Arbitration has gained significant importance as an alternative dispute resolution mechanism in India. It provides parties with an opportunity to resolve commercial disputes outside of the court system in a cost-effective and time-efficient manner. The legislative intent is to develop India as an international hub for arbitration by taking a progressive approach towards promoting arbitration and enhancing India's position in the global marketplace. However, the enforceability of arbitration agreements has been a contentious issue in India. The recent Hon'ble Supreme Court of India's judgment on the enforceability of an unstamped or insufficiently stamped arbitration agreement is directly in the teeth of the legislature's pro-arbitration stance and has an undesirable impact on the arbitration regime in India.
On April 25th, 2023, the Constitution Bench of the Hon'ble Supreme Court of India delivered a significant judgement M/s N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors.1 ("N.N. Global 2023") regarding the enforceability of an unstamped or insufficiently stamped arbitration agreement. In a 3:2 majority judgement, the court held that an arbitration agreement that is not duly stamped in accordance with the Indian Stamp Act, 1899, ("Stamp Act") would render it nonexistent in law, and unenforceable.
The case before the Hon'ble Supreme Court involved a dispute between two parties over the validity of an arbitration agreement. The respondent had contended that the agreement was not valid because it was not stamped as per the Stamp Act. The appellant, on the other hand, argued that the absence of stamping did not render the agreement invalid and that it could still be enforced.
The majority judgement held that the Stamp Act was a fiscal statute that applied to all instruments that required stamping under the act. The court held that an arbitration agreement that was not stamped or insufficiently stamped would not be valid/enforceable or non-existent in law vis-à-vis the Indian Contract Act, 1872 ("Contract Act"). The court further clarified that this rule would apply to both domestic and international arbitration agreements.
However, the minority judgement held that an arbitration agreement that was not stamped could still be enforced under Section 11(6A) of the Arbitration and Conciliation Act, 1996 ("1996 Act"). The minority judgement also observed that the Stamp Act did not invalidate instruments that were not stamped and that the issue of validity would depend on the facts and circumstances of each case.
The N.N. Global 2023 overruled the previous decision of the Hon'ble Supreme Court passed on January 11th, 2021 by a three-judge bench2 ("N.N Global 2021"), which had inter alia held severability and separability of an arbitration agreement from the underlying substantive agreement in which it may be embedded, thereby stating that non-stamping or insufficient stamping of the substantive agreement does not render the underlying arbitration agreement as void and unenforceable.
The majority opinion held that the contracts are only considered valid if they are enforceable by law, as per the Contract Act. The majority further interpreted Section 35 of the Stamp Act, which prohibits any unstamped or insufficiently stamped documents from being used as evidence in court, to note that this provision does not provide any exemption to such documents for collateral purposes, unlike registerable documents which are not registered.
According to the majority opinion, agreements are usually enforced through civil courts and public authorities. Since the Stamp Act precludes any authority from acting upon or giving effect to an unstamped or insufficiently stamped agreement, such agreements cannot be considered enforceable. The majority concluded that such agreements would only become enforceable after they are validated as per the procedure provided under the Stamp Act. The majority opinion compared this view with Sections 2(j) and 2(g) of the Contract Act which render unenforceable contracts void.
The majority also noted that an unstamped instrument with an arbitration clause cannot be used as evidence since it would amount to establishing a collateral transaction. The majority rejected the argument that the arbitrator should have to deal with the issue of sufficiency of stamping and held that courts cannot evade their obligation mandated under the law and defer their responsibility to the arbitrator. However, the majority provided a caveat stating that if the document appears to be stamped, but its sufficiency is in contention, and such contention appears to be without foundation, then the matter can be left to be decided by the arbitrator based on the existing arbitration agreement.
PREVIOUS DECISIONS OF THE SUPREME COURT OF INDIA ON THIS ISSUE.
Historically, the Hon'ble Supreme Court has adopted a strict stance regarding the enforceability of arbitration agreements that lack sufficient stamping or are unstamped. In the case of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.3 ("SMS Tea"), the court ruled that arbitration agreements without proper stamping could not be enforced. The court also made it clear that even if stamp duty and penalties were paid after the start of the arbitration process, the defect in the agreement could not be cured.
Similarly, in Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd.4 ("Garware"), the Hon'ble Supreme Court established that an arbitration agreement included in an unstamped contract could not be presented as evidence or invoked. Additionally, the court stated that if it came across an unstamped document, it must impound the document in accordance with the Stamp Act, and only after such an impounding and the payment of the deficit stamp duty and penalty could the court proceed on the basis of the arbitration agreement. It was also made clear that the arbitration agreement in an unstamped document could not be relied upon in the context of a Section 11 application under the 1996 Act. Ultimately, the judgment's consequence was that an arbitrator could not be appointed until the unstamped agreement in question was impounded.
In the case of Vidya Drolia v. Durga Trading Corporation5 ("Vidya Drolia"), the Hon'ble Supreme Court of India, represented by a bench of three Judges, affirmed the decisions made in the SMS Tea and Garware.
However, in the N.N. Global 2021 by a three-judge bench ruling, Garware was overruled, while holding that even in cases wherein the arbitration agreement was unstamped or insufficiently stamped, reference to arbitration was permitted. This pro-arbitration approach puts India on the same level as international arbitration centers across the globe. The apex court in the N.N Global 2021 case relied heavily on the UNCITRAL Model Law and the doctrine of severability. It rejected the conclusions of SMS Tea and Garware, stating that the lack of stamp duty payment would not render the arbitration agreement null and void. By reconciling the provisions of the Stamp Act and the 1996 Act, the court found Garware's views to be erroneous and determined that the arbitration agreement's fate cannot be tied to the underlying contract. Furthermore, the court established that non-payment or deficiency of stamp duty is a fixable error.
However, the court was aware that Vidya Drolia had upheld Garware's decisions, which was a bench of equal strength. As a result, in N.N Global 2021, the Court decided to refer this matter to a 5-judge Constitutional Bench to settle the dispute in light of the conflicting opinions in the Vidya Drolia and N.N Global 2021 cases.
IMPACT OF N.N. GLOBAL 2023.
This judgement has significant implications for parties entering into arbitration agreements in India. It underscores the importance of ensuring that all agreements are duly stamped in accordance with the Stamp Act. Failure to do so may render the agreement invalid and unenforceable, which can result in a significant loss for the parties involved. The judgement also highlights the need for greater awareness and understanding of the Stamp Act and its implications for arbitration agreements. This decision of the Supreme Court has brought much-needed clarity on the issue of the enforceability of unstamped or insufficiently stamped arbitration agreements. It has settled the law on this issue and has provided parties with an opportunity to enforce such agreements by paying the requisite stamp duty and penalty.
However, it is important to note that the payment of stamp duty and penalty can be a time-consuming and cumbersome process. The parties may have to go through a lengthy legal process to determine the amount of stamp duty and penalty payable. This may lead to delays in the resolution of disputes and defeat the very purpose of arbitration. Further, one of the primary complications with this judgement is that it creates uncertainty in the arbitration process, especially in cases where parties are unaware of the stamping requirements. Section 11(6A) of the 1996 Act, which was inserted through an amendment in 2015, limited the scope of examination of a court at the pre-arbitration reference stage only to the existence of an arbitration agreement. However, the recent judgement may result in increased litigation and disputes over the validity of arbitration agreements, which may delay the resolution of disputes.
Furthermore, the judgement may also lead to potential abuse of the stamping requirement by parties who wish to avoid arbitration. Parties may attempt to exploit the requirement to avoid arbitration by intentionally delaying the stamping process, leading to increased legal costs and delays in resolving disputes. This may also result in the possibility of parties challenging the enforceability of arbitration agreements on frivolous grounds, leading to unnecessary litigation.
Another issue with the judgement is that it may create a barrier to accessing justice for parties who have entered into arbitration agreements that are not duly stamped. The requirement of stamping an agreement can be seen as a technical formality that should not take away the substantive rights of the parties. This may result in the denial of the right to arbitrate disputes, which can have serious consequences for parties who may not have the resources to litigate disputes in court.
As stated in the minority opinion, the issue regarding unstamped arbitration agreements cannot be left unaddressed until a larger bench resolves the issue and provides clarifications. It is necessary to have a legislative intervention that can eliminate discrepancies and bring clarity to this matter. If no such intervention takes place, there is a risk of more legal disputes arising due to ambiguity in the law on unstamped arbitration agreements. The legislative action must align with India's pro-arbitration position.
1. Civil Appeal No(s). 3802-3803 of 2020.
2. (2021) 4 SCC 379.
3. (2011) 14 SCC 66
4. (2019) 9 SCC 209
5. (2021) 2 SCC 1
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