A constitution bench of the Supreme Court of India ("Larger Bench"), in its recent decision in N.N. Global Mercantile Private Limited v Indo Unique Flame Ltd and Other1, by a 3:2 majority, ruled that an unstamped instrument, which is exigible to stamp duty, containing an arbitration clause, cannot be said to be a contract enforceable in law within the meaning of Section 2(h) of the Indian Contract Act 1872 ("Contract Act") and is therefore not enforceable under Section 2(g) of the Contract Act.

It was further held that the provisions of Sections 33 and the bar under Section 35 of the Stamp Act 1899 ("Stamp Act"), applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the arbitration agreement contained in such an instrument as being non-existent in law, unless the instrument is validated under the Stamp Act.

The decision has been handed down in a reference made to the Larger Bench, considering the various conflicting judgments from coordinate benches of the Supreme Court of India.

Non-Stamping of Commercial Contracts and Effect on Arbitration Agreements: the long-drawn controversy

The Supreme Court while ruling on a Section 11 Application under the Arbitration and Conciliation Act 1996 ("Arbitration Act"), in SMS Tea Estates (P) Ltd v Chandmari Tea Co. (P) Limited2 had, with respect to unstamped agreements, held that unless stamp duty and penalty due on an instrument are paid, the court cannot act upon the instrument in question. In effect, the court could not act upon the arbitration agreement contained in the unstamped substantive agreement/ instrument.

Thereafter, in Garware Wall Ropes Ltd v Coastal Marine Construction & Engg.3, following the decision in SMS Tea it was held that an arbitration agreement contained in an unstamped Agreement could not be read in evidence and, therefore, invoked.

In Garware, the court recognised that the defect in stamp duty was curable by payment of the deficit stamp duty and once such defect is cured, the invocation could proceed. The effect of the judgment was that the appointment of an arbitrator would be delayed until the payment of the deficit stamp duty.

Subsequently, a three-judge bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd4 ("NN Global -1") overruled the law laid down in SMS Tea and also expressed its dissent with the findings rendered in Garware.

In N.N Global -1 it was held that since the arbitration agreement is an independent agreement between parties, which does not require payment of stamp duty, the non-payment of stamp duty would not invalidate the arbitration clause or render it unenforceable. In addition, the bench propounded guidelines to be followed when a court is faced with an unstamped Agreement at the pre-reference stage.

Going a step further, the decision also created a dichotomy between Section 9 and Section 11 cases, on the basis that an application filed under Section 9 of the Arbitration Act was of urgent nature and the court would first have to grant ad interim relief and then impound the instrument for payment of requisite stamp duty.

The decision in N.N Global-1 had settled the long-drawn controversy, at least for a while, recognising the need for minimal interference in matters related to arbitration. The decision recognised both the principles of severability as well as Kompetenz-Kompetenz.

Subsequently, however, a coordinate bench in Vidya Drolia v Durga Trading Corporation5, opted to follow the decision in Garware, noting that the law laid down in Garware could not be held per incuriam.

In this background, a reference was made to the Larger Bench on the correctness of the decision in N.N. Global-1.

Issue before the Larger Bench

The issue before the Larger Bench was whether the statutory bar contained in Section 35 of the Stamp Act is applicable to instruments chargeable to stamp duty under Section 3 read with Schedule to the Stamp Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/ instrument.

Majority Judgment

The majority decision was handed down by Hon'ble Justice Joseph Kurian and Hon'ble Justice Aniruddha Bose, with a concurring judgment of Hon'ble Justice CT Ravikumar.

The Majority Judgment held that the view taken in SMS Tea, as followed in Garware, represents the correct position in law. It was further held that N.N. Global-1 was wrongly decided, in as much as it overruled SMS Tea.

The majority further concluded that an unstamped instrument/ contract, which is exigible to stamp duty, and which may contain an arbitration clause, cannot be said to be a contract that is enforceable in law. Therefore, such a contract, and the arbitration agreement therein, cannot be said to exist in law.

Although, the majority view appreciated that a court in an application under Section 11 of the Arbitration Act is only required to examine and ascertain the existence of an arbitration agreement, it was held that an unstamped / under-stamped agreement is effectively void and, therefore, the test of existence does not stand satisfied.

Going a step further, it was also held that a court acting under Section 11 of the Arbitration Act, is duty bound to act in terms of Section 33 of the Stamp Act and impound the unstamped contract. It was clarified that the court could proceed further with the Section 11 Application only once the defect in payment of stamp duty is cured.

Minority Judgments

The Minority upheld the overruling of the decision in SMS Tea. In this regard, the minority reiterated the view in NN Global-1 to the extent that that non-stamping or insufficient stamping of the substantive contract or instrument would not render the arbitration agreement non-existent in law and unenforceable/void, in so far as reference to arbitration is concerned.

It was further held that the existence of a copy/certified copy of an arbitration agreement whether unstamped/insufficiently stamped at the pre-reference stage is an enforceable document for the purposes of appointment of an Arbitrator under Section 11(6A) of the Arbitration Act.

The Minority Judgments were also of the view that the examination of stamping and impounding as well as all other preliminary or debatable issues, including insufficiency of stamp duty as well as validity of arbitration agreement, were matters referrable to the arbitral tribunal and would be decided in accordance with Section 16 of the Arbitration Act.

The Minority Judgments were handed down by Hon'ble Justice Ajay Rastogi and Hon'ble Justice Hrishikesh Roy.

Analysis & Conclusion

The effect of the Majority Judgment is to revive the position of law that was set down in SMS Tea. The Majority Judgment is predicated on a technical reading of the relevant statutes and cannot be faulted on that ground.

The effect of the decision, however, is two-fold: judicial intervention at a pre-reference stage and delay in appointment of arbitrators. This is particularly relevant in India, where post-impounding adjudication under the Stamp Act itself is a tedious and time-consuming process. In this regard, issuance of directions for authorities under the Stamp Act to act in a time bound manner may have been helpful.

Interestingly, the Majority Judgment is silent on applications under Section 9 of the Arbitration Act. Notwithstanding this, if the position in the Majority Judgment and SMS Tea are applied, then even an application under Section 9 ought not to be taken up, nor orders passed thereon, till the deficiency in payment of stamp duty is cured. After all, an agreement cannot be void for one purpose but valid for another. At least no such distinction is made out in the Stamp Act.

The Minority Judgments, on the other hand, recognise the principles of severability and separability of an arbitration agreement. This is in line with the international standards. Arguably, the minimisation of judicial interference, as can be gleaned from the Minority Judgments, appears to be more in line with the true intent and spirit of the Arbitration Act.

The decision of the Larger Bench has once again brought into question the interplay of substantive contracts and the arbitration clauses contained therein. Going forward, parties will have to be mindful of the payment of stamp duty as required under the Stamp Act. Additionally, the manner in which arbitration agreements are executed may need re-examination to see whether a separate arbitration agreement should be executed to safeguard the rights of parties.

While the Stamp Act is a fiscal statute, and for the benefit of the revenue, the very fact that non-payment of requisite stamp duty is a curable defect, an interpretation that is in consonance with speeding up arbitration would have, possibly been the need of the hour and may have helped promote India as a hub for international arbitration.


1 Civil Appeal No(s) 3802 – 3803 of 2020 decided on 25 April 2023: 2023 SCC Online SC 495

2 (2011) 14 SCC 66

3 (2019) 9 SCC 209

4 (2021) 4 SCC 379

5 (2021) 2 SCC 1

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