A five-judge Constitution Bench of the Supreme Court of India in NN Global Mercantile Limited v. Indo Unique Flame Limited and Ors held by a 3:2 majority that an arbitration agreement or clause in a contract would not constitute a contract enforceable under Indian law, if the instrument containing the arbitration agreement is not duly stamped.

The judgment will have larger ramifications on the pro-arbitration regime of India developed over the last decade through legislative amendments and a change in judicial approach to promote a speedier and more efficient arbitration process.

This decision gives clarity on the issue of stamping of arbitration agreements and holds that an arbitration agreement which is not stamped will not ‘exist in law’ or be capable of being acted upon. Thus, at the stage of appointment of arbitrators by courts under Section 11 of the Arbitration and Conciliation Act, 1996, the High Court or the Supreme Court must ascertain that appropriate stamp duty has been paid on the underlying instrument as well as the arbitration agreement.

The decision puts to rest a long-pending question of law on:

(a) whether stamp duty under and in terms of the Stamp Act is payable on an arbitration agreement or clause contained within an overarching agreement, and

(b) if the non-payment or deficient payment of such stamp duty renders the arbitration agreement unenforceable.

This decision upholds the previous decisions of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Limited and Vidya Drolia v. Durga Trading Corporation, and declares that the three-judge Bench decision in NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd is not good law.

Although technically this is a correct interpretation of the legal framework in India, the decision has missed an opportunity to consider the Stamp Act and Arbitration Act harmoniously. The Court could have given supremacy to the Arbitration Act by devising a scheme whereby the fiscal statute on stamping is given effect to by the arbitral tribunal once duly constituted and not by the High Court or Supreme Court at the stage of appointment of the arbitrators.

The possible view could have been that so long as there is prima facie existence of the arbitration agreement in terms of the definition provided under the Arbitration Act, the appointment of arbitrators and grant of interim relief by the courts should not be prevented due to the curable defects of insufficiency or non-stamping of the instrument in which the arbitration agreement is contained. Ideally, it is the prerogative of the arbitral tribunal to decide its own jurisdiction under Section 16 of the Arbitration Act, which includes determining the existence of the arbitration agreement. This power will include the power to determine stamping of the arbitration agreement by the necessary implication. Indeed, the minority opinion correctly takes this view.

By putting a hurdle of stamping before appointment of arbitrators or grant of interim relief, the Supreme Court has taken away the power of the arbitral tribunal to decide its own jurisdiction and also the existence of the arbitration agreement. At the stage of appointment of arbitrators or granting interim relief prior to constitution of the arbitration tribunal, there are no substantive proceedings before the court. Such proceedings are only supportive in nature to aid an early constitution of the arbitral tribunal or to protect the subject-matter of the dispute in the ultimate arbitration proceedings.

By prescribing a mini-trial at this stage, for impounding and adjudication of the stamp duty, the decision has created a procedural difficulty in speedy constitution of the tribunal and urgent need to protect the subject-matter of the dispute.

This decision leaves many questions open, given the view taken on the validity of the arbitration agreement. The purpose of introducing Section 11(6A) in the Arbitration Act through the 2015 amendment was to reduce the involvement of courts at the stage of appointment of the arbitrators so long as there is a prima facie existence of an arbitration agreement. The view taken by the Supreme Court that for an arbitration agreement to exist prima facie, it should be a valid and legal and it becomes void when the contract ceases to be enforceable, is not in the interest of the pro-arbitration regime of India.

The view taken impacts the arbitration landscape of India by adding an additional layer of scrutiny at the stage of appointment of arbitrators to ascertain ‘validity’ or ‘existence’ of the arbitration agreement, contrary to the legislative intent. This will help parties who are in default of their obligations under the contract and who are interested in delaying the initiation of the arbitration. The underlying objective of the Arbitration Act, which was held by the Supreme Court itself to be a special legislation that is an exhaustive and self-contained code, is to promote speedy constitution of the tribunal with minimal judicial intervention.

A full-blown inquiry by the High Court or the Supreme Court into the stamping of the instrument at the time of appointment of arbitrators is contrary to the intent to promote India as arbitration-friendly jurisdiction. In effect, the decision serves to delay the already time-consuming process of appointment of arbitrators.

The meaning of the phrase “any person having by law or consent of parties authority to receive evidence…” contained in the Stamp Act should not have been imported into the Arbitration Act. A certified copy of the arbitration agreement required to be filed along with the application for appointment of the arbitrators is not actually taking the arbitration agreement into evidence, since the High Court or Supreme Court has only limited power to appoint arbitrators.

This decision will also impact many ongoing arbitration disputes, and pending challenges against awards or enforcement proceedings where the arbitration agreement is not duly stamped. Now the prerequisite of stamping will benefit a party who has an incentive to delay the arbitration proceedings or enforcement of awards. This may serve to further prolong the arbitration process and the time taken for the awards to attain finality, thereby undermining confidence in India-seated arbitrations.

The Supreme Court has taken a pro-arbitration stance in numerous cases – especially when looking at questions of minimising judicial intervention in arbitration. However, this decision will have an impact on India’s image and position globally. It may have been a more prudent approach to accord supremacy to the Arbitration Act over the Stamp Act. In any event, non-payment of stamp duty is a curable defect under the provisions of the Stamp Act itself. This function of adjudication and payment of stamp duty could and should have been entirely delegated to the arbitration tribunal at the post-appointment stage.

By declaring of the entire arbitration agreement as invalid and unenforceable is a hyper-technical view of the Stamp Act taken by the Supreme Court, one that fails to balance the underlying objectives of the Stamp Act with those of the Arbitration Act.

However, there is a silver lining. The 2019 amendment to the Arbitration Act has proposed to omit Section 11(6A) of the Arbitration Act and contemplates appointment of the arbitrators by the designated arbitration institutions. With India having credible arbitration institutions such as the India International Arbitration Centre, Mumbai Centre for International Arbitration, Indian Council of Arbitration, International Arbitration and Mediation Centre and the Nani Palkhivala Arbitration Centre among others, it is right time to notify the 2019 amendments.

The expeditious notification of the 2019 amendments will help promote institutional arbitration in India and avoid any delay in appointment of arbitrators, irrespective of this decision. All such technical issues will have to be resolved by the duly constituted arbitral tribunal and not by the High Court or the Supreme Court at the time of appointment of the arbitrators.

An early notification of the 2019 amendments will help nullify the regressive stand taken by this judgment as the process for appointment of arbitrators will be delegated to designated arbitration institutions. In any event, such an intervention by the Central government to expedite the notification of the 2019 amendments will also promote institutional arbitration in India and give impetus to India’s image as an arbitration-friendly jurisdiction.

Tejas Karia is a Partner and Head – Arbitration at Shardul Amarchand Mangaldas.