Introduction
Expeditious and efficacious dispute resolution is essential for creating a business-friendly environment. In its 246th Report, the Law Commission of India observed an emerging trend towards judicial intervention in arbitration. To tackle the same and make India a pro-arbitration jurisdiction, it was recommended to amend the Arbitration and Conciliation Act, 1996 (Arbitration Act). Keeping in view the recommendations and the increasing trend of arbitration, the legislature in 2015 amended the Arbitration Act (Amendment). One of the key features of the Amendment is a paradigm shift towards limited judicial intervention, thereby making arbitration an expeditious dispute resolution mechanism.
Accordingly, post the Amendment, India witnessed a trend in pro-arbitration decisions with the catchphrase being “when in doubt, do refer (to arbitration)”. However, the recent decision of the constitution bench of the Supreme Court in N.N. Global Mercantile Pvt. Ltd. v. M/s Indo Unique Flame Ltd. & Ors. (NN Global Decision) appears to be a deviation from the above-stated object. In the NN Global Decision, the Supreme Court increased the scope of judicial scrutiny of an arbitration agreement by the referring court / authority (Court) at the pre-referral stage.
Background
In early 2021, a three-judge bench in N.N. Global Mercantile Pvt. Ltd. v. M/s Indo Unique Flame Ltd. & Ors. (erstwhile NN Global) referred the question of whether an arbitration agreement contained in an unstamped principal agreement is enforceable to a larger constitution bench. On 25 April 2023, the larger constitution bench, in 3:2 majority answered the question in the negative and held that the principal agreement containing the arbitration provision must be sufficiently stamped prior to initiation of arbitration.
The question regarding stamp duty may arise before three forums after disputes have arisen between the parties:
(i) Before the Court: where parties fail to mutually decide on an arbitral tribunal and approach the appropriate Court to appoint the same.
(ii) Before the Court: where a party institutes proceedings before a Court and the counterparty seeks reference of the dispute to arbitration.
(iii) Before the arbitral tribunal: where parties mutually agree on an arbitral tribunal, the arbitral tribunal so appointed will consider the issue.
In scenario (iii) above, the Court is not involved, and the arbitral tribunal will require the parties to sufficiently stamp the principal agreement before proceeding further. However, the controversy regarding judicial intervention arises for the purposes of Courts involved in scenario (i) and (ii) above i.e., during pre-referral stage.
Prior to the Amendment, Courts had wide powers at pre-referral stage. As per the decision of the Supreme Court in SBP and Co. v. Patel Engg. Ltd. (SBP and Co.), the Courts could look into the validity of the arbitration agreement. At that time, the Courts were empowered to determine threshold issues such as whether the claim was time-barred, or a stale claim, whether there was accord and satisfaction, etc. However, pursuant to the Amendment, all that the Courts are required to look at is whether an arbitration agreement exists, nothing more, nothing less. In this backdrop, the issue to be decided by the Supreme Court was whether at pre-referral stage, the Court is empowered to look into the question of sufficiency of stamp duty.
Previous stand of Indian Courts on arbitration clauses in an unstamped principal agreement
Prior to the decision in erstwhile NN Global, the Supreme Court considered the issue of validity of arbitration agreement when the principal agreement is unstamped / insufficiently stamped. In SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd. (SMS Tea) and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. (Garware), it was held that an agreement only becomes a contract if it is enforceable under law; however, if an agreement is unstamped / insufficiently stamped, it may not be as per relevant substantive laws i.e., stamp laws, and hence, unenforceable. Accordingly, an arbitration agreement contained in a principal agreement which is not stamped / insufficiently stamped would not exist since it is not enforceable.
The decision in SMS Tea dates back to 2012 i.e., prior to the Amendment. Thus, at that time, the Courts had the power to look into the sufficiency of stamp duty. However, during Garware, in 2017, the Supreme Court relied on SBP and Co. without taking into consideration the Amendment. It was held in Garware that an arbitration agreement contained in an unstamped principal agreement cannot be invoked and taken into evidence. The ratio in Garware was subsequently adopted by a three-judge bench in Vidya Drolia & Ors. v. Durga Trading Corporation (Vidya Drolia). Therefore, the decision in SMS Tea and Garware regarding enforceability of an arbitration agreement in an unstamped / insufficiently stamped principal agreement was considered to be settled until it came up for consideration in erstwhile NN Global.
Thereafter, in erstwhile NN Global, although the question was referred to a larger constitution bench, the Supreme Court disagreed with SMS Tea and Garware. The Supreme Court opined that the power of the Court at pre-referral stage is narrow and limited. It was observed that the arbitrator is fully competent to decide whether an arbitration agreement is sufficiently stamped by virtue of kompetenz-kompetenz. Therefore, it was held that reference should be made to arbitration even if the principal agreement is unstamped or insufficiently stamped. However, as both, erstwhile NN Global and Vidya Drolia were passed by three-judges’ bench, the issue of Court’s power to decide enforceability of arbitration agreement contained in unstamped / insufficiently stamped principal agreement was referred to a larger constitution bench, resulting in the recent NN Global Decision.
Held
The larger constitution bench in NN Global Decision disagreed with the view of the three-judge bench in erstwhile NN Global. In fact, the Supreme Court while agreeing with SMS Tea and Garware made the following observations under each of the Acts mentioned:
(i) Stamp Act, 1899 (“Stamp Act”)
It was recognised that while the Stamp Act is a fiscal enactment to book revenue, it is substantive law which must be adhered to by parties. Therefore, a document which is non-compliant with substantive laws such as Stamp Act will be unenforceable.
Moreover, as per the scheme of the Stamp Act, a document that is not duly stamped cannot be admitted to evidence.
Keeping in view the above position, the Supreme Court in NN Global Decision held that where the document is unstamped or insufficiently stamped, the State will not extend its protection or enforce the rights and obligations of parties under that document.
(ii) Contract Act, 1872 (“Contract Act”)
Under the Arbitration Act, an arbitration agreement must comply with the Contract Act in order to be valid. Moreover, as per section 2(h) of the Contract Act, only an agreement enforceable under law is a contract. However, since an unstamped / insufficiently stamped agreement is violative of substantive laws (i.e., Stamp Act), it is said to be unenforceable and hence, void.
Accordingly, an arbitration agreement contained in an unstamped / insufficiently stamped document cannot be said to be valid in the absence of a valid principal contract.
(iii) Arbitration Act
While the Supreme Court in NN Global Decision acknowledged the object of minimal judicial intervention and the principle of kompetenz – kompetenz, it was held that the application of the same leads to contravention of mandatory substantive provisions i.e., of the Stamp Act. Therefore, such principles cannot be relied upon.
Citing the above, the Supreme court in NN Global Decision held that unstamped / insufficiently stamped document is void and invalid until the defect is cured by impounding and paying sufficient stamp duty. Therefore, an arbitration agreement being part of such a document will be unenforceable till the document is duly impounded.
Consequences
As mentioned above, the Supreme Court in NN Global Decision answered whether an arbitration agreement in an unstamped / insufficiently stamped contract is enforceable in context of Courts’ powers during pre-referral stage. However, the question whether parties will be able to seek interim reliefs from the Courts under Section 9 of the Arbitration Act in such a situation is left open. It must be taken into account that interim reliefs are usually in anticipation, to seek urgent protection against the other party. In the event the Court decides to look into the question of sufficiency of stamp duty at interim relief stage, the purpose of interim reliefs will be defeated. Moreover, a party against whom interim reliefs are asked may raise the issue of sufficiency of stamp duty as dilatory tactics.
Apart from the above, it appears that unless a document is sufficiently stamped, the Courts will neither assist the parties to enforce their rights and obligations nor appoint an arbitrator under the principal agreement.
Our thoughts
The NN Global Decision comes as an alarm for parties entering into commercial contracts. In the aftermath of this decision, it is recommended the parties must make a conscious effort to ensure that an agreement is sufficiently stamped. As a consequence of the decision, counterparties will now raise objections regarding stamping of principal agreement at a belated stage as dilatory tactics to prevent arbitrations. In order to avoid the same and save time and effort, it may be helpful that parties mutually agree on the payable stamp duty as per applicable law during negotiation process itself and ensure that the same is paid at the time of execution of the agreement.
It should be noted that while payment of stamp duty is now a prerequisite for initiating arbitrations, stamp duty is also required to be paid on an arbitral award. In order to ensure enforcement, it is recommended that sufficient stamp duty is paid on the award since it is not uncommon for award debtors to raise objections in this regard to evade obligations under the award.
It appears that while the Amendment aimed to limit court intervention for appointment of an arbitrator, the NN Global Decision has re-opened the door for potential challenges at the pre-referral stage. At this juncture, it remains uncertain if similar scrutiny will apply to parties seeking interim measures under Section 9 of the Arbitration Act. Moreover, in the opinion of the authors, the decision seems to blur the underlying objective of the Arbitration Act i.e., minimal judicial intervention and expeditious disposal.
The authors are of the view that given the pro-arbitration narrative of the Government of India, a legislative amendment or a review / revision clarifying the position of arbitration on insufficiently stamped agreement is the need of the hour.
Authors: Renjith Nair, Altamash Qureshi and Richa Phulwani
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