[By Swarnendu Chatterjee & Shreya Mittal]
The authors are Advocate-on-Record, Supreme Court of India and a student at National Law Institute University, Bhopal respectively.
Abstract: By a judgement dated December 13, 2023, a seven-judge bench of the Supreme Court in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, unanimously decided on the issue surrounding the admissibility of unstamped or insufficiently stamped instrument in evidence. By overruling the five-judge bench verdict in NN Global Mercantile Private Limited v. Indo Unique Flame Limited, the Court held that an unstamped or insufficiently stamped instrument would be inadmissible in evidence, however, the same is a curable defect and that in itself does not make the agreement void or unenforceable. In this case comment, we discuss the facts and view of the seven-judge bench verdict and critically analyze this decision and its impact while delving into the conflicting reasoning of previous judgements. The comment sheds light on the various key aspects discussed by the Supreme Court such as the distinction between admissibility and voidness, doctrine of arbitral autonomy, and the harmonious construction of the three statutes. Finally, the comment observes that even though the judgement promotes arbitration friendly regime in the country, it leaves room for further discussion.
I. INTRODUCTION
On December 13, 2023 the Supreme Court of India (“Supreme Court”) delivered the judgement In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899[1] (“the Judgement”). The Court laid to rest the long standing quandary of whether arbitration agreements would become non-existent, unenforceable, or invalid if the underlying contract is unstamped or under-stamped.Theseven-judge bench led by CJI D. Y. Chandrachud delivered its verdict to over-rule the law laid down inM/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd And Ors[2](“N N Global 2”).
The issue arose in the context of three Statutes – the Arbitration and Conciliation Act 1996[3](“the Arbitration Act”), the Indian Stamp Act 1899[4] (“the Stamp Act”), and the Indian Contract Act 1872[5] (“the Contract Act”). On one hand, the quandary revolving around the enforceability of unstamped agreements has been a long-standing issue.On the other hand,Arbitration is a fast-emerging alternate dispute resolution mechanism.Unstamped or under-stamped arbitration agreements have,therefore,become a matter of exploration by the Courts in India. The conflicting decisions on this issue have been laid to rest by the Supreme Court.
II. BACKGROUND
The controversy began with the decision by the Supreme Court in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[6](“N N Global 1”),where Special Leave of the Court invokedto determine the enforceability of an arbitration agreement contained in an unstamped work order.It was observedthatthe arbitration agreements are separate and distinct from the underlying commercial contract and would not be rendered invalid, unenforceable, or non-existent by virtue of unstamping or under-stamping of the principal contract. The non-payment of stamp dutybeing a curable defect would not invalidate even the underlying contract. This was an important juncture in the series of cases as the view taken by the Supreme Court was at variance with previous decisions rendered by the Supreme Court.
Relying on the decision in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd,[7](“SMS Tea Estates”), where the Court held that an arbitration agreement in an unstamped contract could not be acted upon, the Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd[8] (“Garware Wall Ropes”)was of the opinion 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. This was further fortified in the three-judge bench verdict of Vidya Drolia v. Durga Trading Corporation,[9]where the Court observed that an arbitration agreement exists only when it is valid and legal, thereby arbitration agreements must satisfy requirements of both the Arbitration Act and the Contract Act.
However, N N Global 1 doubted the correctness of this position of law and referred the question of applicability of the statutory bar on arbitration agreement contained in an instrument, where the payment of stamp duty was pending,to a five judge bench which decided the matter in the case of N N Global 2. The court in N N Global 2 observed that the position of law given in N N Global 1 was not correct and reiterated the position of law as decided in SMS Tea Estates and Garware Wall Ropes.
The majority judgement in N N Global 2 may be summarized as under:
- In accordance with Section 2(g) of the Indian Contract Act, 1872 an instrument lacking proper stamp duty and incorporating an arbitration agreement is rendered void.
- An instrument devoid of proper stamping, not constituting a contract and lacking legal enforceability, is non-existent in the eyes of the law. The arbitration agreement contained therein can only be given effect subsequent to its appropriate stamping;
- The conceptualization of the “existence” of an arbitration agreement as contemplated in Section 11(6A) of the Arbitration Act transcends mere facial or factual existence and encompasses a requisite “existence in law”;
- A tribunal operating pursuant to Section 11 of the Arbitration Act is precluded from overlooking the imperatives delineated in Sections 33 and 35 of the Stamp Act, mandating thorough scrutiny and impounding of instruments lacking proper stamping;
- The authenticated copy of an arbitration agreement must transparently delineate the discharge of the stipulated stamp duty.
In Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers,[10](“Bhaskar Raju”) the court cited SMS Tea Estates with approval. Bhaskar Raju was decided before N N Global 1. On 7 December 2022, a curative petition was filed seeking a reconsideration of Bhaskar Raju. On 26 September 2023, a Bench of five judges took up the curative petition. Considering the larger ramifications and consequences of the decision in N N Global 2, the Court referred the proceedings to a seven-Judge Bench. Hence, the Supreme Court in the Judgement considered the correctness of the view adopted in N N Global 2 as well as other ancillary issues.
III. THE VERDICT OF THE SUPREME COURT
By virtue of the judgement, the Supreme Court laid down numerous important precedents in relation to arbitration agreements. The decision was based upon specific foundational tenets of the Arbitration Act. This note delineates the said foundational principles and briefly summarizes the said Judgment vis-à-vis each of the aforementioned issues.
A. There is a difference between Admissibility and Voidness
The majority judgement in N N Global 2 observed that an unstamped or insufficiently stamped agreement is not enforceable as long as it remains in the said condition. It is void as being not enforceable. The Judgement in the present case held this observation as a conflation of the distinction between enforceability and admissibility.
The enforceability of an agreement is distinct from its admissibility as evidence in a court of law. Enforceability rather refers to its existence in law whereas admissibility means whether or not the court should consider or rely upon it while adjudicating a case. The Judgement in this case brings out this distinction through a perusal of the relevant sections of the Indian Stamps Act, 1899 and the Indian Contract Act, 1872.
The main purpose of the Indian Stamp Act, 1899 is to generate revenue for the government. The Court observes that the Act does not render an unstamped or under-stamped agreement to be void rather it renders it inadmissible in a court of law.[11] The act of non-stamping has been classified as a curable defect, that is, a defect that can be cured through proper stamping of the agreements.[12] Section 35 of the Indian Stamp Act, 1899 speaks about improper stamping or non-stamping of the agreements, however, it does not render the contract void-ab-initio. It only has the effect of contract inadmissible as evidence which becomes admissible once the proper stamping procedure is followed.
This Court arrived at a similar conclusion in Hindustan Steel Ltd. v. Dilip Construction Co.,[13], where it observed that the purpose of the Indian Stamp Act, 1899 was to generate revenue and the provisions of the statute must be interpreted in the same light. The relevant provisions provide that the instrument may be acted upon and may be admissible in evidence on payment of proper stamp duty.
The author discusses the other two aspects of the judgement and the conclusion in Part – II of this Blog.
[1]In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, 2023 SCC OnLine SC 1666.
[2]M/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd And Ors, (2023) 7 SCC 1.
[3] The Arbitration and Conciliation Act, 1996.
[4] The Indian Stamp Act, 1899.
[5] The Indian Contract Act, 1872.
[6]N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd, (2021) 4 SCC 379.
[7]SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd, (2011) 14 SCC 66.
[8]Garware Wall Ropes Ltd. v. Coastal Marine Constructions &Engg. Ltd, (2019) 9 SCC 209.
[9]Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.
[10]Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju, (2020) 4 SCC 612.
[11]Mohit Rohatgi, Samriddhi Shukla, ‘Supreme Court of India: An unstamped or insufficiently stamped arbitration agreement is not void or unenforceable’, Trilegal Updates < chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://trilegal.com/wp-content/uploads/2023/12/Trilegal-Update_Supreme-Court-An-unstamped-or-insufficiently-stamped-arbitration-agreement-is-not-void-or-unenforceable.pdf >.
[12]Praseem Patel, ‘From “Unenforceable” to “Curable Defect”: Unpacking the Nexus Between Unstamped Contracts and Arbitration Agreements’, CCL NLUO <https://www.ccl.nluo.ac.in/post/from-unenforceable-to-curable-defect-unpacking-the-nexus-between-unstamped-contracts-and-arbitr >.
[13]Hindustan Steel Ltd. v Dilip Construction Co., (1969) 1 SCC 597.