by various High Courts and even the Supreme Court has not taken a firm stance on the matter. Owing to this multiplicity of contradictory views, the matter was finally referred to a constitution bench of the apex court through an order passed by a three-judge bench in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and others (I). Consequently, on April 25, 2023, the issue was finally laid to rest through the landmark judgment in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (II), wherein the Court declared that, “an unstamped document is unenforceable and consequently, the arbitration clause contained therein is also equally unenforceable under law.”

Background

One of the foremost decisions on the issue of enforceability of such arbitration clauses was delivered in the case of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd, where the Division Bench of the Supreme Court had held that, “if a document is found to be unstamped/ insufficiently stamped, then even the arbitration clause embedded in it cannot be acted upon as per Section 35 of the Indian Stamp Act, 1899.”

The decision in SMS Tea was followed by the Supreme Court in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited, which held that, “since an unstamped agreement is unenforceable, the arbitration clause contained in it would not exist as a matter of law until the agreement was duly stamped.”

This view, taken in Garware, was again, approved by a three-judge Bench of the Supreme Court in Vidya Drolia v. Durga Trading Corp., where the Court held that, “the existence and validity being intertwined with each other, 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 payment of stamp duty.”

In complete contravention of the aforementioned judgements, a three-judge bench of the apex court, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (I), departed from such a view and consequently, overruled the two-judge bench decision in SMS Tea. The Court, came to this conclusion, while relying on the principle of Kompetenz-Kompetenz, incorporated under Section 16 of the Arbitration and Conciliation Act, 1996 and the Doctrine of Separability, which views the arbitration agreement as a separate and autonomous arrangement from the underlying contract and allows its legal enforcement even if the latter is unenforceable. The court further doubted the correctness of the ratio in Garware Wall Ropes, which was approved in the Vidya Drolia case by a Coordinate Bench. The presence of such conflicting opinions led to the matter being referred to the present five-judge bench.

Decision of the Supreme Court

The N.N Global (II) judgement was delivered by a 3:2 majority, wherein the court held that an unstamped or inadequately stamped instrument is “bereft of life,” i.e., it is incapable of existing in law, and is therefore void. The bench also observed that the decision in SMS Tea, as reiterated in Garware and approved in Vidya Drolia, is legally valid while that taken in N. N. Global (I) is blatantly incorrect. 

In contrast, the dissenting opinion delivered by Honourable Justices Ajay Rastogi and Hrishikesh Roy stated that such flaws do not render any document permanently void and that failure to pay stamp duty is unquestionably a defect that could be easily resolved. Furthermore, they also noted that the Arbitration Act is a special law and cannot be invalidated by general law. In addition, there is no provision in the Stamp Act, which provides that an arbitration agreement would be void when not stamped.

Moreover, while employing the doctrine of Kompetenz-Kompetenz stipulated under Section 16 of the Arbitration and Conciliation Act, 1996, the Arbitral Tribunal possesses the sole competence to rule on its own jurisdiction, address any challenges posed to the existence, legality, and applicability of the arbitration agreement. Hence, the decision in Garware is inconsistent with both the legislation and the decision in Vidya Drolia, to an extent, is incorrect.

Analysis

With the resolution of this long-debated topic, litigants now have a benchmark for what to do and what not to do when it comes to agreements and contracts with arbitration clauses. The verdict has its pros and cons and has raised several questions that will undoubtedly impact the practice of arbitration in India. While the judgment provides much clarity on the long prevailing issue of admissibility of unstamped documents for adjudication of arbitral disputes, it may not bode well for India’s pro-arbitration stance as by permitting courts to dwell upon the validity of an arbitration agreement, the Court has broadened the scope of judicial intervention in arbitration matters because they are no longer limited to making a prima-facie finding that an arbitration agreement exists. Resultantly, the apex court has missed out on a low hanging fruit that could have helped in further bolstering India’s image as a pro-arbitration jurisdiction. Other than the above, some of the key concerns of the judgement are as follows:

(1) In the future, the disputing party may use this as a tool to delay the procedure of constitution of an arbitral tribunal citing the issue of insufficiency of stamp duty paid, which will then have to be adjudicated by the Courts as a preliminary issue thereby delaying the entire process. 

(2) It is likely to cause additional delays in the appointment of arbitrators by introducing yet another level of examination.

(3) The decision further lacks certain guidelines that would permit the courts to not engage in a mini trial for determining the sufficiency of stamping before referring the matter to arbitration. Although there appears to be some respite in the judgment as the Supreme Court held that where a claim of insufficiency of stamping appears to be wholly without foundation, a reference may be made to the arbitration leaving it open for the Arbitral Tribunal to exercise powers under the Stamp Act, if necessary.

(4) Stamp Act is a legislation primarily intended to provide revenue to the Government and as per the present judgement, it is being allowed to come in the way of judicial remedies.

Furthermore, courts in various countries such as the United States of America, Canada, Singapore and the United Kingdom have been inclined to uphold the validity of an arbitration agreement even when the contract in which the arbitration agreement is contained, is regarded as invalid for any reason. The countries all over the world are inclined towards reducing the burden of courts by promoting alternate methods of dispute resolution. In India, on the other hand, vide the recent law laid down in N.N. Global (II), it seems that our country is now moving in the opposite direction.

In conclusion, for India to be able to establish itself as a hotspot of arbitration across the world, there is a need to address the concerns emerging out of this decision. Appropriate steps should be taken to ensure that the Arbitration Act’s overall scope, purpose, and ethos remains unaffected due to the interplay of arbitration agreement with stamping requirements.