Does the arbitration clause in a commercial contract becomes unenforceable due to non-payment of stamp duty, or it is preserved by the separability doctrine? This question has riddled the Supreme Court of India (“SC”) repeatedly and has resulted in contrary views being adopted by various three-judge benches. The issue has been finally laid to rest by a constitution bench of the SC through its judgment dated April 25, 2023 in M/s N. N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors.[i] , wherein it held that an unstamped instrument in need of stamping is not a contract and not enforceable in law. Therefore, the arbitration clause contained therein is also unenforceable. Similarly, an arbitration agreement, which attracts stamp duty but is not stamped or insufficiently stamped, cannot be acted upon. Interestingly, the decision has not been unanimous since two Hon’ble Judges have dissented.
BACKGROUND
The reference to the Constitution Bench of the SC was made by a three-judge bench in its judgment in N. N. Global Mercantile Private Limited v. Indo Unique Flame Limited & Ors. (“N. N. Global”).[ii] The case centred on the question of whether the arbitration agreement could be enforced and executed if the underlying commercial contract that included the agreement was unstamped, and thus, unenforceable under the Indian Stamp Act, 1899 (“Stamp Act”). The three-judge bench answered this question by relying on the doctrine of separability, which considers arbitration agreement as distinct and separate agreement from the underlying commercial contract and can be valid and enforced even if the latter is invalid. The bench opined that the Stamp Act is a fiscal measure for collection of revenue and that an arbitration agreement is not included in the Schedule to the Stamp Act as an instrument subject to stamp duty. The SC finally held that the non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause.
The decision in N.N. Global marked a departure from the position taken by the SC in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (“SMS Tea”)[iii] wherein the apex court had held that under Section 35 of the Stamp Act, the court cannot act upon an instrument unless the stamp duty and penalty dues were paid. It means that the court cannot act upon the arbitration agreement, which is part of that instrument. The bench in N.N. Global overruled the decision in SMS Tea noting that it did not lay down the correct position of law. However, the decision in SMS Tea had been followed by a two-judge bench of the SC in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited (“Garware”)[iv], 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. Further, the judgment in Garware was cited with approval in Vidya Drolia And Others v. Durga Trading Corporation (“Vidya Drolia”)[v] by a three-judge bench of the SC. The bench in N. N. Global doubted the correctness of the view taken in Vidya Drolia and deemed it appropriate to refer the findings in Garware as affirmed in Vidya Drolia to a five-judge bench of the SC. Hence, the reference to the constitution bench culminating in the judgment at hand came into being.
DECISION OF THE SC
The SC reformulated the reference from N.N. Global as follows on the basis that the case wrongfully proceeded on the premise that an arbitration agreement is not chargeable to payment of stamp duty when in fact it is exigible to stamp duty:
“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, as being non-existent, pending payment of stamp duty on the substantive contract/instrument?”
The decision on the aforesaid reference has been delivered by a 3:2 majority, wherein the majority judgment has been authored by Hon’ble Justice K. M. Joseph on behalf of himself and Hon’ble Justice Aniruddha Bose. A concurring opinion has been authored by Hon’ble Justice C. T. Ravikumar. Hon’ble Justice Ajay Rastogi and Hon’ble Justice Hrishikesh Roy have authored two separate dissenting opinions.
The Majority Opinion
Hon’ble Justice K. M. Joseph, in his majority opinion, agreed with N.N. Global to the extent that the Stamp Act is a fiscal measure to protect the interest of revenue and may not be used as a weapon by a litigant to defeat the cause of the opponent. However, the Stamp Act is required to be implemented with full vigour, including mandatory stamping at the time of execution under Section 17, , failing which, the document would be impounded under Section 33 of the Stamp Act. Based on a reading of Section 33 and Section 35 of the Stamp Act, it is apparent that an unstamped or insufficiently stamped document cannot be used as evidence for any purpose, and hence, cannot be legally enforceable. Further, it should be noted that Stamp Act is not merely a procedural law. An agreement is deemed unenforceable on account of a substantive law, such as Stamp Act, it would not be considered a valid contract. It is so because under the Indian Contract Act, 1872 (“Contract Act”), only those agreements that are legally enforceable are treated as contracts. As per Section 2(j) of the Contract Act, any contract that ceases to be enforceable, becomes void.
As per the Majority view, an unstamped or insufficiently stamped agreement is “bereft of life”, i.e., it cannot exist in law, and is void. The only way it can be ‘validated’ is through the process contemplated in Section 33 and other provisions of the Stamp Act. In view thereof, it was concluded that the decision in SMS Tea, as reiterated in Garware and approved in Vidya Drolia, is correct while that taken in N. N. Global was wrong. Thus, if an arbitration clause in an instrument constitutes the arbitration agreement, and that instrument is unstamped despite being exigible to stamp duty, then the provisions of Section 33 and Section 35 of the Stamp Act would be applicable. Under such circumstances, a court acting under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) is not free to disregard their mandate under the Stamp Act. The same applies when an arbitration agreement is a standalone agreement that attracts duty under the Stamp Act. Section 11(6A) of the Arbitration Act does not allow the courts to turn a blind eye to the injunction of a law, such as Stamp Act, and allow them to be circumvented.
Hon’ble Justice C. T. Ravikumar, in his separate concurring opinion, endorsed the findings in the majority judgment and additionally stated that under Section 11(6), the court receives the arbitration agreement as evidence to decide whether the instrument produced constitutes an arbitration agreement / contains an arbitration clause. The Court having competence and authority to receive evidence under Section 11(6) cannot abstain from proceeding in terms of Section 33 of the Stamp Act when the instrument is unstamped or not duly stamped. This will not be judicial intervention in contravention of Section 5 of the Arbitration Act. Further, the Appointment of Arbitrators by the Chief Justice of India Scheme, 1996 allows production of a certified copy along with a request under Section 11 of the Arbitration Act. This certified copy must declare the amount of stamp duty that has been paid with regards to the original, and a court cannot be invited to act upon a copy of an instrument, which is insufficiently stamped.
The Dissenting Opinion
Hon’ble Justice Ajay Rastogi in his dissent opined that it is well settled law that the Stamp Act is not rigid as deficiency in an instrument, unstamped or insufficiently stamped, can be rectified. Therefore, the deficiencies do not render any instrument invalid permanently as they can be rectified. The law today should be responsive to the rapidly evolving arbitration regime in India and be aligned with the objective of reducing the scope of judicial intervention in the arbitration process. At a pre-referral stage of appointment under Section 11(6A) of the Arbitration Act, an objection cannot be raised regarding an arbitration agreement not being properly stamped as this does not render the agreement non-existent. At a pre-referral stage, courts can only examine the existence of an arbitration agreement, while as per the doctrine of Kompetenz- Kompetenz, objections to existence or validity of an arbitration agreement are within the domain of the arbitral tribunal in terms of Section 16 of the Arbitration Act.
Hon’ble Justice Hrishikesh Roy in his separate dissenting opinion expressed that non-payment of stamp duty is a curable defect and thus there is no absolute bar on the document being acted upon at a later stage when the defect is cured. It is a settled position of law that failure to stamp a document does not affect the validity of the transaction embodied in the document. Therefore, it cannot be held that non-stamping / insufficient stamping of a document affects its enforceability or renders it invalid. Applying the doctrine of Kompetenz-Kompetenz, all issues on initial illegality or a void contract can be decided by the arbitral institutions subject to the ultimate supervisory jurisdiction of the Courts. The 2015 amendment of the Arbitration Act legislatively overruled the decision in SMS Tea. Further, Section 7 of the Arbitration Act does not mandate stamping for an arbitration agreement to be valid. The Arbitration Act is a special law and cannot be rendered void by a general law and in any event, there is no provision in the Stamp Act, which provides that an arbitration agreement would be void when not stamped. Therefore, the decision is Garware is inconsistent with both the Arbitration Act and the Stamp Act and the decision in Vidya Drolia, to an extent, is incorrect.
CONCLUSION
The decision of the majority of the constitution bench has harmonised the Arbitration Act with the Stamp Act and resolved the long-standing confusion on the enforceability of the arbitration clause on account of non-stamping of an agreement. At the same time, the voice of dissent cannot be ignored since historically, it has been seen that today’s dissenting opinion can be tomorrow’s majority opinion. It may be argued by some that the current decision, by allowing courts to dwell upon the validity of an arbitration agreement, had widened the scope of judicial intervention as courts are no more limited to prima-facie determining only the existence of an arbitration agreement. This may be seen contrary to the spirit of Section 11(6A) of the Arbitration Act and the policy of promoting India as a pro-arbitration regime.
For further information, please contact:
Raunak Dhillon, Partner, Cyril Amarchand Mangaldas
raunak.dhillon@cyrilshroff.com
[i] Civil Appeals No(s). 3802-3803 of 2020
[ii] (2021) 4 SCC 379
[iii] (2011) 14 SCC 66
[iv] (2019) 9 SCC 209
[v] (2021) 2 SCC 1
