Unstamped Arbitration Agreements Cannot Be Acted Upon Until Stamp Duty Is Paid: Supreme Court Constitution Bench

Overview of the Dispute

The Supreme Court of India, through a Constitution Bench, was called upon to resolve a foundational question at the intersection of stamp law and arbitration law: can an arbitration clause embedded in an instrument that has not been duly stamped be treated as enforceable and acted upon by a court, even while the underlying instrument remains non-compliant with the Indian Stamp Act, 1899?

This question arose from a reference made by a three-Judge Bench in N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd. & Ors., which had expressed disagreement with the approach previously taken in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited and Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited. Given that a coordinate three-Judge Bench in Vidya Drolia v. Durga Trading Corporation had approved the Garware position, the conflict necessitated authoritative resolution by a five-Judge Constitution Bench.

Background Facts in N.N. Global

The first respondent, having been awarded a Work Order, executed a sub-contract with the appellant. Clause 10 of the Work Order incorporated an arbitration clause. In accordance with Clause 9, the appellant furnished a bank guarantee. When the first respondent invoked this guarantee, the appellant instituted a suit challenging the encashment. The first respondent then moved an application under Section 8 of the Arbitration and Conciliation Act, 1996 seeking a reference to arbitration. A Writ Petition was filed by the first respondent against the Commercial Court's rejection of that application. Among the contentions raised was that the arbitration agreement was unenforceable because the Work Order itself was unstamped. The High Court allowed the Writ Petition. The critical issue before the Constitution Bench was whether an arbitration agreement could be enforced and acted upon even where the parent instrument containing it had not been stamped as required under the Indian Stamp Act, 1899.

The Reference Question

The three-Judge Bench in N.N. Global had held, at paragraph 56 of its judgment:

"We are of the considered view that the finding in SMS Tea Estates [SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66: (2012) 4 SCC (Civ) 777] and Garware [Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209: (2019) 4 SCC (Civ) 324] that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable, is not the correct position in law."

Consequently, the following question was referred to the Constitution Bench:

"Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?"

The Constitution Bench, noting the Amicus Curiae's submission that the premise that an arbitration agreement is not exigible to stamp duty was itself erroneous, reformulated the question as follows:

"Whether the statutory bar contained in Section 35 of the Stamp Act applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, as being non-existent, pending payment of stamp duty on the substantive contract/instrument?"

Relevant Statutory Framework

The Arbitration and Conciliation Act, 1996

Section 2(b) defines an arbitration agreement as an agreement referred to in Section 7.

Section 5 provides:

"5. Extent of judicial intervention. – Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part."

Section 7 sets out the formal requirements of an arbitration agreement, requiring it to be in writing and capable of being embedded as a clause within a contract or constituted as a separate agreement.

Section 11(6A), inserted by Act 3 of 2016 with effect from 23.10.2015, reads:

"6A. The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement."

The Constitution Bench noted that while Section 11(6A) stands omitted by Act 33 of 2019, that amendment had not been brought into force as of the date of the judgment.

Section 16 of the Arbitration and Conciliation Act, 1996 codifies the Doctrine of Kompetenz-Kompetenz, empowering the arbitral tribunal to rule on its own jurisdiction.

The Indian Stamp Act, 1899

Section 33 imposes a duty on every court — being a person having by law authority to receive evidence — to examine any instrument produced before it and ascertain whether it is duly stamped.

Section 35 creates a statutory bar against admitting or acting upon any instrument chargeable to stamp duty that is not duly stamped.

Section 38 prescribes the procedure for impounding instruments.

Sections 40 and 42 set out the steps for curing the stamping defect through payment of duty and penalty to the Collector, following which the instrument receives a statutory endorsement and becomes admissible and capable of being acted upon.

The Precedential Landscape

SMS Tea Estates (2011)

In SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited, a two-Judge Bench laid down the following procedure at paragraph 22: