RESEARCH NOTE

IN RE: INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE

ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT
1899

Judgement by: Hon’ble D.Y. Chandrachud

Date: 13.12.2023

ISSUE:

The central question that emerged was whether an arbitration agreement, commonly
embedded within an underlying instrument or substantive contract, would be rendered non-
existent, unenforceable, or invalid if the underlying instrument was unstamped or
insufficiently stamped.

CHRONOLOGICAL BACKGROUND:

Conflicting judgements were given by various benches of the Supreme Court on the issue of
enforceability of an arbitration agreement attached to an unstamped or insufficiently stamped
underlying instrument:

2011: SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. AND Garware Wall Ropes
Ltd. v. Coastal Marine Constructions & Engg. Ltd.

A two-Judge Bench of this Court held that an arbitration agreement in an unstamped contract
could not be acted upon. (Page 6)

2021: Vidya Drolia v. Durga Trading Corporation

A three-Judge Bench in Vidya Drolia cited Garware Wall Ropes with approval, asserting that
an arbitration agreement exists only when it is valid and legal. The Court stated that
"Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal
or does not satisfy mandatory legal requirements". (Page 7)

2021: N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (NN Global 1)

A three-Judge Bench in NN Global 1 held that an arbitration agreement, being separate and
distinct from the underlying commercial contract, would not be rendered invalid,
unenforceable, or non-existent by the non-payment of stamp duty, characterizing it as a
curable defect. It consequently referred the following precise question to a five-Judge Bench.
(Page 8)

2023: N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (N N Global 2)

The five-Judge Constitution Bench, in N N Global 2, by a 3:2 majority, concluded that NN

Global 1 did not represent the correct position of law.1 The majority upheld the views
expressed in SMS Tea Estates and Garware Wall Ropes, determining that an unstamped
instrument containing an arbitration agreement is void under Section 2(g) of the Contract Act
and cannot exist in law until it is duly stamped. Furthermore, the majority asserted that the
"existence" of an arbitration agreement contemplated under Section 11(6A) of the Arbitration
Act implies "existence in law," not merely a facial or factual existence. It also concluded that
a court acting under Section 11 cannot disregard the mandatory provisions of Sections 33 and
35 of the Stamp Act. (Page 9)

2023: Reference to seven judge bench

On September 26, 2023, a five-Judge Bench, while hearing the arbitration petition and
curative petition, recognized the "larger ramifications and consequences" of the N N Global 2
decision. Consequently, it referred the proceedings to a seven-Judge Bench for
reconsideration. (Page 11)

QUESTIONS OF LAW:

Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to
instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act,
would also render the arbitration agreement contained in such an instrument, which is not
chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid,
pending payment of stamp duty on the substantive contract/ instrument?

OBSERVATIONS:

A. INDIAN STAMP ACT, 1899

Consequences of Failure to Stamp: Inadmissibility vs. Voidness

A central point of contention in this case, and a key area of the Court's analysis, was the
precise legal consequence of failing to stamp an instrument. The Court drew a crucial
distinction between an instrument being "inadmissible in evidence" and being "void"
or "void ab initio". Inadmissibility refers to whether a document can be introduced and
considered as evidence in a legal proceeding, whereas voidness pertains to its fundamental
enforceability and legal existence. For example, an agreement in restraint of trade, though
void under Section 27 of the Contract Act, is still admissible in evidence if a party seeks to
enforce it.

Section 35 of the Stamp Act, a critical provision, mandates that no instrument chargeable
with duty" shall be admitted in evidence for any purpose" or "shall be acted upon, registered
or authenticated" by any person having authority to receive evidence or by any public officer,
unless it is duly stamped. The Court emphasized that non-stamping or inadequate
stamping is a curable defect. The proviso to Section 35(a) explicitly allows for the removal
of this bar upon payment of the requisite duty and any penalty. This curability is a strong
indicator that the instrument is not void, as agreements that are void ab initio or simply void,
by their very definition, cannot be "cured" or revived. The Court explicitly stated that the
majority judgment in N N Global 2 incorrectly "conflates the distinction between
enforceability and admissibility". (Page 33 and 34)

Purpose of the Stamp Act: Not a Weapon of Technicality

Reiterating its previous ruling in Hindustan Steel Ltd. v. Dilip Construction Co. (1969), the
Court emphasized that the Stamp Act is fundamentally a "fiscal measure enacted to secure
revenue for the State on certain classes of instruments." It is explicitly "not enacted to arm a
litigant with a weapon of technicality to meet the case of his opponent". The stringent
provisions of the Act are conceived in the interest of revenue, and once that objective is
secured through the payment of duty and any penalty, the initial defect in the instrument
should not defeat a party's claim. (Page 114)

B. THE ARBITRATION AND CONCILIATION ACT, 1996

Principle of minimum judicial interference

The Court observed the principle of minimum judicial interference in arbitral proceedings is
fundamental to both domestic and international commercial arbitration. It ensures that arbitral
proceedings are conducted in accordance with the parties' agreement or the tribunal's
direction, without unnecessary interference from national courts. This principle aims to
prevent judicial overreach from undermining the parties' objectives in agreeing to arbitrate,
their desire for less formal procedures, and their preference for neutral and expert arbitral
processes.

Section 5's Significance: Section 5 of the Arbitration Act, which is based on Article 5 of the
UNCITRAL Model Law, explicitly limits judicial intervention. It states: "Notwithstanding
anything contained in any other law for the time being in force, in matters governed by this
Part, no judicial authority shall intervene except where so provided in this Part". The non-
obstante clause in Section 5 is of wide amplitude, unequivocally indicating Parliament's
intent to give overriding effect to the Arbitration Act over other laws in matters governed by
Part I. The Court found that N N Global 2's interpretation effectively rendered Section 5
"otiose" by failing to give full effect to its non-obstante clause. (Page 45, 46, 48 and 105)

Arbitration Act is self-contained code

The Court affirmed that the Arbitration Act is a "self-contained code" for arbitration matters,
providing a complete machinery for its purpose with minimal dependence on other
legislations. This means that the Act comprehensively covers aspects such as the appointment
of arbitrators, the commencement of arbitration, the making of an award, challenges to
arbitral awards, and their execution.

The Court remarked that the implication of this characterization is that when a self-contained
code sets out a specific procedure, the applicability of general legal procedures would be
impliedly excluded. Therefore, while the Stamp Act is a valid general law, its application in
arbitration proceedings is now effectively subordinated to the specific procedural and
substantive mechanisms outlined in the Arbitration Act. This implies that even mandatory
provisions of general laws may be interpreted flexibly to align with the overarching
objectives of a special, self-contained code. (Page 53)

Separability of the Arbitration Agreement (Section 16(1))

The Court concluded that when parties append their signatures to a contract containing an
arbitration agreement, they are regarded as independently appending their signatures to the
arbitration agreement. This ensures its validity is independent of the underlying contract's
invalidity, illegality, or termination. The robust affirmation of the separability doctrine is a
powerful statement about respecting the parties' fundamental contractual intent to arbitrate.
Even if the main contract is flawed due to a curable defect like insufficient stamping, the
distinct agreement to arbitrate survives.

The Court found that N N Global 2's refusal to apply the separability presumption in the
context of Sections 33 and 35 of the Stamp Act was contrary to this fundamental and
internationally recognized doctrine. (Page 68 and 69)

HARMONIOUS CONSTRUCTION OF THE ARBITRATION ACT, 1996 AND THE

STAMP ACT, 1899:

The Court asserted that the Arbitration Act will have primacy over the Stamp Act and
the Contract Act in relation to arbitration agreements. This determination rests on the
well-established legal principle that a general law must yield to a special law. It also
reiterated that the non-obstante clause in Section 5 of the Arbitration Act is of particular
significance. It indicates that the rule in Section 5, and consequently the provisions of the
Arbitration Act, must take precedence over any other law for the time being in force.

In view of the above, the Court noted that while the word "shall" in Sections 33 and 35 of the
Stamp Act ordinarily indicates a mandatory provision, it may be read as directory if the
context or legislative intention demands otherwise. The Court observed that the decision in N
N Global 2 prioritized the objective of the Stamp Act—revenue collection—at the cost of the
Arbitration Act's purpose. This approach risked undermining the Arbitration Act's goal of
ensuring a speedy and efficacious alternative dispute resolution system. (Page 100, 104-105,
107 and 114)

HOLDING:

The Hon’ble Supreme Court held as follows (Page 129):

1. Agreements which are not stamped or are inadequately stamped are inadmissible in
evidence under Section 35 of the Stamp Act. Such agreements are not rendered void
or void ab initio or unenforceable.

2. Non-stamping or inadequate stamping is a curable defect.

3. An objection as to stamping does not fall for determination under Sections 8 or

11 of the Arbitration Act. The concerned court must examine whether the arbitration
agreement prima facie exists.

4. Any objections in relation to the stamping of the agreement fall within the ambit
of the arbitral tribunal.

JUDGEMENTS OVERRULED:

1. NN GLOBAL 2.
2. SMS TEA ESTATES (P) LTD. V. CHANDMARI TEA CO. (P) LTD.
3. GARWARE WALL ROPES LTD. V. COASTAL MARINE CONSTRUCTIONS &
ENGG. LTD. (only paragraphs 22 and 29).