The Supreme Court of India in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors.[1] recently decided upon a crucial issue of validity of an unstamped arbitration agreement. The five judge bench by 3:2 majority held that “an instrument which is exigible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act.”.
Brief Facts and Procedural History
The parties to the dispute had entered into a sub-contract containing an arbitration clause. Due issues in performance of the sub-contract, the respondent invoked the bank guarantee provided by the petitioner. Petitioner challenged the invocation of the bank guarantee by filing a suit before the court, which was challenged by the respondent by filing of application under Section 8 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) seeking referral of the disputes to arbitration.
The key issue arose before the Bombay High Court when the contention was raised by the Petitioner that the arbitration clause under the sub-contract was not enforceable as the sub-contract was unregistered and unstamped. The High Court in its ruling noted that such an issue challenging validity of arbitration agreement basis lack of stamping can be raised in before the High Court under Section 11 Application or before the Arbitral Tribunal. This was further challenged before the Apex Court wherein three judge bench observed that the view held in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co Pvt. Ltd.[2] and Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering[3] that non-payment of stamp duty on the commercial contract would make the arbitration agreement invalid and unenforceable in law, is not the correct legal position.
Since the decision of Garware Wall Ropes Limited was already affirmed by Vidya Drolia and Ors. v. Durga Trading Corporation[4], which was decided by a coordinate Bench, the issue was thus referred to constitution bench (five judge bench) of the Supreme Court for it to be authoritatively settled.
Analysis by the Constitution Bench
The bench extensively considered the provisions of the Indian Stamp Act, 1899 (“Stamp Act”) and the Indian Contract Act to understand the scheme and objective of the Act in order to render a decision which fits the intention of the legislature.
The bench analysed the decision of Hindustan Steel Ltd. v. Dilip Construction Co.[5] and noted that the decision failed to consider the requirements under Section 17 of the Stamp Act which prescribes for the precise time, at which an instrument is to be stamped, the bench also looked at Section 62 of the Stamp Act puts penalty on breach of Section 17.
The majority decision rendered by the court opined that the Court acting under Section 11 of the A&C Act is duty bound to act under Section 33 of the Stamp Act. The court further also went on to state that an unstamped or insufficiently stamped arbitration agreement under section 7 of the A&C Act, which attracts stamp duty, cannot be acted upon, in view of Section 35 of the Stamp Act. In both the above scenarios before the court or tribunal could act on the agreement, it is necessary for the party to make payment of the requisite duty and produce the certificate under the Stamp Act.
The court also analysed the intention of amendment and insertion of section 11 (6A) in the A&C Act. The court held that under section 11 the court’s power is not limited to just ascertaining the existence of arbitration agreement, it in fact permits the court to call for an original agreement or a certified copy, and if the certified copy does not indicate that stamp duty has been paid, court is not required to act.
The majority decision of the constitution bench thus went on to held that decision of SMS Tea Estates (P) Ltd, as followed in Garware Wall Ropes Ltd. and Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju & Bros.[6] on the implication of an unstamped agreement containing an arbitration agreement is correct.
Takeaway
While the approach taken by the Apex court is basis due consideration of the fiscal legislation i.e. the Indian Stamp Act, 1899, and leads to stronger enforcement of the Act. However, the requisite of stamping creates an additional obligation, especially upon foreign parties looking to use Indian arbitral institutions, as they will be required to take an additional step of compliance with state revenue departments which may lead to delays and additional costs for the parties. This judgement also poses a challenge for international trade contracts, wherein unsigned agreements are entered by means of email exchange, for example- fixture recaps entered in shipping industry often contain arbitration clauses, and such unsigned fixtures exchanged over emails have been considered valid and enforceable agreements as per the Indian Court.[7]
[1] CIVIL APPEAL NO(S). 3802-3803 OF 2020
[2] (2011) 14 SCC 66
[3] (2019) 9 SCC 209
[4] (2021) 2 SCC 1
[5] (1969) 1 SCC 597
[6] (2020) 4 SCC 612
[7] Shakti Bhog Foods Limited v. Kola Shipping Limited (2009) 2 SCC 134
