India: Stamp Duty And Its Perilous Effect On Arbitration Cases

Much has already been written about the effect of non-payment or insufficient payment of stamp duty on substantive agreements containing an arbitration clause, and whether such default hinders enforcement of the arbitration agreement.

At the outset, it must be clarified that the purpose of this article is not to consider whether interim relief under Sections 9 or 17 of the Arbitration and Conciliation Act, 1996 ("Act") may be granted where unstamped/inadequately stamped instruments contain arbitration agreements, given that this is no longer subject to debate. The decision of the full bench of the Bombay High Court in Gautam Landscapes Pvt. Ltd., Mumbai v. Shailesh S. Shah 2019 (3) Mh.L.J., and the Supreme Court's recent decision in N.N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. & Ors. 2021 SCC OnLine SC 13 ("NN Global"), clarify that interim relief may be obtained even when the substantive agreement is unstamped/insufficiently stamped.

The question relating to enforcing an arbitration agreement contained in an unstamped/insufficiently stamped instrument may arise in any of the following instances: (i) before a Court seized of an application under Section 8 of the Act; (ii) in Section 11 Applications before the High Court or Supreme Court during the process of seeking Court-appointed arbitrators under Part-I of the Act; and (iii) before arbitrators themselves, either at the time of entering reference or in Section 16 Applications, where a party may raise jurisdictional challenges under the Act. This issue relating to stamp duty is once again in the public eye after the recent three-judge bench decision of the Supreme Court in NN Global.

Supreme Court ruling in NN Global

The Supreme Court in NN Global, relying, inter alia, on the doctrine of separability, ruled an arbitration agreement to be a separate and distinct contract dehors the substantive agreement, which in itself is not liable to be subjected to any stamp duty payment. As such, the position that emanates from NN Global is that either a Court may proceed to refer the dispute to arbitration or an arbitrator may enter reference, basis an arbitration agreement (which is distinct and separable) in an unstamped/insufficiently stamped main instrument. The Court or the arbitrator, as the case may be, would also be duty bound to impound the unstamped/insufficiently stamped main instrument and refer the same to adjudication by the Collector of Stamps in compliance with the provisions of the relevant stamp act (this is where NN Global does not differ from the earlier decisions).

The resultant implication in the NN Global case is that while the main instrument would be impounded and sent for adjudication, non-payment/inadequacy of stamp duty would not render the arbitration agreement void, such that the process of appointment of an arbitrator/arbitrator entering reference can be completed unhindered, and a party invoking the arbitration agreement may nonetheless seek interim relief under the Act. However, in doing so, the Supreme Court has clarified that adjudication of the rights and obligations of parties under the substantive agreement can proceed only after the default of non-payment/insufficient stamp duty is corrected.

Position prior to NN Global

In the NN Global case, the Supreme Court has essentially provided a divergent opinion to the previously-accepted position that an arbitration agreement contained in an unstamped/insufficiently stamped document would be rendered void and inseparable from the substantive agreement. Prior to NN Global, the generally-accepted position was that the arbitration agreement contained in a deficiently stamped/unstamped document would be non-est and incapable of being acted upon. This was the position laid down in a series of judgments, beginning with SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd. (2011) 14 SCC 66 ("SMS Tea") (two judge bench), elaborated most famously in Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209 ("Garware") (two judge bench) [which was subsequently, affirmed in Vidya Drolia & Ors. v. Durga Trading Corporation (2021) 2 SCC 1 ("Vidya Drolia") (three judge bench)].

In NN Global, the Supreme Court not only adopted a different view to that previously held, but also questioned the correctness of the ratio in Garware and its subsequent affirmation in Vidya Drolia. Having due regard to the fact that the judgement in Vidya Drolia was also delivered by a co-ordinate bench of similar strength as NN Global, the Supreme Court referred the issue of whether an arbitration agreement is "non-existent, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument" to a larger bench. However, in doing so, the Supreme Court categorically overruled the ratio in SMS Tea Estates (a two-judge bench). The issue of validity/enforceability of an unstamped/insufficiently stamped arbitration agreement will finally be decided by a five-judge Constitution bench of the Supreme Court.

The perplexing position that emerges

The overruling of SMS Tea Estates in NN Global might not have been altogether correct, given that, 11 months before NN Global, another co-ordinate three-judge bench of the Supreme Court in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Ors. v. Bhaskar Raju and Brothers & Ors. (2020) 4 SCC 612 ("Dharmaratnakara"), had upheld and affirmed the principles and ratio laid down in SMS Tea Estates. Given that the bench in NN Global was mindful of the affirmation of Garware by a co-ordinate three-judge bench in Vidya Drolia, the express overruling of SMS Tea Estates, despite its approval in Dharmaratnakara, may well be an example of judicial oversight. It appears that Dharmaratnakara was simply not brought to the attention of the bench during the hearing in NN Global. Curiously, it would appear that Dharmaratnakara has not found reference in any subsequent decisions with regard to arbitrability and payment of stamp duty, leading to an incongruous and vexed situation for Courts and arbitrators.

Conclusion

The fall-out of the foregoing discussion is that it could now be argued that judicial propriety demanded that, given the recorded approval of SMS Tea Estates in Dharmaratnakara, the bench in NN Global ought not to have overruled SMS Tea Estates but, rather, should have referred the entire gamut of decisions (similar to the Garware and Vidya Drolia judgments) to the Constitution bench for adjudication.

At this stage, it is appropriate to touch upon the fact that, pending the determination of the reference in NN Global, courts, especially the High Courts in Section 11 Applications and arbitrators at the time of entering reference or in Section 16 Applications, may well have to rule on the possible arguments: (i) as to which judgment, i.e. Garware (read with the affirmation in Vidya Drolia) or NN Global is good in law, pending the adjudication of the reference to the larger bench; and (ii) as a more extreme argument, whether NN Global is per incuriam (or bad in law) for failing to have considered a judgment of a co-ordinate bench of the same strength, i.e. Dharmaratnakara.

Though the law on the issue of stamp duty and arbitrability may be uncertain, what is clear as day is the peculiar situation created by NN Global and the untested waters on account of Dharmaratnakara.

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