Validity of Unstamped Arbitration Agreements

Is an unstamped or insufficiently stamped arbitration agreement legally valid and enforceable in India?

This question was taken into consideration by the Supreme Court on April 25, 2023, in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors. A five-judge bench has decided this issue and delivered its judgement by a 3:2 majority, holding that unstamped arbitration agreements cannot be enforced in law. Justices K.M. Joseph, Aniruddha Bose and C.T. Ravikumar, gave the majority view, and Justices Ajay Rastogi and Hrishikesh Roy gave the minority view. The Hon’ble Supreme Court overruled the decision of the 3-Judge Bench in N. N Global Mercantile Private Limited v. Indo Unique Flame Limited and others.

Background

In this instant case, a work order dated September 28, 2015, was (“Work Order”) awarded to Indo Unique Flame Ltd (“Indo Unique”) by N.N Global Mercantile Private Limited (“Global Mercantile”) and further, Global Mercantile provided a bank guarantee as per Clause 9 of the Work Order. Clause 10 of the Work Order constituted the arbitration clause.

Before any work could be undertaken, certain disputes arose and led to the invocation of the said guarantee. Global Mercantile filed a suit against the encashment of the bank guarantee in the Commercial Court, Nagpur, wherein an application was filed by Indo Unique under Section 8 of the Indian Arbitration and Conciliation Act, 1996 (power to refer to arbitration where there is an arbitration agreement).

As per Section 8 of the Indian Arbitration and Conciliation Act, 1996, a judicial authority before which a matter subject to arbitration is brought, has the power to refer such matter to arbitration, upon an application being made by a party.

The application filed in reference to the instant case was however rejected by the commercial court and a revision petition was filed before the Bombay High Court. The Bombay High Court had allowed Indo Unique to withdraw the revision petition and file a writ petition before the Hon’ble High Court.

One of the main issues that was considered by the Hon’ble High Court was whether the arbitration agreement was valid and enforceable, even if the Work Order which contained the arbitration clause, was unstamped and unregistered.

Points Considered

The majority opinion was of the view that an instrument chargeable with stamp duty may contain an arbitration clause and if not stamped or if insufficiently stamped, cannot be considered a contract enforceable in law. Section 2(g) of the Indian Contract Act, 1872 states that “an agreement not enforceable by law is said to be void”. Taking into account the opinion of the Hon’ble Supreme Court, an unenforceable instrument would be void as mentioned in Section 2(g) of the Indian Contract Act, 1872, and therefore, cannot be considered a ‘contract’ as mentioned in Section 2(h). However, the minority held that non-stamping or insufficient stamping of the instrument would not render the arbitration agreement unenforceable, as the deficiency was a curable one, as per Section 35 of the Indian Stamp Act, 1935, and therefore such an arbitration agreement cannot be held void.

The majority opined that an arbitration agreement, as provided in Section 7 of the Arbitration and Conciliation Act, 1996, attracts stamp duty as per Section 3 of the Indian Stamp Act, 1899, and therefore such instrument must be duly stamped. The provisions of Sections 33 and 35 of the Indian Stamp Act, 1899, would render the arbitration clause contained in a chargeable instrument, as being non-existent in law until the instrument is duly validated. As per Section 35, an instrument which is unstamped or insufficiently stamped, cannot be admitted as evidence in a court of law, therefore rendering such instrument as unenforceable, and consequently non-existent in law.

In this instant case, the Work Order being an unstamped document could not be received in evidence for any purpose, or acted upon, unless it is duly stamped. In consequence thereof, the arbitration clause in the unstamped agreement also could not be acted upon or enforced and would have no existence in law, unless the applicable stamp duty (and penalty, if any) is paid on the Work Order.

The Hon’ble Supreme Court also considered whether it can ignore an unstamped main agreement containing the arbitration clause and accept the stamped arbitration clause as a valid and enforceable agreement. While taking this question into account, Justices K.M. Joseph and Anuradha Bose opined that it would be unlikely for only the arbitration agreement to be stamped without stamping the larger agreement, and that such an eventuality cannot arise, since, as per Sections 33 and 35 of the Indian Stamp Act, 1899, all instruments appearing before a public officer would be examined and duly stamped.

Note: While the principal issue considered by the Hon'ble Supreme Court was about the validity and enforceability of an unstamped arbitration agreement, there were also related issues that were taken into consideration, which we have not delved into in this article.