India: Supreme Court Rules: Arbitration Clauses In Unstamped Or Inadequately Stamped Agreements Are Enforceable

A seven judge bench of the Supreme Court was called upon to resolve an issue which arose in the context of three statutes – the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), the Indian Stamp Act, 1899 ("Stamp Act"), and the Indian Contract Act, 1872 ("Contract Act") – whether arbitration agreements would be non-existent, unenforceable, or invalid if the underlying contract is not stamped. In its judgement dated December 13, 2023, the Supreme Court held that arbitration clauses in unstamped or inadequately stamped agreements are enforceable.¹

Background

The Supreme Court examined previous judgements which have discussed this issue. In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd², a two-judge bench of the Supreme Court held that an arbitration agreement in an unstamped contract could not be acted upon. Another two-judge bench in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd ³ relied on SMS Tea Estates (supra) to hold that an arbitration agreement in an unstamped commercial contract would not "exist" as a matter of law and could not be acted upon until the underlying contract was duly stamped. Thereafter, a three-judge bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation⁴ cited paragraph 29 of Garware Wall Ropes (supra) and reiterated that an arbitration agreement exists only when it is valid and legal.

In N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd⁵ ("N N Global 1") a three-judge bench of the Supreme Court was called upon in a Special Leave Petition to determine the enforceability of an arbitration agreement contained in an unstamped work order. It was held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent. Further, the non-payment of stamp-duty would not invalidate even the underlying contract because it is a curable defect. N N Global 1 noted the decision in Vidya Drolia (supra) and doubted the correctness of the view adopted in paragraphs 22 and 29 of Garware Wall Ropes (supra) and in paragraphs 146 and 147 of Vidya Drolia (supra). It referred the issue of validity of an unstamped arbitration agreement to a bench of five judges.

The Constitution Bench in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.⁶ ("N N Global 2") answered the reference. By a majority of 3:2, it was held that N N Global 1 (supra) does not represent the correct position of law. The majority judgement upheld SMS Tea Estates (supra) and Garware Wall Ropes (supra) and held the following:

(a) An unstamped instrument containing an arbitration agreement is void under Section 2(g) of the Contract Act;
(b) An unstamped instrument, not being a contract and not enforceable in law, cannot exist in law. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped;
(c) The "existence" of an arbitration agreement contemplated under Section 11(6A) of the Arbitration Act is not merely a facial existence or existence in fact, but also "existence in law";
(d) The Court acting under Section 11 of the Arbitration Act cannot disregard the mandate of Sections 33 and 35 of the Stamp Act requiring it to examine and impound an unstamped or insufficiently stamped instrument; and
(e) The certified copy of an arbitration agreement must clearly indicate the stamp duty paid.

In the present reference before the seven judge bench of the Supreme Court, the petitioners broadly contended that N N Global 2 (supra) does not lay down the correct position of law. The respondents submitted that N N Global 2 (supra) is correct and is in line with the consistent position adopted in SMS Tea Estates (supra) and Garware Wall Ropes (supra), which ought not to be disturbed.

Observations of the Supreme Court on N N Global 2

The Supreme Court made the following notable observations with respect to the judgment in N N Global 2:

(a) The observations in N N Global 2 conflates the distinction between enforceability and admissibility. It was discussed that the essence of the difference between voidness and admissibility is that when an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the court may consider or rely upon it while adjudicating the case. Section 35 of the Stamp Act renders a document inadmissible and not void.

(b) The decision of the majority in N N Global 2 (supra) assumes that the inadmissibility of the document in evidence renders it unenforceable. However, the effect of the principle of competence-competence is that the arbitral tribunal is vested with the power and authority to determine its enforceability. The question of enforceability survives, pending the curing of the defect which renders the instrument inadmissible. By appointing a tribunal or its members, courts are merely giving effect to the principle enshrined in Section 16 of the Arbitration Act. The appointment of an arbitral tribunal does not necessarily mean that the agreement in which the arbitration clause is contained as well as the arbitration agreement itself are enforceable and the arbitral tribunal will answer these questions.

(c) In N N Global 2, it was held that the failure to stamp an arbitration agreement is not a "curable defect." Relying on the provisions of the Contract Act as well as Section 11(6-A) of the Arbitration Act, it was further held that an unstamped arbitration agreement is void, which observation is not correct. This is because Section 2(j) of the Contract Act provides that "a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable" and Section 2(j) is not attracted when an instrument is rendered inadmissible under Section 35 of the Stamp Act.

(d) The concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement. The Supreme Court noted that the legal position in N N Global 2 is contrary to the separability presumption which treats an arbitration agreement as separate from underlying contract.

Holding of the Supreme Court

The decision in N N Global 2 (supra) and SMS Tea Estates (supra) were overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) were also overruled to that extent.

The Supreme Court held the following:

(a) Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
(b) Non-stamping or inadequate stamping is a curable defect;
(c) An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists; and
(d) Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal.

This landmark judgment has provided much needed clarity on the fate of unstamped arbitration agreements and resolved the prevailing inconsistencies in the judgments rendered by various courts. The Supreme Court's decision encapsulates the spirit of the Arbitration Act which aims to limit the judicial intervention of courts in the arbitral process.

Footnotes

1 In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020.

2 (2011) 14 SCC 66.

3 (2019) 9 SCC 209.

4 (2021) 2 SCC 1.

5 (2021) 4 SCC 379.

6 (2023) 7 SCC 1.

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