Non-payment of stamp duty does not invalidate an arbitration agreement

In N.N. Global Mercantile Pvt. Ltd. v M/s Indo Unique Flame Ltd. & Ors, the Supreme Court initially ruled that an unstamped arbitration agreement is separate from the underlying contract, and the lack of stamp duty is a curable defect. However, on April 25, 2023, a five-judge Constitution Bench, in a 3:2 majority, held that an unstamped arbitration agreement is void and unenforceable (hereinafter referred to as N.N Global 2). The majority emphasized that the arbitration agreement cannot be detached from the main contract, making the arbitration clause invalid if stamp duty is unpaid on the main contract. Owing to the substantial implications of the case, a five-judge bench, on September 26, 2023, agreed to review the decision, leading to the case being referred to a seven-judge bench for further consideration. The primary issue for consideration by the seven-judge bench was whether arbitration agreements become non-existent, unenforceable, or invalid when the underlying contract is not stamped.

Arguments of the parties

The petitioners challenged the N.N. Global 2 decision, citing the limited authority under Section 11(6A) of the Arbitration Act, which implied that the court’s role was to establish the existence, not the validity, of an arbitration agreement. The petitioner argued that the lack of stamping was a “curable defect” and should not render the arbitration agreement invalid. The petitioners emphasised the autonomy of an arbitration clause meaning that an invalid contract doesn’t automatically invalidate the arbitration agreement.

The respondents claimed that the five-judge bench in N.N. Global 2 was right to declare that an unstamped arbitration was void. They asserted that the examination by the court under Section 11(6A) of the Arbitration Act is not restricted to identifying the existence of an arbitration agreement.

They argued that an unstamped arbitration agreement is unenforceable and void. In addition, an arbitration clause is not independent and cannot be severed from the main contract.

Decision and analysis

The Supreme Court held that non-payment of stamp duty is a curable defect and unstamped contracts, though inadmissible as evidence, do not invalidate arbitration agreements.

The Supreme Court stated that Section 35 of the Stamp Act renders an instrument that is not duly stamped inadmissible in evidence but does not make the underlying agreement unenforceable or void. The Stamp Act, which is designed to safeguard revenue, provides a remedy for this lapse through Section 38, allowing payment of penalties to rectify the defect.

Emphasizing the pivotal role of the separability doctrine in arbitration law, which aligns with international norms observed in the UK, USA, Singapore, and the New York Convention, the court held that the autonomy of an arbitration agreement means that it is insulated from the flaws of the main contract. It empowers an arbitral tribunal to ascertain its own jurisdiction, thereby ensuring continuity even after termination of the underlying contract.

While the competence-competence doctrine enables a tribunal to adjudicate substantive issues encompassing the existence and validity of the arbitration agreement, it discourages courts from entertaining challenges to tribunal jurisdiction until arbitrators address them. Courts are limited to a prima facie examination of the existence of an arbitration agreement, and issues related to stamp duty fall outside the scope of a prima facie assessment.

The court recognised the supremacy of the Arbitration Act over conflicting provisions in general laws, and the principle that a specific law prevails over a general one. In this context, the Arbitration Act’s status as a specialized law prevails over the Contract Act and Stamp Act, which are general laws.

Arbitrators, not courts, therefore should assess the validity of contracts and arbitration agreements, with the Arbitration Act prevailing over conflicting laws.

In reaching its conclusion, the court overturned the decisions in NN Global 2, SMS Tea Estates v Chandmari Tea Co., and Garware Wall Ropes v Coastal Marine Construction & Engineering Ltd.



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