In a recent ruling in the case of N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited and Others [1], a constitution bench of the Supreme Court of India decided by a majority of 3:2 that an unstamped instrument containing an arbitration clause cannot be considered a legally enforceable contract under Section 2(h) of the Indian Contract Act 1872. Consequently, such an instrument, subject to stamp duty, does not hold enforceability as per Section 2(g) of the Indian Contract Act.
The court further held that the provisions of Sections 33 and the bar under Section 35 of the Indian Stamp Act 1899, which apply to instruments chargeable to stamp duty, render the arbitration agreement in an unstamped instrument legally non-existent unless the instrument is validated under the Stamp Act.
The decision was made in response to conflicting judgments on this matter from different benches of the Supreme Court of India, which led to the reference to the Larger Bench.
The controversy surrounding unstamped commercial contracts and their impact on arbitration agreements have a long history.
In a previous ruling, SMS Tea Estates (P) Limited vs. Chandmari Tea Co. (P) Limited [2], the Supreme Court held that an unstamped agreement cannot be acted upon until the required stamp duty and penalty are paid, including the arbitration agreement within the unstamped document.
In Garware Wall Ropes Limited vs Coastal Marine Construction & Engg [3], the court upheld the requirement for stamp duty payment and stated that an arbitration agreement in an unstamped agreement could not be invoked and used as evidence.
Honorable Justice Ajay Rastogi and Honorable Justice Hrishikesh Roy delivered the minority Judgments. The minority upheld the decision to overrule SMS Tea, emphasizing the perspective that the absence or insufficient payment of stamp duty on the substantive contract does not render the arbitration agreement legally non-existent or unenforceable in terms of arbitration reference. They further stated that the presence of an unstamped or under-stamped copy of an arbitration agreement during the pre-reference stage is a valid document for appointing an arbitrator under Section 11(6A) of the Arbitration Act. The Minority Judgments also held that matters such as stamping, impounding, and other preliminary or debatable issues, including the adequacy of stamp duty and the validity of the arbitration agreement, should be referred to the Arbitral tribunal and determined according to Section 16 of the Arbitration Act.
However, in N.N. Global Mercantile (P) Ltd. vs Indo Unique Flame Ltd, the Supreme Court overruled the SMS Tea decision, stating that the arbitration agreement, being an independent agreement, does not require stamp duty payment. The court also established guidelines for handling unstamped agreements at the pre-reference stage.
Following these conflicting decisions, a reference was made to the Larger Bench to determine the correctness of the NN Global Mercantile’s decision.
The main issue before the Larger Bench was whether the statutory bar in Section 35 of the Indian Stamp Act, applicable to instruments chargeable to stamp duty, also renders the arbitration agreement in an unstamped instrument, not subject to stamp duty, as non-existent, unenforceable, or invalid until stamp duty is paid for the substantive contract.
Hon’ble Justice Joseph Kurian and Hon’ble Justice Aniruddha Bose concluded the majority that an unstamped instrument subject to stamp duty, including any arbitration agreement within it, is not a legally enforceable contract and does not exist in law. The majority acknowledged that in a Section 11 Application under the Arbitration Act, the court only needs to determine the existence of an arbitration agreement. However, they held that an unstamped or under-stamped agreement is effectively void, and therefore the existence test is not satisfied. They further stated that a court acting under Section 11 is obligated to impound the unstamped contract and proceed with the application only after the stamp duty defect is cured.
[1] Civil appeal no. 3802- 3803 of 2020
[2] Civil appeal no. 5820 of 2011
[3] Civil appeal no. 3631 of 2019
Author – Pooja Singh, Senior Associate
Co- Author – Chhavi Dhawan, Intern
