SUPREME COURT JUDGEMENT ON UNSTAMPED ARBITRATION AGREEMENTS

INTRODUCTION

The Supreme Court case of N.N. Global Mercantile Pvt Ltd. v. Indo Unique Flame Ltd. was decided in 2023. In this case of N.N. Global Mercantile Pvt Ltd. V. Indo Unique Flame Ltd., 2023 the non-admissibility of an unstamped arbitration agreement has been challenged. It was declared by a 5-judge Constitution Bench, having a 3-2 majority that an arbitration agreement is not admissible or enforceable if the agreement is not duly stamped or is insufficiently stamped.

As per the 2015 Amendment to the Arbitration and Conciliation Act, 1996, the High courts and Supreme courts are only to decide on the appointment of an arbitrator in case the parties fail to decide themselves and to confirm the existence of an arbitration agreement. However, it has been a challenge to decide what constitutes a valid arbitration agreement and to prove its validity and existence. The question of validity also comes into place if the parties haven’t paid stamp duty on the agreements.

This existence of an arbitration agreement, if stamp duty is not paid, has been questioned in various cases -

1. Tea Estate Pvt. Ltd. V Chandmari Tea Company Pvt. Ltd.- It was held that an unstamped arbitration agreement will not be enforceable. The court also laid down various procedures that are to be followed in case of unstamped agreement as per the scheme of the Indian stamp act.

2. Garware Wall Ropes Ltd. V. Coastal Maring Constructions and Engineering. Ltd- It was held by the Supreme Court that after the amendment and introduction of section 11[6A] in the Arbitration Act, it is pertinent to note that since unstamped agreements aren’t enforceable as decided in the SMS tea estate case, even the arbitration agreement won’t be considered as enforceable.

3. Vidya Drolia V. Durga Trading Corporation- The Garware decision was agreed with by the 3-bench judge in this case and stated that an arbitration agreement would not exist or be valid if it is illegal and if any of the compulsory legal requirements are not fulfilled, one of them being payment of stamp duty.

Facts of the Case- N.N. Global Mercantile Pvt Ltd. V. Indo Unique Flame Ltd., 2023

The respondent was granted a work order in the present civil appeal and therefore came into a subcontract with the appellant which contains an arbitration clause. There were disputes arising between the respondent and the appellant due to which the respondent invoked the bank guarantee furnished to it by the appellant in the said work order. The appellant thus filed a suit against the invocation of the bank guarantee but the respondent as per section 8 of the Arbitration Act applied to the court seeking to refer the said dispute to arbitration as the arbitration clause was mentioned in the contract between the parties. This application was rejected by the Commercial Court. The respondent thus filed a writ petition in the Bombay High Court which stated that since the subcontract was unstamped it would be unenforceable, The Bombay High Court allowed the said writ petition.

Consequently, when the appeal was filed in the Supreme Court by the Appellant claiming that the agreement was unstamped and thus unenforceable, a 5-judge bench was referred to settle this question of the validity of unstamped agreements that has been going on for a long time period. Since there was a 3:2 majority, there were 2 different opinions.

Majority ruling

It was considered that the decision, which was established in the SMS tea estates, the Garwar case and then the Vidya Drolia case was correct in their ruling and thus the majority 3 judges in the present appeal approved their reasoning.

It was stated that according to section 2(g) of the Indian Contract Act, of 1872, any unstamped contract or agreement would not be valid and enforceable.

It was decided that the Hon’ble Supreme Court will not refer the parties to arbitration if the arbitration agreement is not duly stamped. The Supreme Court also highlighted section 33 of the Indian Stamp Act, 1899 that the court is obligated to take legal possession of unstamped agreement and declare it invalid if such agreements are used for evidence.

To consider an agreement to be valid, are stamp duty and penalties must be fully paid as per section 42 of the Indian Stamp Act.

Thus, the majority of 3 ruled that for an arbitration agreement to be enforced and valid, the stamp duty should be paid.

Minority Ruling

The 2 judges did not approve the decision and view taken in the SMS tea case and the Garwarew case and stated that by the introduction of section 11(6A) of the Arbitration Act, it was understood the arbitration agreements that are provided in between a proceeding under section 11 of the act should be enforced even if the stamp duty on it is not paid and that Arbitration matters were for speedy disposal of the cases and such judicial intervention would beat the purpose and delay the time. They further stated the non-payment of the stamp duty should not affect the enforceability and the validity of an agreement and that such questions relating to whether stamp duty is required or payment of such can be decided by the arbitrator itself as the arbitrator has the power to decide its jurisdiction as per section 16 of the Arbitration Act and should not require judicial intervention leading to stalling in cases.

CONCLUSION

After Supreme Court went back and forth to decide the enforceability of an unstamped agreement, while there were contradicting views by the judges, this issue was finally settled by the Supreme Court of India in a 3:2 majority. Since this judgment didn’t deal with section 9 of the Arbitration Act which is interim reliefs and with sections 34 and 36 of the Act which deal with the enforcement of the arbitral award, such question of laws can lead to a delay in any arbitral proceeding in the future, so to avoid such delays it is advisable for all the parties having an arbitration agreement to duly stamp it. The minority judgement had its finger accurately pointed at the fact that matters like stamping could easily be left for the arbitrator to decide as requiring the Stamp Duty at the appointment stage defeats the purpose of the Arbitration Act. Ultimately, payment of stamp duty is a must for the arbitration agreement to be valid.

REFERENCES

1. SMS Tea Estates v. Chandmari Tea Co.,(2011) 14 SCC 66 (SMS Tea Estates)

2. Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., (2019) 4 SCC (Civ.) 324 (Garware)

3. Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 (Vidya Drolia)

4. N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495

~Authored by Nandini Agarwal