Intractable Difficulties: The Decision in NN Global
The SC's recent decision invalidating unstamped arbitration agreements poses practical difficulties in resolving urgent matters.
The Supreme Court’s April 25th decision in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors. held (by a 3:2 majority) that arbitration agreements must be stamped to be enforceable. The reference to the Constitution Bench concerned whether the statutory bar under Section 35 of the Stamp Act, 1899 that attaches to instruments chargeable to stamp duty would also attach to an arbitration agreement contained therein, rendering it ‘non-existent, unenforceable or invalid’ pending payment of stamp duty on the instrument in question.
The majority (Justices K.M. Joseph and A. Bose, with Justice C.T. Ravikumar concurring) held that an inquiry into the “existence” of an arbitration agreement under Section 11(6-A) of the Arbitration and Conciliation Act, 1996 (the Act) must consider whether the stamp duty on an arbitration agreement is paid. The majority found that an unstamped arbitration agreement is non-existent and void in law on account of being unenforceable unless the instrument in question is properly stamped as per the procedure prescribed under the Stamp Act. Once the requisite stamp duty is paid, the instrument will stand validated and be enforceable. A court seized of an application for appointment of an arbitrator under Section 11 of the Act is required to impound the document under Section 33 of the Stamp Act. It is only after the conclusion of the procedure thereunder, when a certificate under Section 42(2) of the Stamp Act is issued, that the court would be free to dispose of the application under Section 11.
NN Global’s decision mortgages the parties’ contractual will to enforce a fiscal statute. Worse still, it shakes beyond recognition the jurisprudence on what constitutes a valid and enforceable contract as it erroneously elevates (as did the Supreme Court’s earlier decision in Garware Wall Ropes v. Coastal Marine Constructions & Engineering Ltd., which it affirms) what is an evidentiary bar (admittedly curable) into a determining factor that speaks to the validity of a contract.
Closing the Door on Urgent Reliefs?
The judgement presents an example of the gap between a theoretical reading of the law and the reality of its practical consequences. In this gap lie the intractable difficulties that practitioners and courts will now face.
The first, and perhaps most pressing, difficulty pertains to granting interim measures under Section 9 of the Act. The majority states, on the one hand, that they ‘make it clear that we have not pronounced on the matter with reference to Section 9 of the Act’. Notably, this is an issue that Garware Wall Ropes also side-stepped entirely, even though it recorded the finding of the Full Bench decision of the Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah, which held that relief could be granted under Section 9 even where no stamp duty was paid.
The majority then states, on the other hand, that being unstamped or insufficiently stamped, ‘the agreement would not be enforceable till it is validated…in the manner provided in the Stamp Act and till then it would not exist in law’ and ‘an agreement which is unenforceable…would not be a contract applying Section 2(h) of the Contract Act…as long it remains an unstamped instrument, it cannot be taken notice of for any purpose… In law, it is bereft of life’ and, further still, that ‘an unstamped arbitration agreement does not exist and an unstamped contract, containing an arbitration agreement, would not exist as it has no existence in law.’
In the face of these findings, it is difficult to contemplate how a court may carve out an exception or exemption for the grant of urgent reliefs. If the embargo as to the enforcement of an unstamped arbitration agreement applies to a matter as fundamental as the appointment of an arbitrator, surely it forecloses the grant of any urgent reliefs pending payment of the adjudicated stamp duty. Needless to say, this is a drastic situation that brings hardship in its wake.
Will this Judgement Make Arbitration a Lengthier Affair?
Another area of concern is how NN Global will operate to prolong proceedings. The very goal of arbitration is to act as an efficient, alternate dispute resolution system and provide a mechanism for the speedy disposal of commercial matters. The result of NN Global is to hold the very reference to arbitration under Section 11 in a state of suspended animation. Garware Wall Ropes sought to harmonise the procedure under the Stamp Act with Section 11(13) of the Act which requires a time-bound referral to arbitration. It did so by stating that the authority may be directed to adjudicate stamp duty ‘expeditiously…and preferably within a period of 45 days’ but there is no legal prescription from which such a result can be derived (much less enforced). This, too, will result in limiting the choice of arbitration as a suitable medium of dispute resolution.
Significantly, NN Global is retrospective in its effect, as all declarations of the law by the Supreme Court are unless specifically stated to be prospective by the exercise of powers under Article 142 of the Constitution. Given this, NN Global leaves the door open to reagitating jurisdictional challenges in proceedings already underway, with orders under Section 16 being reopened.
Recourse could also be had through the invocation of the writ jurisdiction of High Courts in respect of arbitral proceedings. While this is an area of the law that has consistently been held by the courts to be extremely narrow and limited, the authoritative pronouncement in NN Global could qualify as an exceptional circumstance, justifying judicial intervention despite the case law on the subject and the provisions of Section 5 of the Arbitration Act which operate to curtail judicial intervention.
No doubt the majority in NN Global seeks to ensure the fulfilment of the mandate under the Stamp Act. However, better consequences would result if, as urged by amicus curiae, the Court drew a distinction between “existence” and “validity” and confined the inquiry under Section 11(6-A) to prima facie satisfaction as to the existence of the arbitration agreement. This would leave the task of impounding the agreement and fulfilling the mandate under the Stamp Act to the arbitrator, prior to admitting the instrument into evidence.
(Gulnar A. Mistry is a civil litigator based in Mumbai)