Don’t Be Stamped Out: Unstamped Arbitration Agreement Becomes Invalid

The Supreme Court of India over the past years, has not been inclined to enforce an unstamped arbitration agreements. In case relating to invocation of Arbitration clauses/ agreements and appointment of Arbitrators, the Courts have through its various judgments have applied the doctrine of separability^[3] and the principle of “Kompetenz-Kompetenz” in respect of Arbitration in India. The Courts have repeatedly held that Tribunal has the power to decide on its own jurisdiction and also upon the validity of the Arbitration Agreement.^[4] However, in view of conflicting opinions of the Supreme Court, a re-examination of the aspect of whether an unstamped arbitration agreement can be enforced by the Courts was referred to a Constitutional Bench of the Supreme Court of India.

It is important to analyse the timeline in relation to the requirement of the stamping of the Arbitration Clause/ Agreement and the ultimate decision of the Constitutional Bench of the Supreme Court^[5] regarding the validity of an unstamped arbitration agreement.

The NN Global Mercantile Private Limited v. Indo Unique Flame Limited ^[6] (N.N. Global 2023), examined the findings in the case of SMS Tea Estates Pvt Ltd v. Chandmari Tea Company Pvt. Ltd ^[7] (referred to as “SMS Tea Estates Judgement”), wherein the question of the enforceability of an unstamped arbitration agreement arose, and the Supreme Court held that upon examination, if an arbitration agreement is contained in an instrument that is not duly stamped, must be impounded till the deficit stamp duty is paid. Relying on the SMS Tea Estates Judgment, the Supreme Court in Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited ^[8] (referred to as “Garware Judgment”), forbade the appointment of an arbitrator based on an unstamped arbitration agreement. The Court held that a contract is valid when it is enforceable by law, and the court must first examine whether stamp duty had been paid or not. The view was further reaffirmed by a 3 Judge Bench of the Supreme Court in the case of Vidya Drolia v. Durga Trading Corporation^[9] (referred to as “Vidya Drolia Judgment”).

However, it was the case of NN Global Mercantile Private Limited v. Indo Unique Flame Limited ^[10] in the year 2021 (referred to as “N.N. Global 2021”), where the tables turned as the 3 Judge Bench of the Supreme Court reaffirming the separability doctrine^[11], and promoting a pro-arbitration regime and minimal judicial interference in India observed that the non-payment of stamp duty on the commercial contract would not invalidate the arbitration agreement, and render it non-existent in law. The court further held that it is a curable defect and mere non-payment/insufficient payment would not make the agreement unenforceable.

Since, the views pronounced by the respective 3-Judge Benches regarding the validity of an unstamped arbitration agreement in the Vidya Drolia Judgment and N.N. Global 2021 had differing views, the N.N. Global 2021 was referred to the Constitutional Bench of the Hon’ble Supreme Court on the below framing the following issue-

“Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”

Findings of the Constitutional Bench on Reference

While deliberating on the issue, the majority view of the Constitutional Bench of the Supreme Court after examination of the various judgments/precedents and the provisions of the Indian Arbitration and Conciliation Act 1996, the Stamp Act 1899, and the Indian Contract Act, 1872. The majority view, relying extensively on the Provisions of the Indian Contract Act, 1872 and Indian Stamp Act, 1899, concluded that an unstamped arbitration agreement is unenforceable for the following reasons-

1. The purpose of stamp duty, is in support of the measure of raising revenue and protecting the interests of the revenue of the State.^[12]
2. An unstamped instrument, when it is required to be stamped,^[13] being not a contract and not enforceable in law,^[14] cannot, therefore, exist in law.^[15] Thus, for the purpose of enforcement, an arbitration agreement is a contract which is required to be duly stamped.
3. Thus to determine its existence, a valid arbitration agreement, it should satisfy the statutory requirements of the Arbitration Act^[16] and the Stamp Act.^[17] The courts are duty bound to examine the existence of an arbitration agreement in the initial stages before the appointment of arbitrator. Even while producing a certified copy, it needs to show that the stamp duty has been paid on the original document. If the original document is found to be insufficiently stamped, the court must impound
   [18] it and cannot act upon it until sufficient stamp duty is paid by the defaulter along with the fine.^[19]

The court concluded that SMS Tea Estates Judgment, Garware Judgment and Vidya Drolia Judgment represented the correct position in law. The Hon’ble Court further concluded that to make an arbitration agreement enforceable under law it needs to satisfy the provisions of the Arbitration Act, the Contract Act and the Stamp Act. If the agreement is not sufficiently stamped, at the initial stage, the court has the power to impound it until it is sufficiently stamped.

Dissenting Opinion^[20]

While the majority of the Constitutional Bench relied on the enforcing the provisions of the Stamp Act, the dissenting judges emphasised on the frustration of the objective of the Arbitration and Conciliation Act, 1996 i.e., to avoid procedural complexity and the delay in litigation before Courts. The judges were also of the opinion that an unstamped arbitration agreement is merely a curable defect and could be resolved at a later stage instead of the threshold of the proceedings. They further emphasised on the promotion of the pro-arbitration stance of the Indian government and the need to avoid unnecessary judicial intervention in arbitration proceedings.

Position of International Jurisdictions with Respect to Unstamped Arbitration Agreements

Concerns over Potential Delays and Impact on Pro-Arbitration Regime in India

A bare perusal of the position on validity of an Unstamped Arbitration Agreement as depicted above shows that the courts in foreign jurisdictions have been inclined to uphold the validity of an arbitration agreements even when the contract in which the arbitration agreement is contained, is regarded as invalid for any reason. The countries all over the world are inclined towards reducing the burden of courts by promoting alternate methods of dispute resolution. In India, on the other hand, vide the recent law laid down in N.N. Global 2023, it seems that India is now moving in the opposite direction, as this judgment will multi fold increase the delay the issue of appointment of Arbitrators, and the resolution of disputes. The increased requirement of scrutiny at initial stages, will increase the judicial workload of the Courts and also be burden on the revenue authorities. The judgment will be an ally to such Parties who are interested in delaying the initiation of the arbitration, and will end up frustrating the purpose of inclusion of Arbitration Clauses/ agreements. The Supreme Court intervention at the initial stage, will have adverse bearing on the power of the arbitral tribunal to decide on its own jurisdiction and the also existence of the valid arbitration agreement.

The judgment will impact India's image as an arbitration-friendly jurisdiction as it contradicts the basic purpose of the Arbitration Act i.e., effective and speedy dispute resolution by increasing the work of the parties in case of mere failure to fulfil the administrative requirements, which are required to be honoured but could have been deferred till the time an arbitrator will adjudicate upon any dispute.

Impact on Current Unstamped Arbitration Agreements and the way forward

The law decided by the Constitutional Bench of the Supreme Court, has been crystalized^[25], though the same requires a serious re-consideration and evaluation. That Courts have now started to implement the new law laid down by impounding the existing unstamped arbitration agreements, which are in multifarious form such as purchase orders, invoices and other such agreements, wherein a bare mentions of reference of Arbitration has been made. The Courts will now have an increased burden of ascertaining the stamp duty paid, and other ancillary issues, and now the route of resolution of disputes through existing unstamped arbitration will have to be used with caution and by taking all the requisite steps for getting the instrument as valid under the Indian Stamp Act and upon paying of stamp duty and penalty as per the Applicable rules and regulation with respect to calculation of stamp duty.

Thus, it has become necessary that all existing agreement consisting of the arbitration clause are reviewed and all the steps are taken for making the arbitration agreement enforceable under law and so that the time is not consumed at the initial stages itself, even before a reference is made to an Arbitrator.

Authors: Nihit Nagpal (Associate Partner) and Anuj Jhawar (Managing Associate) at S.S. Rana & Co. Avik Gopal, Intern at S.S. Rana & Co. has assisted in the research of this article. Views are personal.

1. Section 17 of the Indian Stamp Act, 1889 ↑

2. Section 33 of the Indian Stamp Act, 1889 ↑

3. Section 16 of the Arbitration and Conciliation Act, 1996 ↑

4. Uttarakhand Purv Sainik Kalyan Nigam v. Northern Coal Field Ltd (2019 SCC OnLine SC 1518) ↑

5. Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy, and Justice C.T. Ravikumar ↑

6. 2023 SCC OnLine SC 495 ↑

7. (2011) 14 SCC 66 ↑

8. (2019) 9 SCC 209 ↑

9. (2021) 2 SCC 1 ↑

10. (2021) 4 SCC 379 ↑

11. Section 16 of the Arbitration and Conciliation Act, 1996 ↑

12. Hindustan Steel Ltd v Dilip Construction Company (1969) 1 SCC 597 ↑

13. Section 17 of the Indian Stamp Act, 1889 ↑

14. Section 2(g) of the Indian Contract Act, 1872 ↑

15. Section 2(h) of the Indian Contract Act, 1872 ↑

16. Section 7 of the Arbitration and Conciliation Act, 1996 ↑

17. Section 17 of the Indian Contract Act, 1872 ↑

18. Section 33 of the Indian Stamp Act, 1889 ↑

19. Section 35 of the Indian Stamp Act, 1889 ↑

20. Justice Ajay Rastogi and Justice Hrishikesh Roy ↑

21. Seidel v TELUS Communications Inc, 2011 SCC 15 ↑

22. BNA v. BNB and BNC (2019) SGHC 142 ↑

23. Section 7 of the United Kingdom Arbitration Act Harbor Assurance Co. Ltd. v. Kansa General International Insurance Co. Ltd.(1993 1 Lloyd's Rep. 455) ↑

24. Prima Paint Corp. v. Flood & Conklin Manufacturing Co. 388 U.S. 395 (1967) ↑

25. Article 141 of the Constitution of India ↑