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Stamp Duty and Arbitration Agreements: The End of the Beginning

Apr 27, 2023
  • Author(s) : Alok Jain , Naresh Thacker , Ashna Contractor

    • Background

    Although the title, inspired by a post-rock album[1], seems to suggest a critique of the decision of the Constitution Bench of the Supreme Court in the case of M/s. N. N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. & Ors.[2], it is intended to indicate that the outro is now abating into quietus.

    To the uninitiated, stamp duty, that is governed by a variety of fiscal statutes, is payable on instruments, including commercial agreements. The consequence of non-payment / insufficient payment includes that any person having authority to receive the instrument in evidence, shall not admit the same in evidence or act upon the same until the stamp duty is paid.[3]

    Cue the opening track; an application was made to appoint an arbitrator, and the defendant’s trial court lawyer asked (as a matter of routine) the court to impound the unstamped/insufficiently stamped main agreement containing the arbitration agreement. When the matter in SMS Tea Estates[4] reached the Supreme Court, it ruled that the court must impound the main agreement containing the arbitration agreement and only appoint an arbitrator after the requisite stamp duty was paid.

    Interestingly, prior to the decision in SMS Tea Estates, the Supreme Court[5] was attempting to unwind some previous positions of law by adopting a pro-arbitration approach and limit the extent to which a court could interfere at the stage of reference to arbitration / appointment of an arbitrator by the court. A few years later in 2015, the legislature, through the amendments to the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) made it abundantly clear that at the stage of appointment of an arbitrator, the courts should limit themselves to the examination of the existence of an arbitration agreement.[6]

    The question of existence, much to the delight of the philosophers, led to a variety of progressive tracks where the Supreme Court, in copious reams, highlighted the need for brevity in the scope of investigation.[7] There was a constant reiteration of the need to respect the principle of separability of the arbitration agreement from the contract in which it was contained; the soul could exist without the mortal vessel.

    In light of this, the question of whether a court ought to impound the unstamped/insufficiently stamped main agreement when the arbitration agreement therein was separable, once again arose. In part two of the opening track, the Supreme Court in Garware[8] agreed with its finding in SMS Tea Estate and held that a court could not appoint an arbitrator until the main agreement was duly stamped as the main agreement and, by extension, the arbitration agreement therein would not exist as a matter of law.

    The critics went into a frenzy. In part three of the opening track, the Supreme Court in N.N. Global[9] ruled that basis the principle of separability and the limited scope of interference at the stage of appointment of an arbitrator, the court, despite the main agreement being unstamped/insufficiently stamped, is empowered to appoint an arbitrator. However, as a coordinate bench of the Supreme Court in Vidya Drolia[10], while expounding upon the existence of an arbitration agreement, had already approved the decision in Garware, the question was placed before the Constitution Bench of the Supreme Court.

    In this final part of the opening track, the Supreme Court, by virtue of a split majority finally concluded that until a main agreement containing an arbitration agreement is not duly stamped, the court cannot appoint an arbitrator.

    Key Findings

    The Constitution Bench of the Supreme Court has arrived at the following findings:

    • Statutes governing stamp duty, although fiscal in nature, are not procedural laws. Being substantive laws, they must be enforced.
    • An unstamped/insufficiently stamped instrument cannot be admitted into evidence or acted upon; the State will not extend its protection by appropriate sanctions and enforce the rights and obligations therein.
    • An arbitration agreement under Section 7 of the Arbitration Act has to necessarily be a contract within the meaning of Section 2(h) of the Contract Act, 1872, i.e., an agreement enforceable by law.
    • An unstamped/insufficiently stamped instrument is not enforceable in law and therefore, cannot exist in law. It is invalid and void not in the sense of it being stillborn; life can yet be poured into it by payment of requisite stamp duty.
    • Although the Arbitration Act disallows court interference except in the manner prescribed under the statute, it cannot override the operation of statutes governing stamp duty.
    • Although the legislature inserted Section 11(6A) in the Arbitration Act, the same was to confine the court, while appointing an arbitrator, to examine and ascertain the existence of an arbitration agreement. As an unstamped/insufficiently stamped instrument does not exist in law, the court would be well within its remit to impound the main agreement containing the arbitration agreement and decline an appointment until the requisite stamp duty is paid.
    • The Court recognizes the principles of kompetenz-kompetenz and the underlying principle behind treating the arbitration agreement as a separate agreement, i.e., to create a mechanism, which survives the contract so that disputes, falling within such agreement, are resolved.
    • However, the same principle cannot be pressed into service to require the Court to adopt an interpretation that will plainly encourage parties to contravene the mandate of the statutes governing stamp duty.

    The Supreme Court thus concluded that:

    • If an unstamped/insufficiently stamped main agreement containing an arbitration agreement is brought before a court for the purposes of appointment of an arbitrator, the court is to conduct a prima facie investigation into the existence of the arbitration agreement.
    • If an objection is raised (whether by the court or the parties) as to the document being unstamped/insufficiently stamped in law and if the court prima facie finds that the objection is wholly unfounded and finds that there is an arbitration agreement, the court will appoint an arbitrator.
    • If the court prima facie finds merit in the objection, the court is duty bound to impound the main agreement until requisite duty along with any penalty has been paid.
    • Since applications to appoint an arbitrator can be initiated basis a certified copy of the arbitration agreement or the main agreement in which the arbitration agreement is contained, and further since a court can only impound the original document, the certified copy must disclose that the stamp duty has been paid appropriately as per law, failing which the court cannot proceed to appoint an arbitrator.
    • Once the requisite duty is paid, the court will appoint an arbitrator.

    Impact

    • On matters where arbitration proceedings are yet to be initiated.

    – Negotiate clauses directly pertaining to the obligation of payment of stamp duty and build in consequences of breach thereof. See if provisions of indemnity may be required.

    – Ensure that multiple originals of the main agreement are executed such that each party has a copy of the same. Alternatively, obtain multiple certified copies disclosing that stamp duty has been paid in accordance with law.

    – Where agreements are already executed, it would be advisable to check whether the main agreement containing the arbitration agreement is stamped as per the relevant fiscal statute. Importantly, this has to be tested in the local jurisdiction where the agreement has to be acted upon.

    • On matters where appointment proceedings are ongoing.

    – If the main agreement containing the arbitration agreement is not stamped as required in law, immediately move for payment of stamp duty. Often, voluntarily proceeding for an adjudication of stamp duty saves time and cost and prevents unnecessary impounding.
    – If a certified copy has been filed and the same does not disclose that duty has been paid on the original instrument as per law, file the original after payment of duty. If the original is in the possession of another party seek a direction from the court for the same to be produced, impounded and sent for adjudication.

    • On matters where the arbitral proceedings are ongoing, or post award court proceedings are ongoing.

    – Irrespective of whether the main agreement containing the arbitration agreement has been admitted into evidence, or already acted upon, or an award is issued based on such agreement, ensure that requisite stamp duty is paid. If this is not resolved, the arbitrator or the court is obliged to impound the document, which will lead to avoidable complications.

    Conclusion
     Social media is already rife with remarks about how this decision creates setbacks to the pro-arbitration regime in India. It appears that none of the authors of those remarks is willing to concede that in the first place the cause of this entire problem arises from the issue of deficiency in payment of stamp duty. Again, the issue whether the court ought to appoint the arbitrator basis an unstamped/insufficiently stamped main agreement containing an arbitration agreement and let the arbitrator impound the document, is simply delaying the inevitable.

    This is not to say that the decision does not have its difficulties. Despite clarifications that the discussions in the decision are confined to the issue of existence/separability of an arbitration agreement in the context of stamping, there is a risk of potential misuse of some observations. The observation that the issue of stamp duty is best decided “under the watchful gaze of the Court” may perhaps not support the atmosphere that India is in the process of creating for arbitrations seated in India.

    A split majority decision always leaves a lingering doubt. The dissenting opinion and the plea for legislative reform ought not to be ignored. Else, this might unintentionally materialize into a Lost Symphony, the last track on the album we began with.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Naresh Thacker, Partner – Email – NareshThacker@elp-in.com
    Alok Jain, Partner – Email – AlokJain@elp-in.com
    Ashna Contractor, Senior Associate – Email – AshnaContractor@elp-in.com

    References:
    [1] The End of the Beginning – God is an Astronaut © Revive Records
    [2] M/s. N.N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors. [Civil Appeal Nos. 3802-3803 of 2020]
    [3] Section 35, Indian Stamp Act, 1899
    [4] SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd., (2011) 14 SCC 66
    [5] National Insurance Company Limited v. Boghara Polyfab Pvt. Ltd., (2009) 1 SCC 267; Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. and Anr., (2005) 7 SCC 234
    [6] Section 11(6A) inserted into the Arbitration and Conciliation Act, 1996 by the Arbitration and Conciliation (Amendment) Act, 2015
    [7] Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729; Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714
    [8] Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209
    [9] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Ors., (2021) 4 SCC 379
    [10] Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1

    Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.