Brief Overview
The five–Judges Constitution Bench of the Supreme Court of India, by 3:2 majority, in N.N. Global II judgement[1] held that an arbitration clause in an unstamped document is not enforceable and therefore a Court cannot appoint an arbitrator unless the unstamped document is (subsequently) sufficiently stamped.
Reference to the Constitution Bench
A three-Judges bench of the Supreme Court in the N.N. Global I[2] judgement observed that the law laid down by two-Judges Bench in SMS Tea Estate[3] and Garware[4] judgements holding that an unstamped instrument containing an arbitration clause is not enforceable, is not correct and therefore made reference to the Constitutional Bench. The N.N. Global I judgment relied upon two principles to observe that the above judgements need reconsideration: (i) Doctrine of severability - arbitration agreement is independent from the substantive underlying commercial contract; and (ii) Kompetenz-Kompetenz - Arbitral Tribunal alone has the competence to rule on its jurisdiction, including objections regarding existence, validity, and the scope of the arbitration agreement.
While in N.N. Global I judgment, the three-Judges bench could have overruled the decision passed (in two– Judges bench) in SMS Tea Estate and Garware judgments, another coordinate three-Judges bench in Vidya Drolia[5] had affirmed the legal position laid down in Garware Judgment, and the judges in N.N. Global I had no other option but to refer the issue to a larger Constitutional Bench.
Majority Judgement of the Constitution Bench
The majority judgement held that if a document is not stamped in terms of the Indian Stamp Act, the document is non-existent in law and consequently an arbitration clause in such document is not valid. The judgement relied on the Indian Stamp Act and an earlier judgement of the Supreme Court[6] to hold that the Stamp Act is a fiscal measure to be implemented with full vigour, and its stringent provisions are meant to raise and protect revenue.
The Bench further held that the Indian Arbitration Act requires the Court, while considering any application for appointment of arbitrator, to examine the "existence" of an arbitration agreement under law, including under the Stamp Act.[7]
Minority Judgement – Dissenting view
The minority judgment dissented with the majority view and observed that the legislative intent indicates that non-payment of stamp duty is a curable defect and has no effect on the enforceability of a document. The judgement further observed that the Stamp Act deals with instances of failure to stamp a document but does not affect the validity of the transaction embodied in such unstamped document. It further relied upon the Kompetenz-Kompetenz principle and held that the Arbitral Tribunal can decide the issue.
Impact of the N.N. Global II Judgement:
The Indian arbitration regime is always criticised for delays, and the N.N. Global II judgment has made the criticism stronger by adding a pre-condition for commencement of arbitrations.
The judgment may have far-reaching ramifications on India-seated arbitrations, domestic or international. Depending on the seat of arbitration within India, as stamp duty varies from state to state, parties will have to pay stamp duty (applicable to the State) along with penalty for even commencing an arbitration.
In addition, the Court has also held that an unstamped instrument is not a contract or is not enforceable and therefore does not exist in law. As a consequence, the parties may challenge an award on the ground that arbitral proceedings based on an unstamped instrument is not valid and award passed is against the public policy.
It is important to mention that in this judgment, while the Court has explicitly limited the implication of its determination to petition under Section 11 of the Arbitration Act and excluded its implications on interim measure application under Section 9, in view of the clear legal position set out in this judgement on the enforceability of agreements that are unstamped, it will be a challenge for High Courts to provide reliefs under Section 9 on an unenforceable/unstamped document.
Lastly, this judgment will result in additional stamp duty implication on (largely the non-defaulting) party wishing to invoke arbitration.
Way Forward
A party needs to examine stamping of the document before commencing arbitration. As a matter of practice, especially in construction contracts, parties work on purchase orders that are never stamped. This practice needs reconsideration.
As it has been held that the instrument must be sufficiently stamped before it is acted upon, accordingly the instrument has to be first produced before the authority concerned for impounding and thereafter pay the penalty as per the Stamp Act, which will entail considerable time and cost.
Where an arbitral tribunal is constituted through mutual agreement, the issue of stamping can be decided by the arbitral tribunal under Section 16 of the Arbitration Act.
To optimise stamp duty cost, parties prefer to sign the agreement in the state with lowest stamp duty. Post this judgement, the parties may have to even consider the seat of arbitration based on the state with lesser stamp duty.
The Government is keen to promote arbitrations in India and N.N. Global II judgment is not aligned with the Government’s goal and therefore the Government may consider amending legislation to overcome the impact of the N.N. Global II judgment.
[1] N.N Global Mercantile Limited v. Indo Unique Flame Ltd. & Ors ((2023) SCC OnLine SC 495)
[2] N.N Global Mercantile Limited v. Indo Unique Flame Ltd. & Ors. ((2021) 4 SCC 379)
[3] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. ((2011) 14 SCC 66)
[4] Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. ((2019) 9 SCC 209)
[5] Vidya Drolia v Durga Trading Corpn. (2021) 2 SCC 1
[6] Hindustan Steel Ltd. v. Dilip Construction Co. (1969) 1 SCC 597.
[7] Para 98