SUPREME COURT ON STAMPING OF ARBITRATION AGREEMENTS & STATUS OF ONGOING ARBITRATIONS AFTER THE ORDER

by Jidesh KUMAR, Managing Partner, King Stubb & Kasiva, India, and Sukrit KAPOOR, Partner, King Stubb & Kasiva, India

Despite the majority in the Five-Judge Bench of the Hon’ble Supreme Court of India settling the debate on mandatory stamping of arbitration agreements in M/s. N.N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors. (passed on 25^th April 2023), certain key clarifications on the implications of the decision on ongoing arbitration proceedings under the Arbitration and Conciliation Act, 1996 (“1996 Act”), is necessary.

To begin with, one must bear in mind the question that was referred to the Five-Judge Bench and the necessary modification thereto as had been highlighted by the Amicus Curaie and noted in the decision rendered by Hon’ble Justice KM Joseph. The Supreme Court was essentially possessed with answering whether Section 35 of the Indian Stamp Act 1899, which prescribes that no instrument chargeable with duty shall be admitted in evidence for any purpose, would also render the arbitration agreement contained in such an instrument, as being non-existent till such time as the payment of stamp duty on the substantive contract/instrument.

Although the majority judgements of Hon’ble Justice KM Joseph and Hon’ble Justice C.T. Ravikumar extensively discuss the scope and ambit of powers of the court under Section 11 of the 1996 Act, and more specifically Section 11(6A), the conclusive finding holds that such an unstamped instrument cannot be said to be a contract, which is enforceable in law under the confines of the Indian Contact Act. The Court specifically rules that: “An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law.”

Effectively, the finding of the decision squarely applies to the sanctity of the arbitration agreement (independent or in the form of an arbitration clause) in the context of the entire arbitral proceeding, and not merely to the stages of appointment of the arbitrator and the larger clarification that the Supreme Court has rendered is that as Section 11(6A) prescribes that at the stage of the appointment of arbitrators the concerned courts are possessed with determining whether an arbitration agreement exists (emphasis) and the very existence of the concerned agreement will be defeated for non-payment of the stamp duty.

By ruling the above, the Court has departed from the harmonious position prescribed in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019)9SCC209, wherein the Supreme Court had noted that: “[…] while proceeding with the Section 11 application, the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Maharashtra Stamp Act, who will then decide issues qua payment of stamp duty and penalty (if any) as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the instrument.” The majority decision of the Five-Judge Bench judgement clearly renders the above harmonious way around Section 35 of the Indian Stamp Act, 1899, as invalid, and any instrument which is not stamped shall be impounded by the court when approached under Section 11.

What if a party opposing a Section 11 petition challenges that the instrument is insufficiently stamped? The Supreme Court has ruled that, unless such contention is “wholly without foundation”, the concerned courts must impound the instrument. The courts may in certain circumstances, however, refer the issue for determination by the arbitrator.

It must however be noted that the non-payment of stamp duty is a curable defect by following the process prescribed under Section 33 of the Indian Stamp Act, 1899 and upon due payment of the same along with any impeding penalties leading to achievement of the endorsement under Section 42(2) thereof, the instrument will be eligible to be acted upon by the concerned courts as well as the arbitral tribunals.

Crucially, in the context of ongoing arbitrations proceedings before the arbitral tribunals, it is prudent to note that Section 16 of the 1996 Act prescribes that a plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator. Additionally, a plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. Be the above as it may, the arbitral tribunal may, in either of the above cases admit a later plea challenging its jurisdiction if it considers the delay justified. By doing so a party to an arbitration may strategically choose to delay the proceedings by challenging the jurisdiction of the arbitral tribunal on account of the non-payment or insufficient payment of stamp duty towards the arbitration agreement rendering the arbitration agreement as not existing.

Additionally, even in the terms of arbitral awards that may have arisen from arbitral proceedings emanating from unstamped or insufficiently stamped arbitration agreements, the enforceability thereof can be challenged in an appeal or reference (such as that under Section 34 of the 1996 Act).

Another question that arises would be whether the Five-Judge Bench decision of the Supreme Court also affects proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 seeking reliefs prior to constitution of the arbitral tribunal?

The Supreme Court – writing through Hon’ble Justice Rastogi (albeit in minority) – categorically denied to examine the impact of an unstamped document on a Section 9 proceeding by observing that: “We, however, refrain ourselves to examine the question regarding the scope and ambit of Section 9 of the Act, 1996 of which a reference has been made by a three-Judge Bench in M/s. N.N. Global Mercantile Private Limited(supra) since the present reference is not concerned to examine the scope of Section 9 of the Act, 1996 and leave it open to be examined in the appropriate proceedings.” However, vide the majority decision, a clear and inambiguous inference can be squarely drawn that even courts possessed with petitions under Section 9 of the 1996 Act, shall be mandated to impound the concerned instrument.

Accordingly, the Five-Judge Bench decision does away with the 2019 judgement of the Hon’ble High Court of Bombay in Gautam Landscapes Pvt. Limited v. Shailesh S. Shah [AIR2019Bom149] wherein it was affirmatively held that a court, under the 1996 Act can entertain and grant any interim or ad-interim relief in an application Under Section 9 of the said Act when a document containing arbitration Clause is unstamped or insufficiently stamped.

By virtue of the above, in the event an arbitration agreement is insufficiently stamped and a party thereto seeks to enforce upon the other party to perform its due by paying its share of the stamp duty (as may be the case in particular circumstances), the concerned party seeking the direction shall be restricted from approaching the courts under Section 9 of the 1996 Act and, based on the particular circumstances of the matter, it may have a remedy to prefer a suit seeking payment of stamp duty against the defaulting party.

We also deem it relevant to address that in the event of a contract or transaction concerning multiple states, which State’s stamping law would apply?

To answer the above query we deem it essential to refer to the 2022 decision of the Hon’ble High Court of Delhi in Religare Finvest Limited v. Asian Satellite Broadcast Private Limited (decided on 10.01.2022). Importantly, the said decision was upheld by the Hon’ble Supreme Court vide order dated 22.04.2022 passed in Widescreen Holdings Private Limited & Anr. v. Religare Finvest Limited & Anr.

The facts of the above decision were such that certain loan agreements had been first signed by a party in Mumbai and then upon being sent to Mumbai were executed by the other party. The query before the Court was whether the arbitrator was right in impounding the concerned agreement for insufficient payment towards stamp duty as per the stamping laws of State of Maharashtra?

At the outset, one must note that the point of time, at which the stamp duty is to be paid is expressly provided for in Section 17 of the Stamp Act and Section 42 therein provides that: “After the procedure is followed and the duty and the penalty is paid, the instrument would come to be visited with the endorsement under Section 42(2). The majority decision held that once the process under Section 42 is satisfied, the agreement becomes enforceable and it can be acted upon in line with the decision in Hindustan Steel Limited v. Dilip Construction Company.

The Hon’ble High Court of Delhi while deciding in Religare Finvest Ltd. held that: “[…] if there are multiple parties or if there are parties other than those whose signatures are necessary to constitute an agreement. In such cases, the chargeability would be from the date “when” such instrument was first executed.” Accordingly, albeit the agreement having been first signed in a State, it is only where the same is executed by both the parties that the said agreement would be fit for stamping and secondly the concerned State where the agreement is “received” may further subject the said agreement to stamping.

The Five-Judge Bench decision is likely to have far reaching effects on ongoing arbitrations and a careful case-by-case study will be essential for determining the exact implications and strategic manoeuvres that may be available to the arbitrating parties.