N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited & Ors.
VALIDITY OF AN ARBITRATION AGREEMENT CONTAINED IN AN UNSTAMPED INSTRUMENT/AGREEMENT – THE LONG PENDING CONCONUNDRUM FINALLY PUT TO QUIETUS BY THE HON’BLE SUPREME COURT IN M/S N.N. GLOBAL MERCANTILE PRIVATE LIMITED VS. INDO UNIQUE FLAME LTD. & ORS.
Recently, on 25.04.2023, the Hon’ble Supreme Court of India on being posed with a Reference by a bench of three learned judges, who disposed of certain Appeals vide the judgment titled as N.N. Global Mercantile Private Limited vs. Indo Unique Flame Limited and Others[1]. has, after critically analyzing the symbiotic relationship and interplay between the Stamp Act, 1899 (hereinafter referred to as “Stamp Act”), the Contract Act, 1872 (hereinafter referred to as “Contract Act”) and the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Arbitration Act”), put quietus to an essential question of law pertaining to the validity of an Arbitration Agreement contained in an unstamped instrument, which has formed subject matter of various disputes across various forums.
Hindustan Steel Limited[2] Analysed.
The Hon’ble Court after carefully examining the provisions of the Stamp Act and Arbitration Act, branched upon to discuss the status of an unstamped Arbitration Agreement as under the Arbitration Act, 1940 as dealt with in Hindustan Steel (Supra), wherein the Appellant had applied for setting aside of the award therein on the grounds that it was unstamped, thus it was illegal and invalid and could not be acted upon. The constitution bench came up with the following conclusions after a detailed analysis of the Hindustan Steel (Supra) case;
- The Stamp act is a fiscal statute to raise revenue;
- The strict provisions therein were only to protect the interests of the Revenue;
- Not be used as a weapon by the litigant to defeat the purpose;
- By virtue of section 42(2) of the Stamp Ac, if an endorsement is made, the document would become admissible in evidence and the same can also be acted upon.
Further the court took cognizance of the provisions under section 33 and 42(2) of the Stamp Act to arrive at the conclusion in lines with the judgment of Hindustan Steel (Supra) that after following due compliance under sections 33 and 42(2), an instrument becomes enforceable by law.
The Indian Contract Act- A Survey, dissection of Garware, Vidya Drolia and NN Global.
For a deeper look, into the validity of the unstamped document, the bench referred to the bible of any contract in India, i.e., The Indian Contract Act,1872. More specifically, the bench recorded in its findings relied on the fundamental principles as enshrined under section 2(g), 2(h) and 2(j) of the Contract Act, which define and distinguish an agreement and a contract.
After a detailed analysis of the provisions of the Contract Act and the Stamp Act, the Hon’ble Court under para 61 of the judgment of the judgment under the scanner herein, overruled the findings in NN Global (Supra) and stated that the same is not correct law in so far as they differentiated with the decision of SMS Tea Estates and suggested that an Arbitration agreement, being an unstamped commercial contract can still be acted upon and is enforceable in law. Whilst doing so, the court also placed reference on the provisions of section 5 of the Stamp Act.
In light of the above, the court went ahead to record its conclusions, which are mainly;
- In light of section 33 of the Stamp act, every person receiving before him a document in evidence on which stamp duty was payable, is duty bound to impound the said instrument, which would no doubt include an arbitrator and a court;
- Drawing a parallel between section 35 of the Stamp act and 49 of the Registration Act, the bench stated that there were stark differences as in case of a document compulsorily registerable but not registered. The collateral transaction would still hold good unlike in the case of a document which is not stamped. Juxtaposing the requirement under the stamp act under sections 33 and 35 on section 2(h) and 2 (g) of the contract act, both civil courts and public authorities are tabooed from giving effect to an unstamped instrument.
- The court made a clear finding that the unstamped or insufficiently stamped document cannot be used as evidence for any purpose. It would be inconceivable, as to how, it could be in the same breath, be found that an unstamped document is yet enforceable in law or that it is not enforceable in law. The court expressed its concern about how parties may act upon it, Goods or services may change hands, for instance, under a document, which may be otherwise exigible to stamp duty and came to a conclusion that in a scenario like this the state would not extend its protection and sanctions would be imposed.
- Accordingly, the bench reaffirmed the view expressed by this Court in Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 in paragraph 22, following SMS Tea Estates (supra), which represent the correct position in law.
Sections 33 and 35 of the Stamp Act, The court of the Arbitrator to Act?
The Respondent and Amicus argued that in light of section 5 of the Arbitration Act, restricting judicial interference, the questions regarding quantum and whether if any stamp duty was payable was to be answered by the Arbitrator who would ensure the interest of the revenue is not jeopardized.
The Appellant and intervenor on the other hand placing reliance on Garware (Supra) and sections 33 and 35 of the Stamp Act, argued that if this matter is resolved by the court itself, the dispute will reach quietus by the time the matter reaches the Arbitrator.
Finding of the Court;
- Sided with the argument of the Appellant that the said question is best answered in the watchful gaze of the HC or SC as the case may be, when no stamp duty is paid.
- The court framed the following Question- In view of the power of the Court under Section 11, to find only prima facie, the existence of the Arbitration Agreement, it would enable the Court to make a Reference and appointment and relegate the issue of impounding of the document to the Arbitrator.
- Answer- Any shirking of the statutory duty by the Court under Section 11 to act in tune with the peremptory statutory dictate of the Stamp Act, appears to us unjustifiable. Such abdication of its plain duty is neither contemplated by the Law-Giver nor would it be justifiable as causing the breach of Section 11(6A).
- The bench created two categories of cases, (i) document not stamped (ii) document insufficiently stamped, leave it open to the arbitrator to act under section 33 if the claim of insufficiently stamped appears to the Arbitrator to be wholly without any foundation.
Conclusions
In light of the aforesaid findings, the bench by majority (dissent of 2 judges) overruled the finding in N.N. Global (Supra) and stated that the position of law as held in SMS Tea Estates (Supra) and Garware (Supra) is correct. It held that an instrument exigible to stamp duty, containing arbitration clause, not stamped would not be an enforceable contract in terms of section 2(g) and 2(h) of the Contract Act and would thus not exist in law.
The concluded that provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.
Author’s Opinion
While the requirement of Stamping was already in existence under the provisions of the Stamp Act, however the same was not taken earnestly by the public at large, taking benefit of the various conflicting judgments passed by several High Courts. The Hon’ble Supreme Court by way of the present landmark judgment made it clear that an instrument/agreement which is not stamped would not be an enforceable contract in terms of section 2(g) and 2(h) of the Contract Act and would thus not exist in law.
As such the present landmark judgment is a welcome step to ensure that all the instruments/agreements are duly stamped and as such the same would rule out (a) the possibility of frivolous agreements being executed and (b) would also effectively benefit the government and/or department of revenue, which would consequently contribute to the economic development of our country.
Authored by Ms. Ridhima Verma, Associate
[1] (2021) 4 SCC 379
[2] Hindustan Steel Ltd. v. Dilip Construction Company, (1969) 1 SCC 597
