The Impact Of Supreme Court's Decision In M/S N.N Global Merchantile V M/S Indo Unique Flame Ltd
In a recent ruling by a constitution bench of the Supreme Court of India,
referred to as the "Larger Bench," a 3:2 majority decision was reached in the
case of N.N. Global Mercantile Private Limited v Indo Unique Flame Ltd and
Others. The judgment established that an unstamped instrument, which is
subject to stamp duty, and contains an arbitration clause, cannot be considered
a legally enforceable contract under the provisions of Section 2(h) of the
Indian Contract Act 1872 ("Contract Act"). Consequently, such instruments are
not enforceable as per Section 2(g) of the Contract Act.
Furthermore, the ruling held that the stipulations outlined in Sections 33 and
the restrictions specified in Section 35 of the Stamp Act 1899 ("Stamp Act"),
which pertain to instruments liable for stamp duty as per Section 3 and the
Schedule of the Stamp Act, would render the arbitration agreement contained
within such an instrument legally null and void unless the instrument undergoes
validation under the provisions of the Stamp Act.
This judgment emanated from a reference made to the Larger Bench due to the
presence of conflicting decisions from coordinate benches within the Supreme
Court of India.
Brief Facts Of The Case
M/S Indo Unique Flame Ltd. was awarded a work order, the respondent entered into
a sub-contract with M/S N.N. Global Mercantile Pvt. Ltd.. Clause 9 of the
"Transport Work Order" specified for furnishing of a security deposit in the
form of a Bank Guarantee whereas Clause 10 of the said contract mentioned the
arbitration clause. Due to certain disputes in the sub-contract, M/S Indo Unique
Flame Ltd. invoked the Bank Guarantee furnished by N.N. Global Mercantile, to
which the applicant filed a civil suit before Commercial Court, Nagpur. Indigo
Unique Flame Ltd. filed an application under section 8 of Arbitration and
Conciliation Act, 1996 seeking to refer suit to arbitration, which was rejected
by the Commercial Court.
Thereafter Indo Unique Flames Ltd. filed a writ petition against the order of
the commercial court, the Bombay High Court allowed the application under
Section 8 of the Arbitration Act,1996. It held that the non-stamping of Work
Order can be raised at the stage of Section 11 of the Arbitration Act,1996 or
before the Arbitral Tribunal at the appropriate stage.
An appeal was filed in the Hon'ble Supreme Court where a three-judge bench of
the Supreme Court in deciding the validity of arbitration agreement in an
unstamped or not-sufficiently stamped contract, held that, the arbitration
agreement is separate and independent from the substantive contract in which it
was embedded. The Hon'ble Apex Court placed reliance on doctrine of severability
and held that when entering into a contract that contains arbitration clause,
they enter into two separate agreements. First is the substantive agreement
which contains rights and duties of the parties and second is the arbitration
Furthermore the Supreme Court held that exclusively Arbitral tribunal has the
competence to rule on its own jurisdiction and entertain questions as regards to
its validity or existence reliance was placed on Doctrine of Kompetenz-Kompetenz
embedded is 16(1) of Arbitration and Conciliation Act, 1996. Furthermore the
court held that legislative intent behind adding 11(6A) was for minimal judicial
The Apex Court refuted the principles laid down in SMS Tea Estates pvt Ltd. v.
Chandmari Tea Co. Pvt. Ltd Garware Wall Ropes Ltd. v. Coastal Marine
Constructions & Engg. Ltd and Vidya Drolia v. Durga Trading Corporation held
that non-payment or insufficient payment of stamp duty does not invalidate the
arbitration agreement and deems it to be non-existent in the eyes of law.
Since it was a three judge bench in Vidya Drolia V. Durga Trading
Corporation, the matter was referred to a larger five-judge Constitutional
Judgment by five-judge Constitutional bench of Supreme Court:
The apex court while expressing its majority view 3:2 in the present reference
held that no instrument chargeable with duty under the Stamps Act shall be
admitted in evidence or acted upon unless it is properly stamped according to
Section 35 of the Stamps Act. This includes any arbitration agreements made in
accordance with the 1996 Arbitration and Conciliation Act.
If the agreement is not stamped or insufficiently stamped, it is not valid and
enforceable. The Hon'ble further explained that section 35 of the Stamp Act,
1899 bars collateral transactions thus if stamp duty is not paid on the
substantive contract then the arbitration clause so embedded cannot be enforced
or acted upon.
Section 35 of The Stamp Act, 1899 prohibits admission of instruments non stamped
or insufficiently stamped as evidence. The supreme court explained that an
unstamped contract, which is exigible to stamp duty, and which may contain an
arbitration clause, cannot be said to be a contract that is enforceable in law.
Therefore, such a contract, and the arbitration agreement therein, cannot be
said to exist in law. In reference to this the apex court further elaborated
that "existence" mentioned under section 11 of the Arbitration and Conciliation
Act, 1996 does not mean mere physical existence, the arbitration agreement must
exist in law i.e. it shouldn't be invalid, enforceable, illegal or void.
The Supreme court further held that the Stamp Act is not intended to be used as
a weapon by a litigant to defeat the cause of the opponent,it is a curable
defect, thus an instrument not duly stamped can become admissible when dues and
penalties if any are paid as per section 42(2) of the Stamp Act, but until stamp
and penalty are paid the contract is not enforceable and would not be a contract
as provided under section 2(h) of the Indian Contract Act, 1872.
The Supreme Court overturned the judgment passed by the smaller bench and held
that principles laid down SMS Tea Estates pvt Ltd. v. Chandmari Tea Co. Pvt. Ltd
Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd and Vidya
Drolia v. Durga Trading Corporation to be correct.
The Majority Judgment's effect is to reinstate the legal position established in
SMS Tea. It is founded on a meticulous interpretation of the pertinent statutes
and withstands scrutiny in that regard.
However, the decision's consequences are twofold: first, it involves judicial
intervention at a pre-reference stage, and second, it leads to delays in the
appointment of arbitrators. This aspect is particularly pertinent in the Indian
context, given that the post-impounding adjudication process under the Stamp Act
is known for its complexity and protracted nature. In this context, issuing
directives to the authorities under the Stamp Act to act expeditiously could
have been beneficial.
Notably, the Majority Judgment does not address applications under Section 9 of
the Arbitration Act. Nevertheless, if we apply the principles set forth in the
Majority Judgment and SMS Tea, even Section 9 applications should not be
entertained, nor should orders be issued until the deficiency in stamp duty
payment is rectified. After all, an agreement cannot be void for one purpose
while remaining valid for another. The Stamp Act does not make such
distinctions, at least not explicitly.
Conversely, the Minority Judgments acknowledge the concepts of severability and
separability of an arbitration agreement, aligning with international standards.
Arguably, the approach to minimize judicial interference, as discerned from the
Minority Judgments, seems to be more in harmony with the true intent and spirit
of the Arbitration Act.
The Larger Bench's decision has once again raised questions about the
relationship between substantive contracts and the arbitration clauses they
contain. In the future, parties will need to be diligent in ensuring the payment
of stamp duty as mandated by the Stamp Act. Furthermore, the manner in which
arbitration agreements are drafted may warrant reconsideration, possibly
exploring the execution of separate arbitration agreements to safeguard the
While the Stamp Act primarily serves fiscal purposes and revenue interests, the
fact that non-payment of required stamp duty is a remediable defect suggests
that an interpretation aligning with expediting arbitration proceedings could
have been a timely response, potentially bolstering India's standing as an
international arbitration hub.
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