Supreme Court on Arbitration Agreements and Stamp Duty: Hits and Misses

[Rohan Deshpande practices as a Counsel at the Bombay High Court, and Karan Kamath is an Advocate practicing at Mumbai]

On January 11, 2020, a three-judge bench of the Supreme Court in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. opined that the declaration of law on arbitration agreements contained in contracts which were subject to insufficient stamp duty required reconsideration.

The Indian Stamp Act, 1899 and state stamp acts are fiscal legislation imposing a stamp duty on certain instruments and transactions at prescribed rates. To ensure that revenue from such duty is secured, the statutes provide that unstamped or under-stamped instruments are generally not enforceable before courts and other authorities unless the defect is cured. If any such instrument is produced in evidence before any person or authority that can legally receive evidence, then the authority is obliged to examine whether the requisite duty has been paid. In the circumstance that duty is unpaid or underpaid, the authority is barred from receiving such instrument in evidence and it must impound and transfer the same to the appropriate revenue officials for adjudication of duty and penalty. Subsequently, if payment is made by the parties to the instrument, then it is admissible in evidence.

The view in SMS Tea Estates and Garware

Most commercial contracts executed in India are amenable to stamp duty. These include contacts which often contain an arbitration agreement, such as share purchase or shareholders’ agreements, contracts for sale of goods and provision of services, construction contracts, and the like. In SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd., decided by a division bench in 2011, the Supreme Court had to consider whether an arbitration agreement contained in an unstamped contract was enforceable. The Court held that insufficient payment of stamp duty invalidated the arbitration agreement, unless the document was impounded, and duty along with penalty was paid. Pending this, even an appointment of an arbitrator under section 11 of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’) could not be effected by the High Court.

SMS Tea Estates was decided under the broadly interpreted section 11 of the Arbitration Act, wherein preliminary issues other than ‘existence’ of the agreement could be raised (such as limitation, accord and satisfaction). The Arbitration Act was subject to a statutory amendment in 2015 (‘2015 Amendment’), based on the recommendations of the Law Commission’s 246th Report. The ambit of judicial scrutiny at the stage of appointment of an arbitrator (in an application under section 11 or in an objection under section 8 in a pending judicial proceeding) was sought to be significantly curtailed to a determination of the ‘existence’ of an arbitration agreement. Other preliminary issues would now have to be raised before the arbitrator.

After the 2015 Amendment, the issue of stamp duty and arbitration agreements resurfaced before another division bench of the Supreme Court in Garware Wall Ropes Ltd. v Coastal Marine Constructions & Engineering Ltd.. The Court observed that SMS Tea Estates was not mentioned in the Law Commission Report, and that amendments based on its recommendations were not intended to disturb the judgment. Further, section 7(2) recognised two types of arbitration agreements – arbitration clauses “in a contract” and standalone agreements. When the agreement to arbitrate was part of a contract, the underlying contract had to be enforceable by law; in the absence of enforceability on account of insufficient stamping, the instrument would never be considered as a ‘contract’ under the Contract Act, 1872. According to the Court, this was a determination as to the ‘existence’ of the agreement, conforming to the limited scrutiny under the post-amendment section 11(6A), and such an agreement must be impounded by the Court prior to the appointment of an arbitrator.

The Judgment in NN Global

The Supreme Court in NN Global departed from this view. The Court noted that in arbitration jurisprudence, an arbitration agreement was a separate and distinct agreement, independent of the underlying substantive contract. In doing so, it referred to various English authorities, including the Court of Appeal’s decision in Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Co. Ltd., [1993] 1 Lloyd’s Rep. 455 (CA) and that of the House of Lords in Lesotho Highlands Development Authority and Fiona Trust). Even if the underlying contract was not sufficiently stamped and was inadmissible in evidence, the arbitration agreement, which survives independently, “would not be rendered invalid, un-enforceable or non-existent” [para 6.4]. In any event, the non-payment of stamp duty was held to be a curable defect, which did not impeach the validity of the contract itself [paras 6.2 & 6.8]. Having held so, the Court proceeded to overrule SMS Tea Estates [para 6.9] and referred the correctness of Garware to a Constitution Bench [para 6.12], since Garware had been cited with approval in Vidya Drolia v. Durga Trading Corporation by a bench of equivalent strength. (The NN Global judgment has earlier been analysed at length on this blog here).

In the view of the authors, NN Global lays down the correct position of law. Separability of the agreement to arbitrate is a fundamental concept in arbitration law, and the appointing court must give effect to the intention of parties for resolution of disputes through arbitration. Insufficient stamping cannot lead to the baby being thrown out with the bath water. Moreover, as the Supreme Court rightly noted, stamp duty legislation do not provide for insufficiently stamped contracts being void ab initio (such as, for instance, a contract in restraint of marriage) — the defect is a curable one. This view is also in consonance with the ruling of the Supreme Court in Hindustan Steel Ltd. v. Dalip Construction Co., wherein it was held that ‘there is no bar against an instrument not duly stamped being acted upon after payment of the stamp duty and penalty’ according to the prescribed procedure, and: ‘The Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instruments : it is not enacted to arm a litigant with a weapon of technicality to meet the case of his opponent.’

Even insofar as the scope of intervention in the post-amendment provisions of the Arbitration Act is concerned, the approach in NN Global is preferable. The purpose of the 2015 Amendment was to limit the appointing court’s scrutiny to the ‘existence’ of an arbitration agreement — borne out from the Law Commission Report as well as the 2015 Amendment’s Objects and Reasons (stating that the inclusion of sub-section (6A) to section 11 was to reduce the courts’ powers to assessing ‘the existence of a prima facie arbitration agreement’ – emphasis added).

When an objection as to improper stamping of a contract is raised, the ‘existence’ of an arbitration agreement contained in such a contract cannot be doubted. For, as held by the Supreme Court in Duro Felguera S.A. v. Gangavaram Port Ltd., after the 2015 Amendment, ‘all that the Courts need to see is whether an arbitration agreement exists – nothing more, nothing less’ [para 59], and the decisive factor to as to whether there is an arbitration agreement is to see ‘if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement’ [para 48]. Only in a scenario where a party contends that the arbitration agreement does not exist at all, the same will have to be looked into by the appointing court because the conclusion of the appointing court on the issue of ‘existence’ is determinative (see the Law Commission Report [33, at p. 20] – ‘if the judicial authority concludes that the agreement does not exist, then the conclusion will be final and not prima facie.’).

Thus, NN Global furthers the case for the appointing court to constitute a tribunal notwithstanding the contract containing the arbitration agreement being insufficiently stamped. The Court noted that the issue of stamping can be relegated to the arbitrator as, under the relevant state stamp act, ‘every person having by law or consent of parties authority to receive evidence’, which includes an arbitrator, had the power to examine and impound an instrument if found to be insufficiently stamped [para 5.3(d)].

Greater Clarity Required – The Way Ahead

Having noted this, however, the Supreme Court missed the bus as regards reducing further judicial oversight at the pre-appointment stage. NN Global holds that the authority impounding the insufficiently stamped contract shall be [para 7.1]:

  • In the case of an appointment by mutual consent, without court intervention – the arbitrator so appointed;

  • Where the section 11 court makes an appointment – the appointing court;

  • Where a section 8 objection is raised before a court in a pending proceeding (viz., that effect must be given to a contract containing an arbitration agreement) – the section 8 court.
It is only in scenario (a) above that an arbitrator is fully clothed with authority to determine questions surrounding nature of the instrument, the adequacy of stamp duty, and then impound the same if found to be unstamped or insufficiently stamped. In the other two scenarios, it is the relevant court which has to do so.

The appointing courts under section 11 of the Arbitration Act are necessarily the High Courts, or the Supreme Court (in the case of an international commercial arbitration). Section 8 courts may be any civil court or even a tribunal, before which an objection is raised. Irrespective of whether it is the appointing court, or another civil court or tribunal, there is a likelihood of precious judicial time (of already over-burdened forums, in most instances) being wasted in determination of issues prior to impounding of an instrument.

While there is a provision under most state stamp legislations for limited delegation of power by a judge of the High Court to an officer appointed by the Court for ‘examining and impounding’ an instrument, the ruling of the Supreme Court in Black Pearl Hotel Pvt. Ltd. v. Planet M Retail Ltd assumes significance. Therein, it has been held that the power to determine the ‘nature and character’ of an instrument cannot be delegated. The Supreme Court illustrated that when the nature of a document is disputed (such as whether an instrument is a sale deed or a deed of mortgage, attracting differing duties), the determination of this question is a judicial one, to be undertaken exclusively by the court. It would be only after the nature of the document is settled, that an officer can be appointed to ascertain whether there is short payment of duty.

In such a case, the process preceding impounding becomes a two-step one, mandatorily involving the court and perhaps, at the latter stage, an officer of the court. This, when the involvement of courts in this process can be altogether avoided by leaving it open to the arbitrator – a person fully empowered under stamp legislation. This was also held by the single judge of the Bombay High Court in Garware and by the Full Bench of the Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh S. Shah. Even on a true construction of the 2015 Amendment to section 11(6A) and its underlying rationale, it is the view of the authors that minimum judicial intervention warrants that this exercise be undertaken by the arbitrator and not by the court.

NN Global therefore falls short of ensuring complete delegation of responsibility to the arbitrator vis-à-vis the issue of stamping. Separability and ‘existence’ of an arbitration agreement contained in an insufficiently stamped contract must be seen not only as jurisprudential concepts, but the sequitur in practice ought to have been considered by the Court. One hopes this aspect is looked into by the larger bench of the Supreme Court.

This is particularly significant on account of the following anomalous situation which is likely to arise. After the 2015 Amendment, even an arbitral institute designated by the appointing courts can appoint an arbitrator. However, section 11(6B) sets out that the designation of an institute will not amount to delegation of judicial power by the appointing courts. In such a case, based on the interpretation of NN Global read with section 11(6B) and the decision in Black Pearl, would it not be correct to say that an arbitral institute cannot determine an objection as to the nature and character of an instrument? The involvement of the jurisdictional court for this purpose is thereby entailed, followed by the impounding of the instrument (if applicable), followed lastly by the appointment of an arbitrator by the institution. Needless to say, the very efficacy of arbitral process will stand greatly diminished as a result.

Another aspect of significance is that the Supreme Court in NN Global overruled its previous ruling in SMS Tea Estates, and referred Garware to a larger bench on account of the latter decision being cited with approval in Vidya Drolia. It may be noted that no legal issue in context of stamping of arbitration agreements arose for determination in Vidya Drolia, and the relevant observations of the bench would not constitute ratio decidendi or amount to a precedent (see, inter alia, the decision of the Supreme Court in State of Haryana v. Ranbir). However, even SMS Tea Estates was followed by three-judge benches of the Supreme Court, where the question of stamping was in issue, including in Black Pearl Hotel and Dharmaratnakara Rai Bahadur v. Bhaskar Raju. It would seem that these two cases were not brought to the notice of the Supreme Court in NN Global.

Thus, the authors hope that the larger bench of the Supreme Court resolves the controversy surrounding stamping of arbitration agreements in an expedited manner, since there is a likelihood of lower courts arriving at conflicting decisions following the divergence of views by various three judge benches of the Supreme Court.

– Rohan Deshpande & Karan Kamath

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