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The contested interplay between the process of dispute resolution and an unstamped or insufficiently stamped instrument was long under judicial scrutiny until it was recently decided by the Constitutional Bench of the Supreme Court of Indiain the case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd (“NN Global Judgement”) wherein the Court by 3: 2 majority held by that an unstamped arbitration agreement is non-est and therefore, unenforceable in the eyes of law. This landmark judgement was delivered in a constitutional reference made by a three Judge bench in the case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd (“NN Global SC”). The pronouncement was delivered in the context of an action for appointment of an arbitrator prior to the commencement of the arbitral proceedings.

Indian Position before the NN Global Judgment

The NN Global Judgment is a significant pronouncement as it primarily opines on the confluence of the provisions of the Maharashtra Stamp Act, 1958 and the Indian Stamp Act, 1899 (“Stamp Act”) and resolution under arbitration agreements, specifically the appointment of arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Prior to the NN Global Judgment, the law of the land was the position as laid down in the case of Garware Wall Ropes v Coastal Marine Constructions & Engg Ltd. wherein, the two-Judge Bench of the Supreme Court upholding the case of SMS Tea Estates (P) Ltd v Chandmari Tea Co. (P) Ltd., held that an unstamped document containing arbitration agreement would not enforceable and thus, cannot be acted upon in law until it was duly stamped under the provisions of the Stamp Act. The judgment in Garware Wall Ropes was further upheld by a three Judge Bench of the Hon'ble Supreme Court in the case of Vidya Drolia v Durga Trading Corpn. However, the findings of the Garware Wall Ropesjudgement were doubted by a three-judge bench in NN GlobalSC wherein they opined that the view taken by the Courts in SMS Tea and Garware Wall Ropes is not the correct position in law. Therefore, the three Judge Bench of the Supreme Court of India referred the matter to a Constitutional Bench to appropriately settle the disputed issue.

Current Position basis the NN Global Judgement

Section 35 of the Stamp Act enumerates that any instrument that is not duly stamped in accordance with law shall not be admitted in evidence for any purpose whatsoever until the same is duly stamped. Such instruments that are not duly stamped shall be dealt by the concerned authority as per the procedure laid down under Section 33 of the Stamp Act. The Hon’ble Court in the NN Global Judgement, considering the above provisions and applying Section 2(h) of the Indian Contract Act, 1872, eventually concluded that an agreement that is unenforceable on account of substantive law including the Stamp Act, would not be a contract. The majority opinion ruled the following:

“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 sec 2 (h) of the Contract Act and is not enforceable under sec 2 (g) of the Contract Act”.

In light of the above pronouncement, until such time that the instrument is duly stamped, the same cannot be taken notice of for any purposes as iterated in Section 35 of the Stamp Act. However, once the instrument is impounded and the duty and the penalty (if any) are paid subsequent to which an endorsement to such effect is received by the concerned authority, the defect/bar as stated in Section 35 of the Act shall be permanently removed and the instrument shall be deemed “validated” under law. The Hon'ble Court clarifies the position to the limited extent that when the Court is acting under Section 11 of the Arbitration Act and the Original of the relevant unstamped instrument is produced, the Court is 'duty-bound' to apply and act in accordance with the procedure laid down in Section 33 of the Stamp Act.

It is albeit interesting to note that the Apex Court whilst reaching the above conclusion, has categorically clarified for all practical aspects that the judgment is silent on its applicability to Section 9 of the Arbitration Act.

Practical implications and prospective challenges

The pronouncement is set to have far-reaching and lasting consequences for all parties to an arbitral reference. The understanding of the practical repercussions owing to the NN Global Judgment in the national and international transactional market is paramount and essential. Indian proceedings are fraught with delays and generally, the adverse party leaves no stone unturned in ensuring that the proceedings are dragged. The pronouncement is set to impact the arbitral proceedings at all stages (pre-reference, post-reference, and ongoing). The authors have attempted to enumerate some of the possible scenarios in all of these proceedings.