In recent times, one of the most contesting and pressing issues in the arbitration domain has been about the validity and enforceability of unstamped arbitration agreement. Finally, the Supreme Court of India (SC) has settled this issue through its judgement in N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495 decided on 25 April, 2023
In its judgment, SC put an end to the debate by declaring that without payment of stamp duty, unstamped arbitration agreement cannot be enforced.
It is interesting to note that the judgment was declared by a SC bench with 5 judges and the judgment is not passed unanimously, but it is approved with support of 3 judges (Justice Josephs’s decision supported by Justice A. Bose and Justice C.T. Ravikumar and other 2 judges (Justices A. Rastogi and Justice H. Roy) against it.
This judgment will have significant impact on arbitration matters and especially arbitration cases with involvement of unstamped arbitration agreement.
Facts leading to the judgment:
Typically, parties to an arbitration case may go to High Court or Supreme Court in case such parties are unable to decide about appointment of arbitrator. Further interesting to note that subject to 2015 Amendment to Arbitration and Conciliation Act, 1996, courts are not empowered to dig deep into arbitration matters, except to decide on appointment of arbitrator and confirm the existence of an arbitration agreement.
In this context, SC has been required multiple times to dwell on the aspect of constitution and existence of arbitration agreement in the light of non-payment of stamp duty makes an arbitration agreement valid or invalid.
Series of cases dealt by supreme court on this subject matter
It was decided by supreme court in couple of cases SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. (2011) and Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019) that:
SC judgement in 2011 case: An unstamped arbitration agreement cannot be enforced.
SC judgement in 2019 case: Contracts (including agreements) are only enforceable if they are duly stamped.
In a case titled “Indo Unique Flame Ltd. and N.N. Global Mercantile Pvt. Ltd.” (2021), involving a dispute over the invocation of a bank guarantee in a contract for coal transportation, SC had to decide on validity of unstamped agreement and it was contested by one of the parties that unstamped agreement is not unenforceable. In this case, judgment passed in 2019 case was overruled by 3-judge SC bench and decided that unstamped agreement is enforceable.
The catch here is despite of overruling judgements in cases 2011 and 2019, said 3 judge bench referred this case to another five judges bench for final decision.
Break down of key pointers in Majority ruling
1) According to Section 2(g) of Indian Contract Act, 1872, unstamped agreement would be void and unenforceable – majority in favor of ruling quoted in the judgment.
2) SC will not process any application relating to referring parties to arbitration unless, SC receives certified copy of arbitration agreement with an acknowledgement of payment of stamp duty.
3) In the light of foregoing, in case of unstamped agreement and until stamp was paid, it is duty of court to impound or take legal possession of such agreement. Such unstamped Agreement will be invalid even to admit as evidence, so long as no stamp duty is paid.
4) Payment of stamp duty (including penalties, if any) is mandatory for SC to consider unstamped arbitration agreement.
5) To conclude, in matters which require specific ascertainment of validity of arbitration agreement, payment of stamp duty is mandatory to admit arbitration agreement as evidence.
Break down of key pointers in dissenting ruling
Two judges have expressed their dissent to the foregoing ruling on the following grounds:
Utmost cautious should be exercised in handling matters relating to arbitration agreement to ensure arbitration proceedings are not stalled due to judicial intervention – As judicial intervention could come as a red flag in the flow of arbitration process beating the very purpose (i.e speedy disposal of cases) of Arbitration and Conciliation Act.
Further arbitrator can handle matters relating to arbitration agreement (including prospect of payment of stamp duty) which does not require judicial intervention.
Conclusion: Ultimately payment of stamp duty is a must for validity of arbitration agreement, yet it is duty of court to ensure judicial intervention on such matters will not stall the flow of the arbitration proceedings causing significant deal in the disposal of arbitration proceedings.
