In a recent decision, the Supreme Court of India addressed a significant legal question regarding the enforceability of arbitration agreements under the Arbitration and Conciliation Act 1996 in relation to the Indian Stamp Act 1899. The Court, led by Chief Justice Dr. Dhananjaya Y Chandrachud, examined the interplay between these two statutes, particularly in the context of unstamped instruments containing arbitration agreements.
The case arose from differing judicial interpretations in previous rulings. In the N N Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. case, a three-judge bench had held that an arbitration agreement, being distinct from the underlying commercial contract, remains unaffected by the non-payment of stamp duty. This ruling diverged from earlier decisions in SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., where it was held that an arbitration agreement in an unstamped contract could not be acted upon until the underlying contract was duly stamped.
The Supreme Court was called upon to resolve this conflict and determine whether the statutory bar under Section 35 of the Stamp Act 1899 would render an arbitration agreement contained in an unstamped instrument as non-existent, unenforceable, or invalid pending the payment of stamp duty on the substantive contract or instrument.
The majority concluded that an unstamped instrument containing an arbitration agreement is void under Section 2(g) of the Contract Act. They asserted that such an instrument, not being a contract and not enforceable in law, cannot exist in law. Thus, the arbitration agreement within it can only be acted upon after it is duly stamped. This ruling mandates the Court under Section 11 of the Arbitration Act to examine and impound an unstamped or insufficiently stamped instrument, emphasizing that the certified copy of an arbitration agreement must clearly indicate the stamp duty paid.
However, the minority judgment, presented a different approach, suggesting that the referral court’s scope under Section 11 is limited to examining the “existence” of an arbitration agreement, leaving other issues, including stamping, to be determined by the arbitral tribunal as per Section 16 of the Arbitration Act.
Given the significant implications of the N N Global 2 decision, the Court referred the proceedings to a seven-judge bench for further deliberation, demonstrating the complex and evolving nature of arbitration law in India.
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