Non-Stamped Arbitration Agreements Inadmissible But Not Void: Supreme Court

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In a crucial decision, the Supreme Court of India in December last year held that unstamped arbitration agreements are inadmissible in evidence yet not rendered void ab initio because the same is a curable defect.

The seven-judge bench led by Chief Justice of India DY Chandrachud overruled the decision by a five-judge bench in NN Global Merchantile Private Limited vs Indo Unique Flame Limited (to be referred to as NN Global 2) and SMS Tea Estates Private Limited versus Chandmari Tea Co. Private Limited. Two paragraphs of the decision in Garwale Wall Ropes Limited versus Coastal Marine Construction & ENGG. Limited were also overruled.

Chronology

In NN Global Mercantile Limited vs Info Unique Flame Limited (herein after referred to as NN Global 1), a bench of three judges of the Supreme Court heard a special leave petition to determine the enforceability of an arbitration agreement contained in an unstamped work order.

The bench held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent. The Supreme Court held that the non-payment of stamp duty would not invalidate even the underlying contract because it is a curable defect. Thus, the bench adopted a different view from two other judgments of the same court. Namely, SMS Tea Estates and Garwale Wall Ropes.

However, in the NN Global 1 case, the court referred the following issue to a five-judge bench:

“Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, enforceable or invalid, pending payment of stamp duty on the substantive contract/instrument?”

Thereafter, the Constitution bench in NN Global 2 answered the reference. By a majority decision of 3:2 it was held that NN Global 1 does not represent the correct position of law. The majority judgment upheld the view taken by the apex court in SMS Tea Estate and Garwale Wall Ropes. Justice Ajay Rastogi and Justice Hrishikesh Roy delivered separate dissenting judgements. While Justice Rastogi noted that the scope of the referral court under Section 11 is limited to the examination of the “existence’’ of an arbitration agreement, Justice Roy relied on the scheme of the Stamp Act to hold that an unstamped or insufficiently stamped document is not rendered invalid because that is a curable defect.
Moreover, on February 20, 2020, a three-judge bench of the Supreme Court in Dharmaratnakara Rai Bahadur Narainswamy Mudaliar Chattram vs. Bhaskar Raju relied on the SMS Tea Estates judgement and reversed a decision of the High Court which had relied on an insufficiently stamped lease deed to refer the parties to arbitration. Although Bhaskar Raju was decided before NN Global 1, while the reference made to the the-judge bench was still pending, review petitions were filed in Bhaskar Raju and were also dismissed on grounds on grounds of delay as well as on merits.

Thereafter, on December 7, 2022, a curative petition was filed before the apex court seeking reconsideration of the view taken in Bhaskar Raju. The Constitution bench in NN Global 2 answered the reference and delivered its verdict on April 25, 2023. Then, on July 18, 2023, a five-judge bench of the apex court issued notice in the curative petition in Bhaskar Raju and listed the matter for hearing on August 24, 2023. In the meantime, a similar case scenario (unstamped agreement) developed in a petition for appointment of an arbitrator. Thus, the same petition was directed to be listed along with the curative petition. Finally, on September 26, 2023, the five-judge bench referred the proceedings to a seven-judge bench.

Submissions

It was primarily contended on behalf of the petitioners that the Constitution bench in NN Global 2 did not lay down the correct position of law. Senior Counsel Darius Khambata submitted that the doctrine of separability recognizes that an arbitration agreement is a self -contained agreement, distinct from the underlying contract. Therefore, it would continue to remain valid notwithstanding the non-stamping of the contract. Moreover, Senior Counsel Arvin Datar submitted that Section 11(6A) of the Arbitration Act expressly confines the referral Court’s power to the examination of existence of an arbitration agreement and it does not extend to the adequacy of the stamping under Section 33 of the Stamp Act. Adding to these submissions, Senior Counsel Nikhil Sakhardande argued that the deficiency in stamping is a curable defect which ceases to operate as soon as the revenue interest is secured and revenue interest of the state is secured and non-payment of stamp duty is a temporary affliction, it cannot affect the validity of an arbitration agreement.

Judgement

While examining the consequences of the failure to stamp an instrument and the procedure laid down under the Stamp Act, the apex Court noted that the difference between inadmissibility and voidness. CJI DY Chandrachud observed-
“The admissibility of an instrument in evidence is distinct from its validity or enforceability in law. Section 2(g) of the Contract Act provides that an agreement not enforceable by law is said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence.

An agreement can be void without its nature as a void agreement having an impact on whether it may be introduced in evidence. Similarly, an agreement can valid but inadmissible in evidence. For instance, A and B may enter into an agreement wherein B is restrained from undertaking a particular trade. This agreement would be void under Section 27 of the Contract Act but it does not impact its admissibility in evidence should A attempt to enforce it against B. The Court will not enforce the agreement between the parties because it is void but the agreement is nonetheless admissible in evidence.

When an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the Court may consider or rely upon it while adjudicating the case. This is the essence of the difference between voidness and admissibility.”

Finally, the CJI concluded the following-

1. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.

2. Non-stamping or inadequate stamping is a curable defect.

3. An objection as to stamping does not fall for determination under Section 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists.

4. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal, and

5. The decision in NN Global 2 and SMS Tea Estates are overruled. Paragraphs 22 and 29 of Garware Wall Ropes are overruled to that extent.

 

Author: Nitish Kashyap

 

Click here to download the judgement.

 


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