The Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd1"N.N.Global") ruled that an arbitration agreement, which is not stamped or insufficiently stamped, cannot be acted on, unless the required stamp duty is paid on such agreement. In N.N.Global, a constitution bench of the Supreme Court concluded that an unstamped or insufficiently stamped instrument cannot be a contract in terms of the Contract Act, 1872 and therefore, cannot exist in law. The consequence of this ruling is that the aggrieved party will have to first pay the stamp duty on the unstamped or insufficiently stamped agreement before initiating the arbitration proceedings.
In many ways, this ruling is regressive and contradicts with the Indian government's push to improve India's standing on the ease of doing business parameters. The statutory mandate of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") is for a quick and time bound resolution of disputes, and the ruling can be a hurdle in implementing this. Probably, this is why, the Supreme Court agreed to hear a curative petition to take a fresh look on the contentious issue of unstamped agreements - within 5 months of the N.N.Global ruling. This is a welcome move and hopefully, the N.N.Global ruling will be cured.
In the meantime, the Delhi High Court in Splendor Landbase Ltd. v. Aparna Ashram Society & Ors2 ("Splendor Landbase") and the Bombay High Court in John Cockerill India Limited v. Sanjay Kamalakar Navare3 ("John Cockerill") took a pragmatic approach to ensure that the statutory mandate of the Arbitration Act is not defeated and the stamp duty is paid in a time bound manner. A look at these two rulings.
Power of Court to Impound
A single judge bench (speaking through Justice Sachin Data) of the Delhi High Court in Splendor Landbase observed that a court seized with a section 11 petition under the Arbitration Act has two options; (a) it can impound the unstamped or insufficiently stamped document and send that to the Collector of Stamps to collect the deficit stamp duty and complete the process under the Stamp Act. This is a long process and without any timeline, which can defeat the purpose of the Arbitration Act; or (b) the court can itself determine the stamp duty payable on such instrument and direct an officer or registrar of the court to collect the deficit stamp duty. This option will save time and the deficit stamp duty can be collected in an easy manner.
If a court chooses the second option, then the court must determine the nature of the instrument and the stamp duty payable on such instrument and post such determination, the remaining process of collection of stamp and other ancillary processes can be delegated to an officer on its behalf. The officer or registrar, appointed on behalf of the court, must collect the stamp duty, transfer such collected duty to the concerned collector of stamps and complete the process under the Stamp Act to ensure that the document is sufficiently stamped. This will avoid the cumbersome process of collection of the deficit stamp duty by the collector of stamps.
The Court, however, clarified that the determination of the nature of the instrument and the stamp duty payable on such instrument is a judicial function and must be performed by the concerned Court – and cannot be delegated to an officer of the court.
Alternatively, if a court chooses the first option of payment of the deficit stamp duty to the collector of stamps then such court can direct the collector to complete the process in a time bound manner. There is no timeline provided in the Stamp Act for a collector to complete the process of collection of the deficit stamp, but to ensure that the statutory mandate of section 11 is not defeated, the courts can impose a timeline.
Relying on this ruling, a single judge bench (speaking through Justice Manish Pitale) in John Cockerill determined the stamp duty (together with the penalty) payable on the unstamped agreement in terms of the Maharashtra Stamp Act. Post determination of the stamp duty, the Court directed the Prothonotary and Senior Master of the Bombay High Court to collect the stamp duty and complete the entire process within 10 days of payment of the duty. This way it was ensured that the initiation of the arbitration is not delayed, which would have otherwise taken between 3-4 months to adjudicate and pay the stamp duty.
The Supreme Court's decision to take a fresh look at the enforceability of unstamped or insufficiently stamped arbitration agreement under section 11 of the Arbitration Act is encouraging and a welcome move. We expect that the Supreme Court will take a forward-looking stand and ensure that insufficient duty is not a hurdle in initiating arbitration proceedings. The Bombay and Delhi High Courts' practical approach is a good sign for the Indian judiciary.
1. (2023) 7 SCC 1
2. ARB.P. 366/2021; decided on 22 August 2023
3. Commercial Arbitration Petition (L) No. 10282 of 2023, decided on 12 September 2023
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