(2021) 4 SCC 379
SUPREME COURT OF INDIA
DATE OF THE CASE: 11 January, 2021
APPELLANT: M/S N.N. Global Mercantile
RESPONDENT: M/S Indo Unique Flame Ltd.
LEGAL PROVISIONS: The Indian Stamp Act,1899 and The Arbitration Act, 1940
FACTS:
- The Work Order’s first respondent, who was chosen, and the appellant formed a subcontract. An arbitration clause was included in Clause 10 of the Work Order, which served as the subcontract.
- In accordance with Clause 9, the appellant had provided a bank guarantee. The encashment of the bank guarantee prompted the appellant to file a lawsuit in response to the use of the guarantee. Under Section 8 of the Arbitration and Conciliation Act of 1996, the first respondent submitted a request for reference.
- The first respondent filed a Writ Petition to overturn the Commercial Court’s decision to deny the application made in accordance with Section 8 of the Act.
- One of the arguments put out was that the Arbitration Agreement was rendered useless when the Work Order was unstamped. However, the Writ Petition submitted by the first respondent was accepted by the High Court.
ISSUE RAISED:
- Whether an arbitration agreement would be enforceable and acted upon, even if the Work Order dated 28.09.2015 is unstamped and un-enforceable under the Stamp Act?
CONTENSION:
Arguments from the Petitioner’s Side:
- According to the appellant Global Mercantile, the application under Section 8 for the referral of disputes to arbitration was unmaintainable because, under Section 34 of the Maharashtra Stamp Act, 1958, the Work Order, which was an unstampable document, could not be admitted into evidence for any purpose or be used as legal authority without being properly stamped.
- The appellant’s attorney has relied on paragraph 22 of the judgement to make the claim that until stamp duty is decided upon and paid on the substantive contract, the arbitration provision would be void and unenforceable.
- In cases of Garware[1] and SMS Tea Estates[2] ,the Hon’ble Supreme Court has already ruled that an arbitration agreement is separate and unrelated to the main terms of a commercial transaction. Regardless of the apparent illegality of the commercial contract, the arbitration agreement can be implemented if it is determined to have an independent existence.
- An arbitration agreement is different from and independent of the underlying substantive commercial contract, as we have previously recognised. If the arbitration agreement is determined to exist independently, it will be enforceable regardless of whether the commercial contract is invalid.
Arguments from the Respondent’s Side:
- The Respondent contended that The Stamp Act and the Act must be construed in a way that is harmonious by the court. He highlights how crucial it is to follow Section 5 of the Act.
- Since the Stamp Act is based on the principle of minimal interference, and Section 5 of the Act contains a non-obstante clause that states that “notwithstanding anything contained in any other law for the time being in force,” the Court should not be detained by Sections 33 and 35 of the Stamp Act.
- He adds that the requirements of Section 11 are a prima facie fulfilment. When the Parliament passed Section 11 (6A), the validity was not a requirement. Sections 8 and 11 are intentionally separate from one another.
- To put it another way, there is a difference between the terms “existence” and “validity.” It is argued that Section 16’s powers have an unrestricted scope.
RATIONALE:
A constitution bench of the Supreme Court of India, in N.N. Global Mercantile Private Limited v Indo Unique Flame Ltd and Other, by a 3:2 majority, ruled that an unstamped instrument, which is exigible to stamp duty, containing an arbitration clause, cannot be said to be a contract enforceable in law within the meaning of Section 2(h) of the Indian Contract Act 1872 and is therefore not enforceable under Section 2(g) of the Contract Act.
But the ruling has two effects: it delays the nomination of arbitrators and involves court action at the pre-reference stage. In India, where the Stamp Act’s post-impounding adjudication procedure is a cumbersome and drawn-out process, this is especially important. The issue of directives requiring agencies covered by the Stamp to respond in a timely way may have been beneficial in this respect.
There was initially a three-judge bench of the supreme court which held that stamps should not be a barrier and the matter should go to arbitration. It was because sec 11 (6A) stated that the court shall only focus on the existence of an arbitration agreement or clause. SC held that the stamp act cannot be held herein as it is a fiscal statute and payments under it are a curable defect so it cannot make arbitration agreement void and this judgement had overruled SMS tea and Garware
The case was sent to a 5-judge bench for reference
Court said that for an agreement to exist under 11(6A) or for there to be a valid arbitration agreement under section 8, it must be an enforceable contract under 2h because if it is not an enforceable contract then by virtue of section 2g it will be an agreement which is not enforceable by law and will be void
Next the court goes in whether in view of sections 33 and 35 which says that a court cannot admit the document in evidence cannot act upon the document and it must impound the document if the stamp duty is not adequately paid, so looking at those provisions can you say that the agreement is not enforceable or is it a mere curable defect??
Court says no, stamp act is not a mere procedural legislation, it creates a substantive bar , it cannot be overlooked or ignored by any court.
Sec 5 of arbitration act which talks of judicial non-interference does not come in the bar or procedure given under 33 and 35
The moment a document comes in a court it is duty bound to see whether it is duty bound to check whether it is stamped or not and cannot act upon it. If a court cannot act upon a document that means a court cannot enforce a document. If the court can’t enforce the document then it means that it is an agreement not enforceable by law. It does not have the cooperation of the state i.e. the state authority would not help in enforcing of that document
So it is in that sense void in accordance of 2g and void here does not mean for say, an agreement which is against a famous politician or contrary to public policies, herein void is in a different sense since the voidness is not curable there but here although you can pay the penalty and stamp duty late but till the time that happens, the contract cannot be enforceable in the eyes of law. The stamp duty and penalties can only be paid once it is judicated. The law requires the stamp duty to be paid when the instrument has been executed or signed. If you don’t pay it then you have missed the bus till the time the document has further been impounded and duties and penalties have been paid.
On the other hand, the Minority Judgements acknowledge the severability and separability elements of an arbitration agreement. This complies with all applicable international requirements. According to the Minority Judgements, there appears to be less judicial intrusion, which may be more in accordance with the genuine object and spirit of the Arbitration Act.
Although the Stamp Act is a fiscal statute and the fact that failure to pay the required stamp duty is a correctable defect benefits the revenue, a reading that expedites arbitration may have been necessary at the time and may have helped India become a centre for international arbitration.
INFERENCE:
In the case of M/S N.N. Global Mercantile vs M/S Indo Unique Flame Ltd, the Section 11 codes have been impounded upon and especially about their stamping.
The moment a section 11 file has been sent in, the court firstly looks at whether it is stamped or not, impound the document and stamp duty and penalty is adjudicated and then paid. All these steps make the document reliable.
As per my understanding, this judgement has an impact on all agreements as many agreements today contain arbitration clause. In fact, stamping is not unique to arbitration agreements, every agreement unless exempted must be stamped so the judgement herein is not telling us something unique but is emphasing on the law that has already been there since the Stamp Act that in a document if there is an instrument chargeable to duty you must pay the stamp duty otherwise it has to be impounded. It is a different view that in practice it is not really happening but now the court has brought it into the limelight.
Ankita Kukreja
Student at UPES Dehradun
[1] Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324
[2] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 : (2012) 4 SCC (Civ) 777