Introduction 

A five Judge bench of the Supreme Court in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors. (2023) held that an instrument which is exigible to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of Section 2(h) of the Indian Contract Act, 1872.

What was the Background of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors. Case?

• The petitioner and the respondent in this case had entered into a sub-contract which contained an arbitration clause.
• Certain disputes arose and the respondent invoked the Bank Guarantee furnished by the petitioner.
• A suit was filed before the Commercial Court regarding the said invocation.
• The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 in the suit and sought for reference of disputes to arbitration.
• However, the Commercial Court rejected the application.
• A revision petition was filed by the respondent before the Bombay High Court.
• The HC held that the Section 8 application was maintainable.
• Thereafter, an appeal was filed before the SC.
• A five-judge bench of the SC comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar has decided with 3:2 majority the question whether the arbitration clause in a contract, which is required to be registered and stamped, but is not registered and stamped, is valid and enforceable.
• Justice K. M. Joseph in concurrence with Justice Aniruddha Bose and Justice C. T. Ravikumar held that an instrument which is exigible to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of Section 2(h) of the Indian Contract Act, 1872.
• Justice Rastogi and Justice Roy concluded that non-stamping or insufficient stamping of the substantive instrument would not render the arbitration agreement unenforceable and noted that stamp deficiency being a curable defect would not render the arbitration agreement void.

What were the Court’s Observation?

• The majority particularly held that while deciding an instrument on Section 11 of the Arbitration and Conciliation Act, 1996 the Court must perceive the fact that the document concerned is particularly stamped. If the document is found to be unstamped or insufficiently stamped, then it must be rejected at that stage itself.
• In addition to this the Court stated that if the Court finds that the document is stamped but one of the parties has concern of it not being duly stamped, and Court also notes that the objection lacks a licit foundation then the Court may refer the parties to arbitration and the power of impounding the document shifts in the hands of the arbitrator.
• The majority concluded that an arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act, 1996 attracts stamp duty, and which is not stamped or insufficiently stamped cannot be acted upon in view of Section 35 of the Indian Stamp Act, 1899 unless following impounding and paying requisite duty.
• The SC considered the verdicts of SMS Tea Estates v. Chandmari Tea Co. (2011), along with Garware Wall Ropes Ltd v. Costal Marine Constructions & Engg. (2019).

What are the Criticisms in Relation to this Case?

• Parties have to undergo a long waiting period for availing the remedy under arbitration clause due to the process of impounding which is marred by delays under Stamp Act.
• The ruling will result in a delay in the appointment of arbitrators in ad-hoc arbitrations.
• It will harm the progress of institutional arbitration or where an institution is nominated for arbitral appointments by the courts.
• If the unstamped agreement refers to institutional arbitration, filing an application before the courts will be the only option left with the parties to the dispute.
• The ruling does not deal with a situation where the instrument is executed outside India.

What are Legal Provisions in Relation to this Case?

Arbitration and Conciliation Act, 1996

• This Act improved the previous laws regarding arbitration in India, namely the Arbitration Act, 1940, the Arbitration Act, 1937, and the Foreign Awards Act, 1961.
• This act also derives authority from the UNCITRAL (United Nations Commission on International Trade Law) Model Law on international commercial arbitration and the UNCITRAL rules on conciliation.
• It unites and manages the laws associated with domestic arbitration, international business arbitration, and the enforcement of foreign arbitral awards. It also defines the law related to conciliation.
• The Arbitration and Conciliation Act, 1996 controls domestic arbitration in India and was amended in 2015, 2019 and 2021.
• Section 6 of the Arbitration and Conciliation Act, 1996 talks about administrative assistance. It states that, in order to facilitate the conduct of the arbitral proceedings, the parties, or the arbitral tribunal with the consent of the parties, may arrange for administrative assistance by a suitable institution or person.
• Section 7 of the Arbitration and Conciliation Act, 1996 deals with arbitration agreements. it states that —

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

• Section 8 of the Arbitration and Conciliation Act, 1996 deals with the power to refer parties to arbitration where there is an arbitration agreement. It states that—

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued, and an arbitral award made

• Section 11 of the Arbitration and Conciliation Act, 1996 deals with the appointment of arbitrators.
  • This Section delineates the essentials of the appointment of arbitrators.
  • It evolved twice in 2015 and 2019 with the amendment which resulted in the insertion, deletion, and substitution of several provisions including the insertion of sub-section 6A which was later deleted in the 2019 amendment.
  • The provision restricted the role of the judiciary at the pre-arbitration stage. Its deletion boosted the stance of institutional arbitration.

Section 35 of the Indian Stamp Act, 1899

• It deals with the instruments not duly stamped inadmissible in evidence, etc. It states that-

No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.

Provided that—

(a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of any instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion.

(b) where any person from whom a stamped receipt could have been demanded, has given an unstamped receipt and such receipt, if stamped, would be admissible in evidence against him, then such receipt shall be admitted in evidence against him on payment of a penalty of one rupee by the person tendering it.

(c) Where a contract or agreement of any kind is affected by correspondence consisting of two or more letters and any one of the letters bears the proper stamp, the contract or agreement shall be deemed to be duly stamped.

(d) nothing herein contained shall prevent the admission of any instrument in evidence in proceeding in a Criminal Court, other than a proceeding under Chapter XII or Chapter XXXVI of the Code of Criminal Procedure 1898 (V of 1898);

(e) nothing herein contained shall prevent the admission of any instrument in any Court when such instrument has been executed by or on behalf of the Government, or where it bears the certificate of the Collector as provided by section 32 or any other provision of this Act.

Conclusion

The decision SC in the aforesaid case has undoubtedly marked the inception of a new era of pro-arbitration jurisprudence in India. The SC has adopted a holistic, well-balanced and a contemporary approach in discarding the long persisting apprehensions of the Indian courts that provoked them to unduly interfere in arbitration proceedings and provided for safeguarding the fate of valid arbitration agreements and the competence of the Arbitral Tribunal to rule on its own jurisdiction.