INTRODUCTION
Non-registration of agreements and inadequate Stamp Duty payment are generally critical elements in Arbitration disputes, altering the scope of Arbitration and resulting in many rounds of litigation. To avoid mistakes during the registration and payment of Stamp Duty, parties must be aware of the current legal position in light of applicable modifications and recent rulings of the Hon’ble Supreme Court of India (SC). This article will examine the evolution of the law in this area and if such a judgement might potentially undermine some of the recent positive moves achieved by the Courts and Legislation in reducing Court intervention.
PRECEDENTIAL STATUTORY BACKGROUND
Law Pertaining to Stamp Duty
Stamp Duty, a levy in the nature of a tax, is needed to be paid in respect of every document/instrument giving rise to rights or duties under Indian law. If an unstamped Instrument/Document is brought before a person authorised to accept evidence or a person holding a public office, that person must impound such Instrument/Document. Such unstamped document cannot be accepted as evidence or acted upon by such person unless the Stamp Duty and penalties, if any, are paid in full by the party liable to make such payment.
Indian Arbitration Law
Various courts have debated the scope of independence of an Arbitration Agreement under Section 16 of the Arbitration and Conciliation Act, 1996 (the Act) during the last decade. According to Section 7(2) of the Act, an Arbitration Agreement between the parties may take the form of an Arbitration Clause in a contract or a separate agreement altogether. The appointment of Arbitrators is addressed under Section 11 of the Act.
Furthermore, Section 11(6) of the Act states that if a party fails to act or agree to appoint the Arbitrator as specified in an Arbitration Agreement, the party may petition the SC or, as the case may be, the High Court, or any person or institution designated by such Court, to take the necessary action. Section 16(1) of the Act acknowledges the existence of an Arbitration Agreement apart from the primary contract that contains it. Cumulatively all these sections limit the Court’s intervention.
Amendment to the Arbitration Law
To limit Court intervention at the pre-arbitral stage and expedite the process of appointing Arbitrators, the Law Commission of India (LCI) proposed various sweeping changes to the Arbitration Act in its 246th Report, which were put into effect through an Amendment to the Act in 2015 that, inter alia, incorporated Section 11(6A) in the Act. Section 11(6A) provides that the SC or the High Court may appoint Arbitrators.
FROM SMS TEA ESTATES TO VIDYA DROLIA: THE SAGA CONTINUES
The Arbitration Clauses have undergone many changes, and the judiciary has played a pivotal role in putting out interpretations to aid and guide the current legal system.
Firstly, in SMS Tea Estate Pvt. Ltd. Vs. Chandmari Tea Co. Pvt. Ltd. [(2011) 14 SCC 66] (the SMS Tea Estate Case), ruled by a Division Bench in 2011, the SC was asked to determine whether an Arbitration Clause contained in an unstamped contract was enforceable. The SC ruled that failure to pay Stamp Duty rendered the Arbitration Agreement null and void unless the document was seized and the duty and penalty were paid. It was resolved on the widely interpreted Section 11 of the Act, which allows for preliminary issues other than the Agreement’s “existence” to be addressed (such as limitation, accord and satisfaction).
Impact of Amendment Act, 2015
The Amendment Act added Section 11 (6A), limiting the Court’s power to assess the presence of an Arbitration Agreement. In Gautam Landscapes Pvt. Ltd. v. Shailesh S. Shah [2019 SCC OnLine Bom 563], the legality of an Application under Section 9 of the Act in an unstamped agreement was challenged. The Bombay High Court ruled that the SMS Tea Estate Case solely applied to Section 11 of the Act and had no bearing on Section 9 Petitions.
However, in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd. [2019 9 SCC 209] (Garware Case) in 2019, the SC noted that SMS Tea Estate Case was not addressed in the LCI Report, and that modifications based on its suggestions were not meant to overturn the verdict. Section 7(2) further distinguished between two kinds of Arbitration Agreements: Arbitration Clauses in a contract and independent Arbitration Agreements.
When the promise to arbitrate was part of a contract, the underlying contract had to be legally enforceable; in the event of a lack of enforceability because of insufficient stamping, the document was never regarded a “contract” under the Indian Contract Act of 1872 (Contract Act). According to the SC, this was a decision of the Agreement’s “existence,” in accordance with the restricted examination under post-amendment Section 11(6A), and such an Agreement must be impounded by the Court prior to the appointment of an Arbitrator.
The Three Judge Bench in Vidya Drolia & Ors. v. Durga Trading Corporation [2019 SCC OnLine SC 358] referred to the Garware Case, affirming the SC’s conclusions and holding that an Arbitration Clause in an unstamped agreement is unenforceable and illegitimate.
ANALYSIS OF NN GLOBAL JUDGEMENT
The SC’s decision in M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd. [(2021) 4 SCC 379] (NN Global Case) represents a fundamental shift in the Court’s view regarding the legality of an Arbitration Clause in an unstamped instrument. On the basis of the theory of ‘separability’, the SC determined that an Arbitration Agreement is independent and distinct from the substantive Commercial Contract.
“The failure to pay Stamp Duty on the substantive contract would not render the primary contract null and void. It is a deficit that can be remedied by paying the required Stamp Duty”. It was also held that there would be no legal impediment to the enforcement of the Arbitration Agreement as a result of insufficient Stamp Duty. In this decision, the SC acknowledged the Doctrine of Separability and concluded that failure to pay Stamp Duty cannot invalidate an Arbitration Clause since it is a separate agreement under the Arbitration Act.
After reviewing the ruling, it might be claimed that non-payment of the Stamp Duty is a correctable flaw, and that an Arbitration Agreement cannot be declared illegal and unenforceable for this reason alone. The failure to pay Stamp Duty does not render an Agreement null and void, for it is readily remedied by paying the applicable Duty.
AMLEGALS REMARKS
This SC decision in the NN Global Case is critical in readdressing the flaws of the judgements in the SMS Tea Estate Case and Garware Case. The failure to apply the Doctrine of Separability in unstamped instruments but not in unregistered instruments resulted in conflicting legal situations. Furthermore, the enlarged breadth of judicial examination in Section 11 Petitions placed an immense responsibility on the Courts to address every question pertaining to the ‘existence’ of an Arbitration Agreement. This decision refers the matter to Arbitral Tribunals, who are more suited to deal with such ‘existence’ problems.
Furthermore, the NN Global Case represents a seismic shift in the Court’s attitude from increasing judicial intervention to pro-arbitration. With aspirations of becoming the next global Arbitration centre, the same is required to boost stakeholder trust in India’s Arbitration structure. The burden is now on the Five-Judge Constitution Bench to resolve the matter once and for all.
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For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.
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