The Supreme Court’s recent landmark judgment by a 3-2 majority1 in N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.2, held that an arbitration agreement in an unstamped contract is not enforceable under Indian law if such contract is not duly stamped. The court thus overruled its previous decision by a bench of three judges3.
Background Facts
The case involves a sub-contract between the first respondent and the appellant, which included an arbitration agreement in a Work Order. The appellant had provided a bank guarantee, and after its invocation, the appellant filed a suit against the encashment of the bank guarantee. The first respondent sought reference under Section 8 of the Arbitration and Conciliation Act, 1996, and filed a Writ Petition after the commercial court rejected their application. One contention raised was that the arbitration agreement was unenforceable due to the unstamped Work Order. However, the High Court allowed the Writ Petition. The issue before the Supreme Court was whether the arbitration agreement was enforceable despite the Work Order being unstamped and therefore unenforceable under the Stamp Act, 1899.
The bench of three judges, in N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.4 unanimously agreed with the appellant and held that the arbitration agreement in the Work Order was valid and enforceable, even though the Work Order was unstamped, as per the doctrine of separability of the arbitration agreement from the main contract. Accordingly, it overruled its previous judgments in SMS Tea Estates5 and Garware Wall Ropes6, wherein it was held that an unstamped contract’s arbitration agreement is non-existent in law and cannot be acted on. The Supreme Court also agreed with the appellant and held that the arbitrator could decide the stamp duty payable on the Work Order. It also observed that the court’s role under Section 11 of the Arbitration Act, 1996 was limited to examining the existence of an arbitration agreement and not its validity or enforceability.
However, since a coordinate bench in Vidya Drolia v. Durga Trading Corporation7 affirmed the judgment in Garware Wall Ropes, the bench of three judges considered it necessary that the issue of the validity of an arbitration agreement in an
1 K. M. Joseph, Aniruddha Bose and C. T Ravikumar, JJ., comprising the majority.
2 (2021) 4 SCC 379
3 Dr. D. Y. Chandrachud, Indu Malhotra and Indira Banerjee, JJ.
4 (2021) 4 SCC 379
5 (2011) 14 SCC 66
6 (2019) 9 SCC 209
7 (2021) 2 SCC 1
unstamped contract be authoritatively settled by a constitution bench of the Supreme Court. Hence, N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. was referred to a five-judge constitution bench.
Contentions Before the Bench of Five Judges
The appellant, N.N. Global Mercantile Pvt. Ltd., contended that the arbitration agreement in the Work Order was valid and enforceable, as per the doctrine of separability of the arbitration agreement from the main contract, even though the work order was unstamped. It also argued that the stamp duty payable on the Work Order could be decided by the arbitrator, who had the power to impound the document and direct the parties to pay the stamp duty and penalty. It further argued that fraud or fraudulent invocation of a bank guarantee was arbitrable unless it affected the public interest or public policy of India.
The respondents, Indo Unique Flame Ltd. and others, contended that the arbitration agreement in the Work Order was invalid and unenforceable, as the Work Order was unstamped and not a valid contract under Section 2(h) of the Contract Act, 1872. They also argued that stamp duty payable on the Work Order had to be decided by a court, acting under Section 11 of the Arbitration and Conciliation Act, 1996, as per the judgments in SMS Tea Estates and Garware Wall Ropes. They further argued that fraud or fraudulent invocation of a bank guarantee was not arbitrable, as it involved severe allegations of criminality and malpractice.
Decision and Key Takeaways Regarding Stamping of Arbitration Agreements
- An unstamped instrument containing an arbitration clause cannot be considered a contract enforceable under Section 2(h) or Section 2(g) of the Contract Act, 1872. An arbitration agreement that is part of an unstamped contract cannot be acted on or enforced by a court unless the parties cure the defect of non-payment or insufficient payment of stamp duty.
- Sections 33 and 35 of the Stamp Act, 1899, applicable to instruments chargeable to stamp duty, would render the arbitration agreement in such instruments non-existent in law unless the instrument is validated under the Stamp Act, 1899.
- A stand-alone arbitration agreement that does not form part of any contract requires no stamping and can be valid and enforceable.
- Under Section 11 of the Act, a court must impound an unstamped contract containing an arbitration agreement under Section 33 of the Stamp Act, 1899 and direct the parties to pay the stamp duty and penalty as per the relevant stamp laws before appointing an arbitrator.
- Once appointed, the arbitrator can also impound an unstamped contract containing an arbitration agreement and direct the parties to pay the stamp duty and penalty as per the relevant stamp laws before moving forward with the arbitration.
Final Thoughts
The requirement of stamping arbitration agreements may create a procedural difficulty in the speedy constitution of arbitral tribunals and delay the already time-consuming process of appointment of arbitrators. It may also give an opportunity to recalcitrant parties to avoid or frustrate their duty to arbitrate. Most common law jurisdictions, including the U.K., Singapore, Hong Kong, Australia, and the USA, do not require stamping of arbitration agreements. In such jurisdictions, the authenticity of agreements is ensured through other means such as notarization, witnesses, and electronic signatures.
India, too, should exempt the stamping of arbitration agreements. Doing so will strengthen India’s arbitration regime. This will require amending India’s stamp laws to exclude arbitration agreements from stamp duty. Alternatively, India could enact separate legislation to provide for the validity and enforceability of arbitration agreements despite the stamping of the main contract. However, such a change would require the consent of the states, as stamp duty is a state subject under the Indian constitution. It may also affect the revenue collection of the states from stamp duty. This will make exempting stamping of arbitration agreements a formidable task.