The Stamp Act requires all instruments covered in its schedule to be duly stamped with the duty provided in the legislation. An unstamped document cannot be received as evidence by a court or a tribunal. The first time the Supreme Court dealt with the argument that an arbitration agreement contained in an unstamped instrument is not valid was in the 2011 decision of SMS Tea Estates, where a party used this argument to object to an arbitrator’s appointment. The Supreme Court relied on the provisions of the Stamp Act and refused to appoint an arbitrator until the applicable stamp duty and penalty was adjudicated and paid. This view was upheld in another Supreme Court decision of Garware Wall Ropes, where the court categorically observed that an arbitration agreement contained in an unstamped instrument was void in the eyes of the law and incapable of being enforced in terms of the Indian Contract Act 1872. A three-judge bench of the Supreme Court in Vidya Drolia affirmed this position. This line of judgments was subsequently contradicted by a three-judge bench decision in the NN Global case in 2021, where the court relied on the competence-competence doctrine to hold that the arbitral tribunal has the authority to rule on the existence, validity and scope of the arbitration agreement, which includes issues of stamping. The 2021 decision in NN Global sought to overrule the position in SMS Tea Estates and Garware. It also doubted the correctness of Vidya Drolia, which it could not overrule, since it was decided by a bench of the same strength. Instead, it referred the question – would the failure to stamp the substantive contract containing an arbitration agreement render the arbitration agreement non-existent or invalid pending payment of stamp duty on the substantive contract – to a larger bench.

The reference was answered in the NN Global 2023 decision in the affirmative. As a first step, the court unanimously agreed that arbitration agreements, being an agreement within the meaning of the Contract Act, ought to be stamped. Neither SMS Tea Estates nor Garware directly considered whether arbitration agreements are required to be stamped separately. In the 2021 decision in NN Global, the court held that arbitration agreements are separate from the instrument they are contained in and do not need to be stamped, and therefore will be valid even if they are contained in an unstamped instrument. The majority in the NN Global 2023 decision held that an agreement which is unenforceable due to the operation of substantive law, including the Stamp Act, would not be a valid contract under the Contract Act. It did not agree with the proposition that stamp duty defects in an arbitration agreement are curable and therefore an arbitrator can be appointed, who can then rule on issues including stamp duty. On the contrary, it held that an unstamped arbitration agreement is “bereft of life”, i.e., unenforceable in law.

The majority explained its reasons: the Stamp Act imposes mandatory legal obligations that are substantive in nature and cannot be brushed aside as “technicalities”. Without a valid agreement, the court cannot proceed with a reference to arbitration or appointment of an arbitrator. The lack of validity in this case is reversible, and capable of being permanently remedied by paying applicable stamp duties. In view of this, it held that it would be unjustifiable for a court under section 11 to abdicate its statutory duty under the Stamp Act, by “acting on” an unstamped arbitration agreement and appointing an arbitrator.

Practical impacts

The NN Global 2023 decision will have far-reaching practical implications, intended and otherwise. It is feared that this decision will once again open the floodgates for courts to interfere in arbitration proceedings. It is quite common for parties to have failed to pay applicable stamp duty on instruments at the time of execution. It is also very common for a foreign investor to enter into agreements and leave it to the Indian partner to ensure that the agreement is enforceable according to Indian laws, which would include the obligation to pay applicable stamp duty. The fact that the agreement is not stamped is usually only discovered after a dispute has arisen and when the foreign investor tries to get an arbitrator appointed. With this judgment, a claimant will not be able to initiate arbitration until the agreement is duly stamped. Moreover, it is the investor who may now have to take steps to pay the stamp duty and penalties, which can be a lengthy and cumbersome process, especially when the agreement between the parties has been terminated. This unnecessary delay in initiating the arbitration does not bode well for India’s image as an arbitration-friendly jurisdiction.

Arbitration would typically mirror a life cycle for a claim in a civil court proceeding, albeit with fewer procedural and technical hurdles and at a faster pace. In a traditional court litigation in which the underlying contract is unstamped, the proceedings can progress up to the evidence stage, by which point a party would have to pay the duty and penalty pursuant to which courts will admit the agreement as evidence. It is anomalous that in arbitration, which is touted to be a speedier and a less technical alternative to traditional litigation, this objection is dealt with at the very first step before the process can even begin.

While neither parties nor courts can be permitted to circumvent applicable stamp duty, a balance must be drawn between competing interests. Earlier decisions show that the Supreme Court did make efforts to draw a balance. For example, in one of its decisions, the Supreme Court, appointed an arbitrator despite an objection raised regarding the sufficiency of stamp duty paid. The court left it to the arbitrator to deal with any objections regarding stamping. Moreover, in both Garware and the 2021 NN Global decision, the court directed the High Court to impound the unstamped instrument and the authority under the Stamp Act to assess applicable duties and penalties within 45 days, clearing the way for appointment of an arbitrator. Impeding the commencement of arbitration for a process (adjudication of applicable stamp duty) which inevitably has to take place betrays the speedy adjudication objective of the Arbitration Act. Justice Rastogi, in his minority opinion, rightly held that the Arbitration Act “was enacted with an object of making the process of arbitration cost effective, less technical and in accordance with the prevalent international practices across the world”, insinuating that technical objections as to payment of stamp duty should not hold the court back from appointing arbitrators.

The court also did not consider the impact its decision would have on the judiciary, which is already burdened with pending section 11 petitions. They will all now have to first examine if the arbitration agreement or the instrument in which it is contained is duly stamped. In a case where the document bears no stamp duty at all, courts will now have to impound the documents and send them to the appropriate authority under the Stamp Act for the stamp duty and penalty to be adjudicated. Parties would then have to approach the courts again to proceed with the section 11 petition to appoint the arbitrator once the duty and penalty has been paid. Crucially, the Stamp Act does not stipulate a strict timeline within which authorities are required to adjudicate the duty leviable and this process can take weeks, if not months.

Increasing the scope of the courts’ judicial review during the appointment stage, in fact, is contrary to the intention of the 2019 amendments, which intended to transfer the power of appointment of arbitrator from courts to arbitral institutions precisely to minimise the need to approach courts. Will arbitral institutions, which will soon be appointing arbitrators once the 2019 amendment is notified, perform the judicial function of reviewing agreements and deciding whether they are duly stamped?

Finally, the court’s position on stamping the arbitration agreement separately is not clear. While it holds that the arbitration agreement is required to be stamped, it goes on to state that since the duty to be paid on arbitration agreements is meagre, the court need not pay much heed to whether the arbitration agreement is separately stamped or not so long as the main agreement is duly stamped. The court observes that it “may proceed on the basis that the amount of stamp duty, which the arbitration agreement contained in an arbitration clause, would be exigible to being extremely meagre, there is very little likelihood of such an agreement not being stamped. Therefore, what the court is to consider is, whether the contract, in which the arbitration clause is contained, is not duly stamped.”

The court has also omitted to clarify the effect of its decision on arbitrations that are already under process. Under Indian law, decisions of the Supreme Court clarifying a principle of law are applicable to all cases irrespective of the stage of their progress, because it is presumed that what is enunciated by the Supreme Court was, in fact, the law from the inception. Disruptive litigants can well argue that the defect of stamping is strong enough to unseat arbitral tribunals that have already commenced proceedings and may even be at advanced stages, costing counter-parties valuable time and resources.

While the NN Global 2023 decision does clarify the law from a stamp duty perspective, the decision fails to take into account the nuances of the Arbitration Act and its objectives. Globally, arbitration is looked at as a reprieve from the technicalities and rigour of regular litigation practices. While parties cannot avoid compliance with their obligations under the Stamp Act, the stage at which their failure to stamp the agreement becomes actionable could have benefited from a more insightful analysis of the arbitration landscape.

The court once poignantly remarked that stamp duty is a revenue measure for the state, which was “not enacted to arm a litigant with a weapon of technicality to meet the case of his opponent”. Unfortunately, the NN Global 2023 decision may well arm a respondent to resist the arbitration agreement that they had once agreed to. One hopes that Justice Roy’s passionate plea to further modernise stamp law to meet the requirements of digital economy will bear fruit, which would prevent stamp duty from being used as a way to delay arbitrations.

This article was originally published in Global Arbitration Review on 12 June 2023 Co-written by: Ila Kapoor, Partner; Ananya Aggarwal, Principal Associate; Ujval Mohan, Associate. Click here for original article

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