The five-judge constitution bench of the Supreme court had recently held in N.N Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. that the unstamped or insufficiently stamped arbitration agreements are not enforceable in arbitration proceedings and cannot be acted upon until the stamp duty is duly paid.
In this blog, we will be discussing the ruling of the Hon’ble Supreme Court in N.N. Global case and how it affects arbitration proceedings that were initiated prior to N.N. Global ruling based on the unstamped agreements. This blog also highlights the interpretation of N.N. Global ruling by various Indian High Courts. Further, this blog also talks about the Supreme Court’s recent ruling wherein the judgement in N.N. Global has been referred to a larger bench of seven-judge bench to decide on the issue of validity of unstamped or inadequately stamped arbitration agreement.
The decision which created uncertainty in Arbitration Law
The court ruled that if a contract includes an arbitration agreement or clause that is subject to stamp duty but remains unstamped or is insufficiently stamped, the entire contract, including the arbitration clause, becomes legally unenforceable.
A stipulation for arbitration, whether integrated into a contract or presented as a separate agreement, is valid for enforcement only when properly stamped; otherwise, the document is deemed void.
The Supreme Court held that any court acting under Section 11 of the Arbitration and Conciliation Act is bound to impound the document if the same is not stamped or insufficiently stamped under Sections 33 and 35 of the Stamp Act.
The Hon’ble Court noted that in the usual course, agreements are enforced through civil courts and by public authorities in some cases. As the scheme of the Stamp Act precludes any authority (Court or public authority) from acting upon/ giving effect to an unstamped/ insufficiently stamped agreement, the Hon’ble Court said, it is not fathomable to conclude that such agreement would constitute enforceable agreements. The Hon’ble Court, thus, concluded that such an agreement would not be enforceable till it is validated as per the procedure provided under the Stamp Act as it would not exist in law till then. The Court juxtaposed this view with Sections 2(j) and 2(g) of the Contract Act which renders an unenforceable contract to be void. The Hon’ble Court, further, added that an unstamped instrument, of which the arbitration clause is a part of, cannot be allowed to be used as it would amount to establishing a collateral transaction, considering arbitration agreement has an independent existence from the main contract.
Interpretation of N.N. Global judgement by various Indian High Courts
Indian High Courts have recently navigated the delicate balance between recognizing India’s advancements in becoming an arbitration-friendly jurisdiction and maintaining adherence to the principles laid out in N.N. Global. To avoid unnecessary litigation, courts have to exercise caution while applying the N.N. Global standards, especially in cases where parties contend that inadequate stamping has led to the impoundment of agreements, the rejection of applications for arbitrator appointments, or the annulment of awards.
Recently, in Alliance Import & Export v. GHCL Ltd., (AIR Bom R 628, 28-07-2023) in an application under section 11 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court, insufficiency of the stamp duty was cited by the respondent to support the dismissal of the application. However, the relevant provision of Stamp Act, 1899 was not cited. The amicus curiae assisting the court by citing the judgement ‘Vidya Amin Tata Capital Financial Services Ltd. v. Kunal Structure (India) Pvt. Ltd.’ emphasized the necessity for the pertinent Stamp Act provisions to support the claims. The Court while the impounding fixture notes and disposing of the arbitration application, concluded that it is duty bound to uphold the N.N. Global and Section 33 of the Maharashtra Stamp Act, 1958.
In ARG Outlier Media Pvt. Ltd. v. HT Media Ltd.,(SCC OnLine Del 3885, 04-07-2023) the Delhi High Court addressed the issue of setting aside an award made on an inadequately stamped agreement in a section 34 application of the Arbitration Act. The Court decided that this inadequacy alone could not be grounds for invalidating an award based on an unstamped agreement. It stated that a court could only impound the agreement and suggest stamping and not act as a court of appeal against the award. The Court while dismissing the application held that it lacked the authority to intervene in enforcing the award on the grounds of insufficient stamping.
In Ambience Developers & Infrastructure v. Zesty Foods (2023 SCC OnLine Del 4231, 21-07-2023), the Delhi High Court was approached with a review petition to reverse the court’s order for the appointment of an arbitrator based on an inadequately stamped agreement. The Court stated that given its limited powers under S.11, it is the arbitrator that must adjudicate on inadequacy of stamp duty and take recourse under S. 33 of the Stamp Act to impound the agreement.
In L&T Finance Limited vs. Diamond Projects Limited, the High Court of Bombay has held that the judgment of the Constitution Bench in N.N. Global does not affect the power of the Court to grant interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 despite the non-payment or insufficiency of payment of stamp duty on the arbitration agreement or the main agreement containing the arbitration clause.
In Chandan Chatterjee v. Gita Sundararaman & Ors., (SCC OnLine Cal 1407, 08-06-2023) the Chhattisgarh High Court interpreted insufficiency of stamp duty as, “at the worst, curable by impoundment”. The Court distinguished ’Chandan Chatterjee’ from ’N.N Global’, observing that while in N.N. Global the agreement was ‘ex facie’ insufficiently stamped, in Chandan Chatterjee, the actual stamp payable required interpreting the terms and rights created in the agreement. The Court acknowledged its restricted authority under S. 11(6A) of the Arbitration Act and ruled that the newly appointed arbitrator would assess the insufficiency of stamping and impound the agreement under the Stamp Act.
Challenges faced by the arbitrators post N.N. Global ruling
The N.N Global ruling, which invalidates unstamped arbitration agreements, is posing challenges for the arbitrators in arbitral proceedings which were initiated on an unstamped arbitration agreements but prior to the N.N Global ruling. The majority decision in N.N Global has paved the way for unnecessary delays in the process of arbitration by making the validity of an arbitration agreement dependent on the provisions of the Stamp Act.
This ruling applies retrospectively, as is typical for Supreme Court decisions unless specified otherwise under Article 142 of the Constitution. This retrospective effect is creating challenges for arbitrators, unleashing a Pandora of past cases with agreements lacking proper stamping.
Conclusion
The view taken by the High Courts only highlights the uncertainty created by N.N. Global ruling and this lack of clarity also empowers the opposing party to delay the arbitration proceedings by taking the plea of unenforceability of unstamped agreement. All in all, these issues undermines the purpose of Arbitration Act which aims for speedy and amicable resolution.
To address this crucial issue, the Supreme Court has referred the N.N Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. case to seven-judge bench to reconsider the decision of five-judge bench which had ruled that unstamped or insufficiently stamped arbitration agreements are not enforceable in arbitration proceedings and cannot be acted upon until the stamp duty is duly paid. This provides an opportunity for the Supreme Court to revisit its decision and address the concerns due to the uncertainty caused by N.N. Global.
CJI DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Surya Kant, Justice JB Pardiwala, Justice B R Gavai, Justice Sanjiv Khanna, and Justice Manoj Misra constitute the seven-judge bench.
