This is an article prepared by Krishna Venkat (Partner) and Harshi Baldota (Paralegal).

The discussion here revolves on the judgement of the Supreme Court of India in the case of N.N. Global Mercantile Private Limited versus Indo Unique Flame Limited & Others.

Background of the case:

On April 25, 2023, a 5-judge bench of the Supreme Court, in N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited and Others (“N.N. Global 2”) (MANU/SC/0445/2023), received a reference from a 3-judge bench of the same court. The question was of the validity of an arbitration agreement found in an unstamped document. The 5-judge bench’s ruling has now settled this important legal question: Is an arbitration clause rendered invalid and unenforceable under the law if the main contract, which includes the arbitration clause, is not properly stamped according to the applicable stamp duty laws?

In the same case, on January 11, 2021, a panel of 3 judges in the Supreme Court examined this legal question (“N.N. Global 1”) (MANU/SC/0014/2021). The Supreme Court held that an arbitration agreement should be treated as a separate and independent agreement, distinct from the underlying commercial contract in which it is embedded. This perspective is based on the principle of severability which asserts that when parties enter into a commercial contract containing an arbitration clause, they are essentially entering into two distinct agreements: (i) the substantive contract, which outlines their rights and obligations arising from the transaction and (ii) the arbitration agreement, which establishes the binding obligation of the parties to resolve disputes through arbitration.
Moreover, the Supreme Court emphasized on the principle of kompetenz – kompetenz, as provided under section 16(1) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), affirming that the arbitral tribunal alone has the authority to decide on its jurisdiction, including matters related to the existence, validity and scope of the arbitration agreement. However, the findings in this judgement were not aligned with the previous case laws on the same issue.
Previous judgments on the issue:
In 2011, in the case of SMS Tea Estates Private Ltd v Chandmari Tea Company Private Ltd (“SMS Tea Case”) (MANU/SC/0836/2011), the Supreme Court addressed the issue of unstamped agreements and concluded that such agreements cannot be legally acted upon unless the required stamp duty and penalty are paid. Therefore, the court cannot enforce the arbitration agreement contained within an unstamped substantive agreement or instrument.
Basis the above ruling, the case of Garware Wall Ropes Ltd v Coastal Marine Construction & Engineering Ltd. (“Garware Case”) (MANU/SC/0511/2019) reaffirmed the position that an arbitration agreement within an unstamped agreement cannot be presented as evidence and, therefore, cannot be invoked. However, there was a consensus that such deficiency can be remedied by payment of the
applicable stamp duty and the invocation can thereafter be proceeded with. This finding however would result in delay of appointment of arbitrators leading to delay in the proceedings.

In the subsequent case of Vidya Drolia and Ors. v Durga Trading Corporation and Ors. (“Vidya Drolia Case”) (MANU/SC/0939/2020), another Supreme Court bench chose to adhere to the ruling in Garware Case noting that a party cannot sue and claim rights based on a document which is unenforceable on account of stamp duty not duly paid.

Overturning the previous position of law established in the above mentioned cases, the 3-judge bench in N.N. Global 1 held that an arbitration agreement, being an independent agreement, the arbitration clause will not be invalidated or be rendered unenforceable because of non-payment of stamp duty.

Additionally, the 3-judge bench propounded certain guidelines with respect to unstamped documents at the pre-reference stage. The Court has created a distinction between the applications made under Section 9 and Section 11 of the Arbitration Act. If an application for urgent interim reliefs is filed under Section 9 before the Court, and if the substantive contract is not duly stamped, the Court would first grant ad-interim relief to safeguard the subject-matter of the arbitration. However, the substantive contract would then be impounded, and the concerned party will be directed to take the necessary steps for payment of the requisite stamp duty in accordance with the provisions of the relevant stamp duty laws, within a time-bound period.

However, the court stated that it could not hold the position laid down in Garware Case, which has also been affirmed in Vidya Drolia Case by a coordinate bench, as per incuriam and hence referred this question to be determined by a constitutional bench of 5 Judges. We have summarised the following crucial judgements in the table below:

Matter Date of Order Key Findings
SMS Tea Case July 20, 2011 Arbitration agreement contained in an unstamped substantive agreement cannot be acted upon unless the stamp duty/ penalty due on that instrument is paid.
Garware Case April 10, 2019 Non-payment of stamp duty is a curable defect, and to proceed with the applications under section 11 of the Arbitration Act, stamp duty and penalty are to be paid on the instrument.
Vidya Drolia Case December 14, 2020 Affirmed the findings in the Garware Case with respect to due payment of stamp duty to make a contract enforceable.
N.N. Global 1 January 11, 2021 Arbitration agreement is a distinct and separate agreement which is independent from the underlying commercial contract in which it may be embedded and hence non-payment of the stamp duty will not invalidate the arbitration agreement. The decision also states that, for applications under section 9 of the Arbitration Act, the courts would first have to grant ad-interim reliefs and then impound the instrument for payment of requisite stamp duty.

Majority Decision of the Constitution Bench:

In the case of N.N. Global 2, the Supreme Court referred to the decision in Hindustan Steel Ltd. v. Dilip Construction Co. (MANU/SC/0474/1969) to extract the general principles regarding the stamping of instruments. It emphasized that the Indian Stamp Act, 1899 (“Stamp Act”) serves as a fiscal measure aimed at generating revenue, and courts have a duty to interpret the law in a manner that
upholds its enforcement rather than allowing its violation.

However, it held that if an instrument which is required to be stamped and which contains an arbitration clause is not stamped, it cannot be said to be a contract enforceable in law within the meaning of section 2(h) of the Indian Contract Act, 1872 and is not enforceable under section 2(g) of that act. It was further noted that an unstamped instrument is subject to mandatory impounding under section 33 of the Stamp Act, and it becomes enforceable or actionable under the law only upon the payment of the prescribed penalty. Section 35 of the Stamp Act prohibits the admission of an unstamped or inadequately stamped instrument as evidence for any purpose. In essence, such instruments cannot be utilized as evidence in a court of law in any circumstance. One may further note that the order is silent on the applications made under section 9 of the Arbitration Act, which governs applications for granting urgent interim reliefs.

This landmark judgement will go a long way in clarifying the necessities of paying stamp duty under the relevant stamp duty laws. This ruling specifies the requirement of duly paid stamp duty in agreements, thereby leading to generation of funds for the government, as it would render such agreements unenforceable otherwise.


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