The Validity of an Unstamped Arbitration Agreement: The NN Global Judgment
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The Arbitration & Conciliation Act, 1996 (Arbitration Act) is a state-of-the art legislation based on the UNCITRAL Model Law on International Commercial Arbitration, 1985, and enforced with the objective of providing an alternative remedy to disputes in India. Being a well thought-out piece of legislation, the Act has been designed to preclude judicial scrutiny, except in certain limited circumstances, including where the existence of the arbitration agreement in itself, is put to question.
In any other case, the Act has been repeatedly upheld to hold a preceding position as compared to other laws. The exceptions to such rule, however, have also emerged, albeit at rare instances. The recent case of N.N. Global Mercantile Pvt. Ltd. vs Indo Unique Flame Limited & Ors., was one such exception, where the court held the arbitration agreements to be subject to the applicability of the Indian Stamp Act, 1899 (‘Stamp Act’).
Brief Facts of the Case
The matter in issue was that the Respondent No. 1, after being awarded with a Work Order, entered into a sub-contracting agreement with the Appellant. In terms of clause 9 of the said order, the Appellant submitted a bank guarantee, the encashment of which led to the dispute, whereafter Section 8 of the Arbitration Act was invoked by Respondent No. 1. Upon dismissal of such petition by the Commercial Court, on the ground of the unenforceability of the agreement due to an absence of stamps, the Respondent No. 1 preferred a Writ Petition before the Hon’ble High Court of Bombay, which was duly admitted and allowed.
Following such decision of the High Court, the appeal was preferred before the Hon’ble Supreme Court of India where the proposed issue pertaining to the enforceability of the arbitration agreement in a case where the Work Order is unstamped and unenforceable under the provisions of the Stamp Act, was raised.
The Interplay between the Stamp Act and the Arbitration Act
The Arbitration Act has been, time and again, mentioned to be a well-thought out piece of legislation, with little to no room for ambiguity. Being formulated on principles of international law and designed with the primary objective of reducing the judicial backlog, this enactment has been held to be self-sufficient in many ways. An example of such independent existence is highlighted through clauses (a) and (b) of Section 16, which designate an arbitration clause to be an agreement, independent of the other terms of the contract and further specify that the decision of the contract being null and void shall not entail ipso jure the invalidity of the arbitration clause.
In fact, the provisions highlighting the rule of Kompetenz – Kompetenz, under sub-section (1) of Section 16 is also an adequate example which seeks to make arbitration agreements self-reliant, while successfully attaining the objective of reducing the scope for judicial scrutiny. Needless to mention, that Section 5 of the Arbitration Act explicitly excludes judicial intervention unless expressly provided by the Act. Even where the Courts are provided with the power to exercise scrutiny, the same is limited, which may be inferred by sub section 6A of Section 11 of the Act, which specifically states that while considering any applications under Section 11 of the Act, the Courts should confine to the examination of the existence of the Arbitration Agreement. Thus, making it evident that the purpose of an arbitration is to provide a simple and expeditious method of resolution which is detached from judicial intervention.
The Stamp Act, on the other hand, is a consolidated and fiscal enactment aimed at securing revenue of the State. As per Section 2 (14) of the Stamp Act, an ‘instrument’ has been defined to include every document, seeking to create, limit, extend, extinguish, or record, any right or liability. Additionally, Section 35 specifies that any instrument, which is not duly stamped, is inadmissible in evidence and may become admissible if such duty is paid at a later stage.
The precise time at which, such instrument is to be stamped, vis-à-vis before or at the time of execution, is provided under Section 17.
The cumulative activity of these aforementioned provisions infers that any contract, which is not duly stamped, is also bound to become voidable under the applicable laws, thus rendering all the provisions contained therein, inadmissible in the Court. While the said defect has been made curable under the Act, its anticipated misuse was also kept in mind, where in the case of Hindustan Steel Limited vs. Dilip Construction Company, the Hon’ble Supreme Court had clarified that the Stamp Act is not intended to be used as a weapon by the litigant to defeat the cause of his opponent. The Hon’ble Court had held that,
“The stringent provisions of the Act are conceived in the interest of the revenue, once that object is secured according to law, the party staking his claim on the instrument will not be defeated on the ground of the initial defect in the instrument.”
The Arbitration Act, being a part of the contract between two parties, is invariably, a subject of the provisions of the Stamp Act and its related pronouncements. Therefore, when the question of whether such agreement will hold good, in view of the absence of a requisite stamp, the Hon’ble Court was left with no other option than to take a negative stance.
A Discussion of the Majority Decision
Within its decision, the Hon’ble Bench delved deep into the intention behind various provisions of both the Arbitration and the Stamp Act. A detailed journey was taken through the different international principles, various judicial pronouncements, the 246th report of the Law Commission of India, and the submissions made by the Ld. Amicus Curiae.
The Court observed that an unstamped agreement, being bereft of life, is unenforceable in law. Not only this, but an arbitration agreement which forms part of a contract, wherein the latter is subject to the provisions of Section 33 and Section 35 of the Stamp Act, will be non-existent in law, unless such contract is validated under the Stamp Act. On point of whether the applicability of Section 16 (a) of the Arbitration Act, protect it from the invalidity of the Contract Act, the Hon’ble Bench specified that such a view will have the effect of encouraging the parties to adopt an interpretation which will inevitably contravene the mandate of the Stamp Act. It was thus, held that,
“An Arbitration Agreement, within the meaning of Section 7 of the Act, which attracts stamp duty and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp Act.”
The Dissenting Decision – The Other Side of the Coin
“In law and in point of fact, an unstamped instrument bears life”. The Hon’ble Dissenting Bench based its decision on this meaningful suggestion made by the Ld. Amicus Curiae. The ground taken was that the defect under the Stamp Act was indeed curable as per Section 35 of the Stamp Act, which suggests that an inadmissible instrument may be made admissible by simply paying the stamp duty alongwith the penalty at a later stage.
The Hon’ble Judge further studied the intention of the Stamp Act and observed that its purpose was not to completely invalidate the instrument due to lack of stamps but to collect the stamp duty on each instrument. After all, the purpose of the Stamp Act was to generate revenue. In lieu of such observation and after expansively studying the history of the Arbitration Act, the Hon’ble Court held arbitration agreements to be enforceable, irrespective of an absence or insufficiency of a stamp. It was further held that the issues pertaining to such absence of stamps were open to be referred to an Arbitrator by virtue of the Principal of Kompetenz-Kompetenz.
An Analysis – Two Sides of a Coin
Both the benches in the present case undertook a detailed study of the enactments before them and interpreted the laws in line with the competent principles. Within such decisions, the Hon’ble Court also read through the decisions pronounced in the cases of SMS Tea Estates Pvt. Ltd vs. Chandmari Tea Co. (P) Ltd, Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engg. Ltd. and Vidya Droila vs. Durga Trading Corpn., wherein the Hon’ble Bench upheld all three judgments.
The Court took note of the fact and observed that Section 11 (6A), which stands omitted by Act 33 of 2019, was yet to be brought into force. In light of this fact, the Majority Bench observed that it was necessary to give a literal meaning to the legislative intention behind the insertion of the Section, which mandates the Court to confine itself to the examination of the existence of the arbitration agreement.
The Hon’ble Majority Bench, also could not preclude the fact that the Stamp Act, being a law, was meant to have teeth, and thus, requires an implementation with full rigor, without an interpretation which will allow it to be flouted with impunity. In lieu of such observation, the decision pertaining to the invalidity of such arbitration agreement was, thus, inevitable.
It is paramount to mention that the decision made by the Hon’ble Court in this case would have both positive as well as negative impacts, with the latter one pertaining to a possible misuse by litigants with reference to the validity of the arbitration agreements. However, it is also undeniable that the said decision was in line with the rule of law.