Dealing with the real but unintended effects of the Supreme Court Constitution Bench decision in NN Global

The recent Constitution Bench judgment of the Supreme Court in NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd may have a widespread impact on every kind of dispute resolution - be it seeking the appointment of arbitrators, or seeking interim relief in arbitral disputes, or even on contracts that are unstamped.

In a nutshell, the Supreme Court in NN Global held that an unstamped agreement that contains an arbitration agreement is not enforceable in law, and therefore, a person seeking the appointment of an arbitrator based on such an agreement cannot seek the appointment of an arbitral tribunal absent stamping of the agreement.  

The Court in NN Global has not only laid down the effect of non-stamping of an agreement in relation to arbitration, but also makes powerful observations regarding the effect of non-stamping of agreements generally, and the effect in law of such unstamped agreements. According to NN Global, any agreement being an instrument that is not stamped in accordance with the Indian Stamp Act, 1899 is not legally unenforceable.

The grave practical difficulty that has been caused by this judgment is that dispute resolution, especially in the realm of arbitration, has taken a backseat to the interest of the revenue. The Court has unfortunately not applied itself to the practical realities of stamping in India and the incredible time that is spent in getting instruments stamped.

Take for example an unstamped agreement containing an arbitration agreement, and a party wishing to prefer a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. By virtue of NN Global, since the agreement itself is unenforceable, the party will have to, even though it is in a tearing urgency, send the agreement for stamping to the Collector. Only after it is received back duly stamped can it be acted on. The time spent in this process can be a very costly affair from the point of view of the stakes involved in such an agreement. In other words, because of the process of stamping being excruciatingly slow, a party may lose out on much needed relief.

Interestingly, though the Supreme Court has kept the issue of the effect of an unstamped agreement on redress under Section 9 of the 1996 Act open and has not decided upon it, it may well be argued relying upon the general principles laid down by NN Global itself, that since the substantive contract is unstamped and therefore unenforceable, the Court cannot grant its protection to such a contract. Furthermore, relying upon the language of Section 35 of the Indian Stamp Act 1899, it can be contended that there is an express prohibition on the Court acting on an unstamped agreement, thereby rendering court interference legally unavailable.

The reasoning in NN Global though is confined to the issue that was referred to it in the context of unstamped agreements being used for the appointment of arbitrators. However, the observations made by the Court, that an agreement is rendered unenforceable by law and the court cannot extend its protection to such an agreement, will nevertheless be binding on all the courts of India. Thus, a party resisting an order under Section 9 of the 1996 Act would possibly try and defeat any consideration by the court on this basis. Such an approach could very well close the doors of the courts on petitions filed under Section 9 of the 1996 Act. This would be a huge setback in commercially sensitive cases, where an interim order pretty much decides the final outcome of the case.

I believe this is an unintended consequence of NN Global, and an alternative can be evolved by which a party seeking redress can avail much-needed relief without causing much delay, and at the same time, the interest of the revenue can be protected.

Our courts need to innovate and be agile in dealing with such an unintended consequence. One practical solution could be that the Court should lay down a Standard Operating Procedure (SOP) - streamlined procedure for dealing with cases where a party approaches it under Section 11(6) or Section 9 of the 1996 Act with respect to an agreement that is not stamped.

As a first step, the party approaching the court must declare the fact that the agreement in question is not stamped or is insufficiently stamped. Secondly, the party must file an affidavit giving details of the  instrument, its nature, and in accordance with the Stamp Act, 1899, perform a self-assessment of the duty and penalty payable on the instrument. The affidavit must provide an unequivocal undertaking of the party that it shall deposit the self-assessed amount with the registry of the court within a period of two weeks of the summons being issued by the court. Further, the party shall undertake that if the registry deems the self-assessment short, then the party shall deposit any such amount as may be determined short by the registry of the court. When the matter comes up before the court and summons/notice is being issued, the court shall direct the self-assessed duty to be paid within two weeks or such other time, and only after this, the notice/summons shall become effective. However, in cases where the party is seeking urgent, ad interim ex-parte relief, the party should deposit the self-assessed amount with the registry before the matter gets listed before the court.

Such a process, if deployed, would protect the interest of the revenue and the mandate of the Stamp Act, for the court will offer its sanction to the agreement in question only after the necessary duty and penalty is paid. This procedure would also broadly find agreement with Sections 33, 35 and 38 of the Stamp Act. 

This is a fairly straightforward process that the court can prescribe for cases where the agreement itself is not stamped. However, since this is something which ordinarily our courts are not accustomed to doing, there may be some reluctance on their part. It would, therefore, be advisable that each court prescribes its own guidelines, perhaps even on the lines discussed above. A party can follow these guidelines while moving court and thereby remove the pall of uncertainty that has come to shroud dispute resolution in the backdrop of NN Global.

Kamaldeep Dayal is an Advocate practicing before the Supreme Court of India and the High Court of Delhi.