Enforceability of an unstamped arbitral agreement

The judiciary has debated whether an arbitration provision in an unstamped or poorly stamped agreement may be implemented. The issue regarding the applicability of arbitration clauses in such unstamped or inadequately stamped agreements was, however, resolved by a five-judge Supreme Court panel in the recent case of N.N. Global Mercantile Private Limited.[1]

A subcontract between the petitioner and defendant had an arbitration provision. When disagreements developed, the respondent referred to the bank guarantee that the petitioner had supplied. Regarding the use of the guarantee, a dispute arose.

The respondent filed an application requesting that the dispute to be referred to arbitration before the HC as a writ. The HC considered the enforceability of the arbitration agreement due to the sub-contract being unregistered and unstamped. The HC noted that this issue could be raised in an application under Section 11 or before the Arbitral Tribunal. The matter was appealed before the Supreme Court on the question of whether an arbitration clause in a contract can be considered valid and enforceable if it has not been adequately stamped?

Pre NN Global

The SC in SMS Tea Estate v Chandmari Tea Company[2] noted that if an insufficiently stamped document is placed before the court in a S. 11 petition, the court must first impound the agreement and then only after the payment of the stamp duty, it may proceed with the appointment of an arbitral tribunal.

Post the said judicial pronouncement, a legislative amendment through Section 11(6A) in the Arbitration Act restricted the scope of judicial intervention to merely examining the existence of an arbitration agreement. In Duero Felgera[3], the court noted that under a S. 11 application the Courts have a confined role to merely probe the existence of an arbitration agreement.

This position was altered when the division bench of the SC in the case of Garware[4] held that the ruling in SMS Tea Estates would not be impacted by the insertion of Section 11(6A) in the Act. In N.N. Global Mercantile, the court doubted this position, since an arbitration agreement is an independent contract, it cannot be invalidated merely by insufficiently stamped main contract. The SC referred the issue to a larger 5 judge bench to render the verdict.

Current Position on Law
The Supreme Court by a 3:2 majority, has now settled the law in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited. It was held that the payment of the requisite stamp duty can only happen "under the watchful gaze of the Court"

Only those agreements that are enforceable by law are contracts as per the scheme of the Indian Contract Act. The court also noted that the provision in S. 35 of the stamp act is strictly worded and does not provide any exemption to documents.

In the usual course, agreements are enforced through civil courts and by public authorities in some cases. As the scheme of the Stamp Act precludes any authority giving effect to an unstamped/ insufficiently stamped agreement, the Court observed that such an agreement would not constitute as enforceable agreements. Therefore, an agreement would not be enforceable until it is validated as per the procedure provided under the Stamp Act.

The Court further expounded its observation with S.2(j) and S. 2(g) of the Contract Act, which rendered an unenforceable contract to be void. An unstamped instrument, of which the arbitration clause is a part of, cannot be allowed to be used as it would amount to establishing a collateral transaction, considering arbitration agreement has an independent existence from the main contract.

On the restriction imposed by Section 11(6A) of the Act, the Court held that the section envisages a contract to begin with for the bar to operate. The Court ruled that the said section does not merely envisage the literal existence of an arbitration agreement, but rather an enforceable contract. Hence, an arbitration agreement must satisfy the requirements under the Contract Act without which there can be no reference to arbitration. The rationale behind including 11(6A) in the Act was to stop excessive interference by Courts but this cannot be extended to mean that the Courts would disregard the legislative enactment altogether.

The SC provided an exception that when the document on the face of it appears to be stamped but its sufficiency is contended (without foundation), then a reference is made to the existing arbitration agreement and left to the wisdom of the arbitrator.

The certified copy of the arbitration agreement will also only become enforceable if it discloses the factum of the payment of the applicable stamp duty on its original. If the original document is not sufficiently stamped, the Court cannot impound the certified copy however it is precluded from acting upon it.

The verdict has clarified the Indian position on stamp duties. It was a settled principle in law that necessary stamp duty must be remitted for an arbitration agreement to be valid. The present judgement has now put the onus on the court to decide this question at the stage of appointment of the arbitrator itself.

Critics have pointed out that this decision would increase judicial delays in the legal system. It focuses on the narrow interpretation of the legislature and now the intention of the parties who entered into the contract. Now respondents may contest the insufficiency of the stamp to delay the process of appointing an arbitrator. The legislature should bring out relevant amendments to the Stamp Act to streamline it with the current practice of arbitration.

References:

• Ali, S. and Chaturvedi, A. (2023) Enforceability of an unstamped arbitration agreement, India Corporate Law. Available at: https://corporate.cyrilamarchandblogs.com/2023/05/enforceability-of-an-unstamped-arbitration-agreement/#_ftn1 (Accessed: 22 June 2023).
• Ratho, S. (no date) Stamping Of The Underlying Contract For A Valid Arbitration Clause – An 'Existential' Crisis, Icc India Arbitration Newsletter | Issue 4. Available at: https://nishithdesai.com/Content/document/pdf/Articles/190618_A_Issue4_ICC_India_Arbitration_Newsletter.pdf (Accessed: 22 June 2023).

End-Notes:

1. M/s N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors. Civil Appeal 3802-3803 of 2020
2. SMS Tea Estate (SMS Tea Estate Pvt Ltd v. Chandmari Tea Company Pvt Ltd, (2011) 14 SCC 66)
3. Duro Felguera v Gangavaram Port Ltd, (2017) 8 SCC 729
4. Garware Wall Ropes (Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd, Appeal (Civil) 3631/2019)