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Enforceability of an Arbitration Clause Contained in an Unstamped Contract

*Sparsh Srivastava[1]


Introduction


Over the years, several legal proceedings have focused on the question of whether an arbitration clause in an unstamped or inadequately stamped agreement can be enforced. Conflicting decisions have been delivered by various High Courts, and even the Supreme Court has not taken a firm stance on the matter. On April 25, 2023, the issue was finally laid to rest by a constitutional bench of the apex court, through its judgment in N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd. (II) (“N.N. Global Mercantile Pvt Ltd II”), wherein the Court declared that, “an unstamped document is unenforceable and consequently, the arbitration clause contained therein is also equally unenforceable under law.”


Background


One of the foremost decisions on the issue of enforceability of such arbitration clauses was delivered in the case of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P.) Ltd. (“SMS Tea Estates”) where the Division Bench of the Supreme Court had held that, “if a document is found to be unstamped/ insufficiently stamped, then even the arbitration clause embedded in it cannot be acted upon as per Section 35 of the Indian Stamp Act, 1899.”


The two-judge bench decision in SMS Tea Estates was followed by the Supreme Court in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited (Garware Wall Ropes”), which held that, “since an unstamped agreement is unenforceable, the arbitration clause contained in it would not exist as a matter of law until the agreement was duly stamped.”


This view, taken in Garware Wall Ropes, was again, approved by a three-judge Bench of the Supreme Court in Vidya Drolia v. Durga Trading Corp. (“Vidya Drolia”), wherein the Court held that, “the existence and validity being intertwined with each other, an arbitration agreement would not exist if it is illegal or does not satisfy the mandatory legal requirements for it to be enforceable, one of which is the payment of stamp duty.”


In complete contravention with the reasoning in the above judgements, a three-judge bench of the apex court, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (I) (“N.N. Global Mercantile Pvt Ltd I”), departed from such a view and consequently, overruled the SMS Tea Estates. The Court, came to this conclusion while relying on the principle of Competenz-Competenz, enshrined under Section 16 of the Arbitration and Conciliation Act, 1996 (“Act, 1996”) which provides that the arbitral tribunal is competent to rule its own jurisdiction and the doctrine of separability, which views the arbitration agreement as a separate and autonomous arrangement from the underlying contract and allows its legal enforcement even if the latter is unenforceable. These are two foundational principles of arbitration law and are fundamental to preventing judicial intervention in the initial judicial proceedings.


The Supreme Court further delved into the same question and revisited onto the correctness of the ratio in the Garware Wall Ropes case, which was approved in the Vidya Drolia case by a coordinate Bench. The presence of such conflicting opinions led to the matter being referred in N.N. Global Mercantile Pvt Ltd I to a bigger bench of five judges, which resulted in the decision at hand.


To critically appraise the decision of the Court, let us examine the reasoning of both the concurring and dissenting opinions of the judges.


Decision of the Supreme Court


The latest judgement was delivered by a 3:2 majority, wherein the majority held that an unstamped or inadequately stamped instrument is “bereft of life,” i.e., it is incapable of existing in law, and is therefore void. The bench also observed that the decision in SMS Tea Estates, as reiterated in the Garware and approved in the Vidya Drolia case, is legally valid while that taken in N. N. Global (I) case is bad law. The majority held that ‘ an instrument, which is exigible to stamp duty, may contain Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law.’ The majority declined the doctrine of separability and relied on the fundamental argument of “Nothing can arouse from nothing.”


In contrast, the dissenting opinion delivered by Justice Ajay Rastogi and Justice Hrishikesh Roy stated that such flaws do not render any document permanently void and that failure to pay stamp duty is unquestionably a defect that could be easily resolved. Furthermore, they also noted that the Act, 1996 is a special law and cannot be invalidated by a general law, such as the Stamp Act. In addition to this, interestingly, they also observed is no provision in the Indian Stamp Act, 1899 which provides that an arbitration agreement would be void when not stamped as the Act specifically does not provide for arbitration agreement and would only get covered into the residuary entry.


Moreover, the dissenting judges observed that while making use of the doctrine of Competenz-Competenz stipulated under Section 16 of the Act, 1996, the Arbitral Tribunal possesses the sole competence to rule on its own jurisdiction, address any challenges posed to the existence, legality, and applicability of the arbitration agreement. Thus, declaring the decision in the Garware case to be inconsistent with both the legislation and the decision in the Vidya Drolia case, to be incorrect.


Analysis


With the resolution of this long-debated topic, a clear decision has been provided by this judgement regarding agreements and contracts with arbitration clauses. But the verdict seems to on both its pros and cons as it has raised several questions that will undoubtedly have an impact on the practice of arbitration in India. While the judgment provides much clarity on the long prevailing issue of admissibility of unstamped documents for adjudication of arbitral disputes, it may not bode well for India’s pro-arbitration stance as by permitting courts to dwell upon the validity of an arbitration agreement, the Court has expanded the range of judicial action because they are no longer limited to making a prima-facie finding that an arbitration agreement exists, overshadowing the two doctrinal pillars of the Arbitration (i.e. Doctrine of Separability and Competenz-Competenz). Consequently, the apex court has missed a golden opportunity to boost the image of India as an arbitration-friendly jurisdiction. Furthermore, some of the key concerns of the judgement, in the view of the author, are as follows:


(1) In the future, the disputing party may use this as a tool to delay the procedure of the constitution of an arbitral tribunal citing the issue of insufficiency of stamps which will then have to be adjudicated by the Courts as a preliminary issue thereby delaying the entire arbitration process, making the purpose of opting Arbitration as infructuous.


(2) The decision further lacks certain guidelines that would permit the courts to not engage in a mini-trial for determining the sufficiency of stamping prior to referring the matter to arbitration. Although there appears to be some respite in the judgment as it also mentions therein that where a claim of insufficiency of stamping appears to be wholly without foundation, a reference may be made to the arbitration leaving it open for the Arbitral Tribunal to exercise powers under the Stamp Act, if necessary.


The judgement leaves a scope of being misused by one of the disrupting parties to indulge in the nominal or procedural issues, in contrast to the objective of the Act, 1996 and arbitration, as a whole. The purpose of the Arbitration is to provide for a speedy process of dispute resolution but the same is jeopardized by allowing the disruptive parties to take advantage of the procedural delays that are expected to arise by this judgement.


(3) The Act, 1996 is a special legislation, that should have been given primacy over Indian Stamp Act, 1899. The Latin maxim, Generalis Specialibus Non-Derogant, which means that the erstwhile special law is given superiority over the general law, is in direct conflict with this decision.


(4) The Indian Stamp Act, 1899 is a legislation primarily intended to provide revenue to the Government and as per the present judgement, it is being allowed to come in the way of judicial remedies, in lieu of safeguard that ought to be provided in the name of the veracity of an agreement.


Conclusion


In conclusion, India’s ambition to become a global arbitration hub requires careful consideration of the concerns arising from the recent decision, as it undermines the arbitration’s basis of a pro-arbitration approach. It is essential to take appropriate steps purpose, and spirit of the Act, 1996, ensuring they remain unaffected by the complexities introduced by stamping requirements in the arbitration agreement. The Supreme Court, thus, in the author’s opinion, missed an opportunity to reinforce and foster arbitration in India as a flexible and user-friendly process, instead introducing an additional layer of scrutiny.


 

[1] This paper is written by Sparsh Srivastava, a 2nd-year law student at National Law University Odisha. His areas of interest include Commercial Dispute Resolution (particularly, Arbitration) and International Law. The author can be reached out at- sparsh4203@gmail.com.

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