Stamp Act, 1899 and Arbitration and Conciliation Act, 1996 – Yeh Rishta Kya Kehlata Hai?

On 13-12-2023, a seven-Judge Bench of the Supreme Court of India held that an unstamped or insufficiently stamped instrument can be acted upon by the courts under Section 8¹ and Section – 11² of the Arbitration and Conciliation Act, 1996 (the Act) (N.N. Global 7 case hereafter).³ It was hearing a reference against the judgment delivered earlier this year by a five-Judge Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.⁴ (N.N. Global 5 case). This has brought the spotlight back on the interplay between two crucial legislations, viz. the Arbitration and Conciliation Act, 1996⁵ and the Stamp Act, 1899⁶ (ISA). By way of this article, we intend to analyse the interplay between these two crucial legislations. We also delineate why the Supreme Court’s ruling in N.N. Global 5 case⁷ was a flawed approach which has been rightly corrected by the seven-Judge Bench.

While the said judgment was limited in its reference to Section 11⁸, we look beyond the same and attempt to gauge the position with reference to other sections of the Act.

From SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.⁹, to Gautam Landscapes (P) Ltd. v. Shailesh S. Shah¹⁰ and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.¹¹, Vidya Drolia v. Durga Trading Corpn.¹², and the three-Judge Bench decision in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.¹³ (N.N. Global 3), to N.N. Global 5 case¹⁴ and N.N. Global 7 case¹⁵ we look at a catena of the Supreme Court and the High Court judgments to analyse how Indian courts have often shifted their goalpost on the interplay between the two crucial legislations.

Stamp it please!

More than a decade ago, when the question of admissibility of an unstamped Arbitration Act came up before the Supreme Court in SMS Tea Estates case¹⁶, the Court made a reference to Sections 33 and 35 of the ISA which deal with examination and impounding of instruments and instruments not duly stamped inadmissible in evidence respectively¹⁷ and held that in the case of absence of sufficient stamping, the Court cannot act upon that instrument due to bar placed by Section 35 of the ISA. Interestingly, the Court here also drew a distinction between a stamped but unregistered instrument on one hand and an unstamped instrument on the other hand. The Court held that an arbitration agreement would not be liable for registration under the Registration Act¹⁸ since it is an independent agreement from the main contract and an unregistered contract containing an arbitration clause can be acted upon. However, if it was unstamped the same will not hold true and the Court will have to impound it. The Court came to such a conclusion because unlike Section 49¹⁹ of the Registration Act, there is no such equivalent provision in the ISA. The Court relied upon Section 35 of the ISA to conclude that in case deficient stamp duty and penalty dues, if any, was not fully paid the Court would not be empowered to act upon that instrument.

Thereafter, Section 11(6-A) was inserted by the 2015 Amendment Act²⁰ with the aim to limit judicial interference whereby the courts were restricted to merely examine the existence of an arbitration agreement while adjudicating a Section 11 application. In these circumstances, would courts be empowered to deal with the question of validity or stamping of the arbitration agreement was the question posed before the Supreme Court in Garware Wall Ropes case²¹. The Court observed that the ruling in SMS Tea Estates case²² would not be impacted by Section 11(6-A) since the Court, deals with an application for the appointment of an arbitrator “it is enjoined by the provisions of the Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon”. Therefore, the Court in Garware case²³ bypassed the legislative intent behind insertion of Section 11(6-A) and expanded the scope for judicial interference at referral stage. The three-Judge Bench judgment in Vidya Drolia case²⁴ further cemented this position whereby the Court interlinked the validity of an arbitration agreement with its existence and that to cut the deadwood at the referral stage itself, the courts can determine the validity of an arbitration agreement without leaving the same for the Arbitral Tribunal. Similarly, as held in SMS Tea Estates case²⁵ and Garware case²⁶ and, the Court would have to deal with the stamping issue at the referral stage itself and impound the instrument.

The aforesaid issue stood reignited when the Supreme Court in N.N. Global 3 case²⁷ disagreed with the decisions in SMS Tea Estates case²⁸ and Garware case²⁹ and observed that since the arbitration agreement is an independent agreement in itself, and is “not chargeable to the payment of stamp duty”, merely the fact that the stamp duty on the main contract was not paid, would not refrain the courts from acting on such an arbitration agreement. In such circumstances, the issue was referred to a five-Judge Constitution Bench to settle the debate once and for all.

Decision of the Constitution Bench in N.N. Global 5 and the dissent: (Section 11)

By a 3:2 majority, the Supreme Court in N.N. Global 5 case³⁰ overturned its decision in N.N. Global 3 case³¹ and held that in a Section 11 application for appointment of an arbitrator, arbitration agreement contained in an instrument with insufficient stamping will not be valid, and the courts would not be empowered to take that arbitration agreement into evidence and act upon the same. While Joseph, J. and Bose, J. wrote a common judgment, Ravikumar, J. authored a separate judgment in support of the majority opinion. Roy, J. and Rastogi, J. each wrote a dissenting opinion.

The Court upheld the view that the word “existence” in Section 11(6-A) does not limit the courts to determine merely the literal existence of the arbitration agreement. Even at the referral stage, the validity of that arbitration agreement would fall within the meaning of existence and as an unstamped instrument containing an arbitration agreement would be hit by the bar placed by Section 35 of the Stamp Act, neither the main instrument nor the arbitration agreement would gain the privilege of existence in the eye of the law. As a result, for the purpose of Section 11 of the Act, the courts would not be empowered to act on the same.

One of the reasons put forth during arguments against allowing courts at the pre-referral stage the power to impound an unstamped arbitration agreement was the kompetenz-kompetenz principle i.e. the Arbitral Tribunal would alone be competent to rule on issues of validity of the arbitration agreement. And hence, it was argued to leave the issue of deficient stamping to the Arbitral Tribunal. The Court was urged to take into account the intent of the legislature to minimise the scope for judicial interference in and before the arbitral process. However, the majority found favour with the argument that the Court hearing a Section 11 application cannot also overlook the legislative mandate contained in Sections 33 and 35 of the Stamp Act and cannot refuse to impound an instrument containing arbitration clause with insufficient stamping.

Going back to the earlier decision, one of the reasons propounded in N.N. Global 3 case³² was to apply the doctrine of separability to hold that the arbitration agreement was distinct from the main contract, and therefore, even if the main contract was unstamped the arbitration clause cannot be treated as invalid since arbitration clause in itself does not require separate stamping. However, the majority seemed to find no resonance with this argument and instead chose to join its reasoning with SMS Tea Estates case³³ that there is a legislative bar on the use of an instrument which is unstamped or insufficiently stamped, and that includes the arbitration agreement as well. The majority, whether unknowingly or knowingly, created an additional compliance barrier of stamp duty for the parties to cross before referring their disputes to arbitration. The courts acting under Section 11, as held by the Constitution Bench, would be mandatorily required to ascertain if sufficient stamp duty and penalty, if applicable, was paid on the contract or instrument placed before it, under Section 11, thereby increasing the cost and compliance burden.

Coming to Roy, J. and Rastogi, J.’s dissent, it would be pertinent to quote Burton J. Hendrick who once remarked that “The dissenting opinions of one generation become the prevailing interpretation of the next.” Roy, J. in his judgment made reference to international best practices on this issue and remarked that every reputed arbitral institution has recognised the importance of kompetenz-kompetenz principle whereby courts interference at the referral stage have been limited to only “preliminary prima facie examination” of the arbitration agreement.

Interestingly, while the majority went with the reasoning in SMS Tea Estates case³⁴ Roy, J., remarked that by way of the 2015 Amendment Act, SMS Tea Estates case³⁵ stood overruled. Roy, J. felt that the best way to harmonise Section 11 of the Act and Section 35 of the Stamp Act would be to defer the issue of necessary stamping and impounding to the arbitrator.

Rastogi, J. in his dissent made reference to the decision of the Supreme Court in Duro Felguera SA v. Gangavaram Port Ltd.³⁶ and upheld that in light of the 2015 Amendment Act, all that was needed to be examined by the courts in an application under Section 11 of the Act was the mere existence of an arbitration agreement.

N.N. Global 7: Making things right

On 26-9-2023, a five-Judge Bench of the Supreme Court was hearing a curative petition against the Court judgment in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Bros.³⁷ along with an arbitration petition under Section 11 of the Act in Seka Dobric v. SA Eonsoftech (P) Ltd.³⁸ Since the issues therein were related to stamping of the arbitration agreement, keeping in mind the decision in N.N. Global 5 case³⁹, and the larger ramifications of the questions involved, the Court referred the issue to a seven-Judge Bench.

Contrary to the view of the majority in N.N. Global 5 case⁴⁰, the Supreme Court in N.N. Global 7 case⁴¹ drew a distinction between the inadmissibility and voidness of an agreement. The Supreme Court held that while the bar contained under Section 35 of the ISA renders a document inadmissible evidence, it does not make that document void. As such, the document will not be invalid. Moreover, the Court emphasised that the defect of insufficient stamping or absence of stamping is a curable defect.

While the Supreme Court in N.N. Global 5 case⁴², gave higher importance to the fiscal interests of the State protected by ISA, the seven-Judge Bench adopted a more harmonious approach, by also stressing upon the need to reduce judicial interference by the courts at the stage of appointment of an arbitrator. The Supreme Court held that the issue of stamping is best left for the arbitrator to decide, keeping in mind the principle of kompetenz- kompetenz. The duty of courts under Section 8 or Section 11 of the Act, is limited to prima facie examination of the existence of the arbitration agreement, and the issue of stamping is not for the courts to determine.

This, in our opinion, is correct approach, since it recognises the importance of the Stamp Act as a fiscal statute enacted to protect the revenue interests of the State, while also restricting the scope of judicial interference under Sections 8 and 11 of the Act.

The Supreme Court, once again, rightly adopted the principle of separability, which states that an arbitration agreement is separate from the instrument it is contained in. While the bar under Section 35, renders an unstamped instrument inadmissible, it does not come in the way of the courts dealing with applications under Section 11 or Section 8 of the Act.

Beyond Section 11: The way it is

Before the decision of the Constitution Bench in N.N. Global 5 case⁴³, the Bombay High Court in its judgment in Gautam Landscapes case⁴⁴, had dealt with both Sections 11 and 9 when it came to unstamped instruments containing an arbitration agreement. Although the Division Bench of the Bombay High Court at an earlier occasion in Universals Enterprises v. Deluxe Laboratories (P) Ltd.⁴⁵ had already upheld that Section 9 reliefs cannot be refused merely on the ground that the instrument containing the arbitration agreement was unstamped, the respondents put forth the judgment of SMS Tea Estates case⁴⁶ before the three-Judge Bench Court in Gautam Landscapes case⁴⁷.

In Universal Enterprises case⁴⁸, the Bombay High Court had held that even before arbitration is invoked, the Court can pass ad interim/interim orders to protect the subject-matter of the dispute. The Court here acknowledged that the issue of absence or deficiency of stamp duty can be dealt with at a later stage and the mere existence of the agreement and arbitration clause would be sufficient for the case for interim/ad interim reliefs to be considered. The Court also pointed out that if this was not the case, the easiest way for denial of interim reliefs to the applicant would be for the respondent to merely raise an objection as to the absence/deficiency of stamp duty. In Gautam Landscapes case⁴⁹, the Court distinguished the decision in Universal Enterprises case⁵⁰ and SMS Tea Estates case⁵¹ on the basis that while the former was a judgment in a Section 9 application, the latter dealt with Section 11 of the Act only. It also made a reference to the Supreme Court’s decision in Firm Ashok Traders v. Gurumukh Das Saluja⁵² wherein the courts’ powers under Section 9 were delineated and noted that the right which a party exercises under Section 9 finds its genesis in the arbitration agreement, not the main contract. The Supreme Court, at a later stage in Garware case⁵³, overruled Gautam Landscapes case⁵⁴ to the extent it held that courts would not be required to examine insufficient/absence of stamping in an application under Section 11.

When we compare Sections 9 and 11, on a plain reading, we find that while courts under the latter are required to determine the existence of an arbitration agreement, there is no such requirement under the former. However, if a party secures an interim order/ad interim order in its favour it is required to commence the arbitration proceedings within a period of 90 days from the date of the order or within such further time as the Court may determine.

The way forward

While the ruling of the Constitution Bench in N.N. Global 5 case⁵⁵ worked towards increasing the scope for judicial interference and the level of compliance at the referral stage contrary to the intent and objectives of the Arbitration Act, the decision in N.N. Global 7 case⁵⁶ has brought a sigh of relief. Erecting incurable barriers on pathways to the arbitration process does not work in favour of creating an arbitration friendly atmosphere.

When in doubt, do refer is the unalienable principle when it comes to dealing with Section 11 applications, and the same has been upheld by the Supreme Court on several earlier occasions and followed by the High Courts without fail. The Supreme Court in N.N. Global 7 case⁵⁷ has upheld the foregoing principle and corrected the fallacious approach adopted by the five-Judge Bench in N.N. Global 5 case⁵⁸.

And to be honest here, in the commercial world, one has to tackle numerous disputes. However, litigation is the dread of many due to the time, effort, and finance consuming black hole that it is with no clear sight of relief anytime soon. It takes years for a suit to come to finality at times, and it just cannot keep up with the pace at which the commercial world works. With increasing judicial intervention and the ever-expanding scope of interference at the referral stage itself, arbitration may not seem that viable of an option. One may wonder if reference to arbitration is a major challenge in India, then how bigger a challenge would be executing an arbitral award. But alas, that is a topic for another day.