Saji Koduvath, Advocate, Kottayam.

Contents in a Nutshell

The Seven Judge Bench of the Supreme Court, in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., overruling Earlier Decision of the Five Judge Bench, on 13, Dec. 2023, held as under:

• Defects on unstamping or inadequate stamping of documents are curable defects.
• They are not void (though such documents would be “inadmissible” under Sec. 35 of the Stamp Act)
• Though the courts (in proceedings for appointment of arbitrators) under Sec. 8 and 11 of the Arbitration Act only examines whether the arbitration agreement “prima facie exists”,  and the objection as to non-stamping fall within the ambit of the arbitral tribunal.

Earlier Decision of the Five Judge Bench

• The 5-Judge Bench of our Apex Court, in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2023) 7 SCC 1, by majority (3:2), held that existence of a valid arbitration agreement (with sufficient stamp) was necessary, for ‘reference to arbitrator’ under Sec. 8 of the Arbitration and Conciliation Act, 1996.
• After 2015 Amendment on Arbitration and Conciliation Act, for ‘referring’  parties to arbitration (under Sec. 8) the courts should have “FOUND“  ‘PRIMA FACIE’ –
  • (i) the EXISTENCE of the arbitration agreement and
  • (ii) the VALIDITY thereof.
• Sec. 8(1), as amended, reads as under:
  • “A judicial authority …. shall … refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
• The scope of judicial review and jurisdiction of the court under Sec. 8 (for reference to arbitrator) and Sec. 11 (for appointing arbitrator) of the Arbitration Act are identical.

Existence of Arbitration Dispute

 Section 16 of the Arbitration and Conciliation Act 1996 declares the competence of arbitration tribunal to determine the existence or validity of the arbitration agreement . It reads as under:

• “16. Competence of arbitral tribunal to rule on its jurisdiction. – (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,–
  • (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
  • (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
• (2) Where an award is remitted under sub- section (1) the Court shall fix the time within which the arbitrator or umpire shall submit his decision to the Court: Provided that any time so fixed may be extended by subsequent order of the Court.
• (3) An award remitted under sub- section (1) shall become void on the failure of the arbitrator or umpire to reconsider it and submit his decision within the time fixed.”

PART I

N.N. Global Mercantile v. Indo Unique Flame – Contentions, in Substance

The legal disputes in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2023) 7 SCC 1, 2023 SCC OnLine SC 495, was placed before the Apex Court, treading following course:

• A suit was filed by the appellant, to enforce a contract.
• The defendant applied for reference under Section 8 of the Arbitration and Conciliation Act, the contract being contained an arbitration clause.
• Trial Court rejected the application.
• A Writ Petition was filed by the defendant challenging the Order. It was contended that the Arbitration Agreement was unenforceable as the (main) contract was unstamped.
• The High Court allowed the Writ Petition. (Hence the plaintiff became the appellant before the Supreme Court.)

It was argued before the Apex Court that the Arbitration Agreement in the contract was enforceable and could have been acted upon, even if the contract was unstamped and unenforceable under the Indian Stamp Act. The 2-Judge Bench of the Supreme Court, referred the matter to 3-Judge Bench.

The 3-Judge Bench of the Supreme Court, referred the case to 5-Judge Bench, pointing out that an arbitration clause would stand as a distinct, separate and independent from the substantive contract.  This is based on the doctrine of severability or separability. That is, when the parties enter into such a contract, there are two separate agreements,

• (i) the substantive contract and
• (ii) the arbitration agreement.

In this premise, the 3-Judge Bench opined as under: 

• Even if the main contract was bad for it was unstamped or insufficiently stamped, the arbitration clause could be enforced.
• The defect on insufficiency of stamp could be cured as provided in the Stamp Act, and therefore, it could not be said that an unstamped or insufficiently stamped instrument did not exist in the eye of the law.
• The failure to stamp a document, did not affect the validity or unenforceability of the document, but it merely rendered the document inadmissible in evidence.

Before the 5-Judge Bench of the Supreme Court, it was argued –

• by the respondents/defendants, on the basis of the relevant provisions of the Arbitration Act (especially Sec. 16), that an arbitration clause would stand as a distinct, separate and independent from the substantive contract and that an arbitration reference can be made by the court even if the arbitration agreement was insufficiently stamped; and
• by the appellant/plaintiff, in view of the provisions in the Indian Stamp Act (especially Sec. 33 and 35), that the arbitration reference could not be made by the court on the basis of an insufficiently stamped agreement. It was pointed out that unstamped or insufficiently stamped documents cannot be used as evidence for any purpose, as provided in the Stamp Act; and that for reference under Sec. 8 of the Arbitration Act the court has to specifically find that prima facie a “valid arbitration agreement exists“.

N.N. Global held – If Arb. Agreement Unstamped, No ‘Valid Arb. Agreement Exists‘

It is held, by majority (3:2), in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, that an arbitration reference cannot be made by the court under Sec. 8 of the Arb. Act, on the basis of an unstamped or insufficiently stamped agreement.

The Majority affirmed the findings in this regard, in the two earlier 3-Judge Bench decisions.

• (i) Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 (it was held that an arbitration reference cannot be made on the basis of an unstamped or insufficiently stamped agreement).
• (ii) Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1 (it was held that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations).

The majority judgment Para 110 and 111 of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, reads as under:

• “110. An instrument, which is eligible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. Therefore, we approve of paragraphs-22 and 29 of Garware (supra). To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware (supra) is approved.
• 111. The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an Arbitration Agreement.”

PART II -_Relevant Provisions of Law

Arbitration and Conciliation Act on Arbitrability

Sec. 8(1), Sec. 11(6A) and Sec. 16 of the Arbitration Conciliation Act requires consideration in this regard.

There is a major change in the concept of ‘separability’ of the arbitration clause in a contract, after 2015 Amendment. The Amendment directed that the existence or validity of an arbitration agreement has to be ‘found’ by the Court, before referring the parties to arbitration, and appointing arbitrator, under the Arbitration and Conciliation Act.

Sec. 8(1) of the Arbitration Conciliation Act reads (after 2015 Amendment) as under:

• “8. Power to refer parties to arbitration where there is an arbitration agreement – (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

Sec. 11(6A) of the Arbitration Act (inserted by 2015 Amendment) reads as under:

• “11. Appointment of arbitrators – (1) … (2) … (3) … (4) … (5) …
• (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) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.”

Sec. 16, Arbitration and Conciliation Act reads as under:

• “16. Competence of arbitral tribunal to rule on its jurisdiction – (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose –
  • (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
  • (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
• (2) … (3) ….“

Section 33 and 35 of the Indian Stamp Act, 1899

Section 33 of the Indian Stamp Act, 1899 reads as under:

• 33. Examination and impounding of instruments – (1) Every person having by law or consent of parties, authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.
• (2) … (3) …

Section 35 of the Indian Stamp Act, 1899 reads as under:

• 35. Instruments not duly stamped inadmissible in evidence, etc. – No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped:
• Provided that – (a) any such instrument shall, be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion;
• (b) …. (c) ….. (d) …. (e) …..

PART III -_Decisive Earlier Decisions

SBP and Co. v. Patel Engg. Ltd.

Our Apex Court had occasion to consider the apparent inconsistency between Sec. 16 and Sec. 11 of the Arbitration Act, in SBP and Co. v. Patel Engg. Ltd., (2005) 8 SCC 618.

• Sec.16 enjoins the arbitral tribunal ‘to rule on its own jurisdiction’, including ruling on any objections with respect to the ‘existence or validity’ of the arbitration agreement and it is made clear that the arbitration clause shall be treated as an agreement independent of the other terms of the contract.
• Sect. 11(7) conferred finality to the decision of the Chief Justice, as regards the ‘reference’ to arbitration.

The explanation placed by the learned Senior Counsel, Mr. K.K. Venugopal, was pointed out by the Court.  He argued that Sect. 16 had ‘full play’ only when an Arbitral Tribunal was constituted without intervention under Sec. 11.

In SBP and Co. our Apex Court held as under:

• “Prima facie, it would be difficult to say that in spite of the finality conferred by sub-section (7) of Section 11 of the Act, to such a decision of the Chief Justice, the Arbitral Tribunal can still go behind that decision and rule on its own jurisdiction or on the existence of an arbitration clause.”

In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209, it was observed as under:

• “It is settled by SBP & Co. that Section 16 of the 1996 Act has full play only after the arbitral tribunal is constituted, without intervention of the Court under Section 11.”

Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.

As regards the enforceability of an unstamped agreement and the bifurcation of an arbitration clause, it is held in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209, as under:

• “… A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Sections 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. It is important to remember that the Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence, as has been contended for by the respondent. The independent existence that could be given for certain limited purposes, on a harmonious reading of the Registration Act, 1908 … “
• “22. When an arbitration Clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law. We have seen how, under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration Clause in an agreement would not exist when it is not enforceable by law. This is also an indicator that SMS Tea Estates has, in no manner, been touched by the amendment of Section 11(6A).”
• “29. This judgment in Hyundai Engg. case is important in that what was specifically under consideration was an arbitration Clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration Clause did “exist”, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration Clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6A) deals with “existence”, as opposed to Section 8, Section 16, and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court’s understanding of the expression “existence” in Hyundai Engg. Case as followed by us.”

Vidya Drolia v. Durga Trading Corporation

Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, made it clear-

• For appointing an arbitrator, Courts shall make a Prima Facie ‘finding’ under Sec. 11(6A) as to “Non­-arbitrability of disputes”; and 
• the prima facie examination is to make a “check”and to protect parties from being forced to arbitrate when the matter is demonstrably “non-­arbitrable”.

It is held in Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, as under:

• “133. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide.
• 134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial… …
• 139. … Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable.”

The Apex Court further observed as under:

• “146. We now proceed to examine the question, whether the word “existence” in Section 11 merely refers to contract formation (whether there is an arbitration agreement) and excludes the question of enforcement (validity) and therefore the latter falls outside the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word “existence”. However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.
• 147. We would proceed to elaborate and give further reasons:
• 147.1. In Garware Wall Ropes Ltd. [Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324], this Court had examined the question of stamp duty in an underlying contract with an arbitration clause and in the context had drawn a distinction between the first and second part of Section 7(2) of the Arbitration Act, albeit the observations made and quoted above with reference to “existence” and “validity” of the arbitration agreement being apposite and extremely important, we would repeat the same by reproducing para 29 thereof : (SCC p. 238)
  • “29. This judgment in Hyundai Engg. case [United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607 : (2019) 2 SCC (Civ) 530] is important in that what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did “exist”, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6-A) deals with “existence”, as opposed to Section 8, Section 16 and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court’s understanding of the expression “existence” in Hyundai Engg. case [United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607 : (2019) 2 SCC (Civ) 530] , as followed by us.”
• Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.”
• “153. Accordingly, we hold that the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.”
• 154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.
• 154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. ”
  • The afore stated passages from Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, is quoted and followed in NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389.

BSNL and Anr. v. Nortel Networks India (P) Ltd.

In BSNL and Anr. v. Nortel Networks India (P) Ltd., (2021) 5 SCC 738, it is held held as under:

• “45.1 …While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time-barred and dead, or there is no subsisting dispute…” (quoted and followed in NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389).

NTPC Ltd. v. SPML Infra Ltd.

NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389, without changing the foundations laid down by the Apex Court in earlier decisions, Dr. DY Chandrachud; CJI, made clear the position of law with clarity and emphasis. It is observed as under:

• “24. Following the general rule and the principle laid down in Vidya Drolia (supra), this Court has consistently been holding that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. In Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd., (2021) 5 SCC 671, Sanjiv Prakash v. Seema Kukreja, (2021) 9 SCC 732, and Indian Oil Corporation Ltd. v. NCC Ltd., (2022) SCC OnLine SC 896, the parties were referred to arbitration, as the prima facie review in each of these cases on the objection of non-arbitrability was found to be inconclusive. Following the exception to the general principle that the court may not refer parties to arbitration when it is clear that the case is manifestly and ex facie non-arbitrable, in BSNL and Anr. v. Nortel Networks India (P) Ltd., (2021) 5 SCC 738, and Secunderabad Cantonment Board v. B. Ramachandraiah , arbitration was refused as the claims of the parties were demonstrably time-barred.
• 25. Eye of the Needle: The above-referred precedents crystallise the position of law that the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non- arbitrability of the dispute.
• 27. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves. This also requires the courts to examine whether the assertion on arbitrability is bona fide or not. The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the other hand, even if there is the slightest doubt, the rule is to refer the dispute to arbitration.
• 28. The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the referral court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. It has been termed as a legitimate interference by courts to refuse reference in order to prevent wastage of public and private resources. Further, as noted in Vidya Drolia (supra), if this duty within the limited compass is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court. Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator, as explained in DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd., 2021 SCC OnLine SC 781″

In N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., , (2023) 7 SCC 1, taking note of the divergence in the debated points among Judges, Hrishikesh Roy, J., one of the (two) judges who dissented from the view of the majority, laid down the following-

•  “… Let our minority opinion (self and Learned Brother Justice Ajay Rastogi, who has written a separate opinion), appeal to the brooding spirit of the future as also the powers of the legislature to examine the interplay between the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899; and to emphatically resolve the imbroglio to avoid any confusion in the minds of the stakeholders in the field of arbitration.”

PART III

Seven-Judge-Bench reconsiders NN Global Mercantile v Indo Unique Flame

Seven-Judge Bench of the Supreme Court (D.Y. Chandrachud, CJI, and S.K. Kaul, Sanjiv Khanna, B.R. Gavai, Surya Kant, J.B. Pardiwala and Manoj Misra JJ.) was constituted to reconsider the five-judge bench decision in NN Global Mercantile v Indo Unique Flame, (2023) 7 SCC 1.

It was in a Curative Petition.

The seven-judge bench heard it on the “larger ramifications and consequences”.

The main arguments were the following:

• The lack of a stamp was “rectifiable and curable”.
• It cannot render the arbitration agreement void.
• NN Global Mercantile declared an unstamped arbitration agreement was void.
• It is not correct (If ‘Void’, it cannot be resurrected later).

The matter was referred to Seven–Judge Bench on the following order-

• “Having regard to the larger ramifications and consequences of the view of the majority in NN Global Mercantile Private Limited vs Indo Unique Flame Limited and Others, we are of the considered view that the proceedings should be placed before a seven-Judge Bench to reconsider the correctness of the view of the five-Judge Bench.”

Findings of the Seven-Judge Bench – on Stamp Act

• The Stamp Act is a fiscal statute only.
• The Act itself provided for curing defects on non-stamping.
• Hence such unstamped agreements are not void.

Findings of the Seven-Judge Bench – on Arbitration Act

• The Arbitration Act provided for minimum judicial interference.
• Arbitration Act is a self-contained code.
• It provides for the separability of the arbitration agreement from the main contract.
• Arbitral tribunals had jurisdiction to determine the limits of their own jurisdiction
• “At the referral stage by deferring to the jurisdiction of the arbitral tribunal in issues pertaining to the existence and validity of an arbitration agreement”.

Harmonious interpretation of  Stamp Act and Arbitration Act

• The Arbitration Act, a comprehensive legal code.
• It is a “special” statute.
• It did not specify stamping as a pre-condition of a valid arbitration agreement.
• It requires courts to confine at the referral stage to examination of the existence of arbitration agreement.

The Seven Judge Bench of the Supreme Court held:

• Defects on Unstamping or inadequate stamping is a curable defect.
• They are not void (though “inadmissible” under Sec. 35 of the Stamp Act)
• Though the courts (in proceedings for appointment of arbitrators) under Sec. 8 and 11 of the Arbitration Act only examines whether the arbitration agreement “prima facie exists”,  and the objection as to non-stamping fall within the ambit of the arbitral tribunal.

 The Supreme Court has Overruled

• NN Global Mercantile v Indo Unique Flame, (2023) 7 SCC 1;
• SMS Tea Estates v Chandmari Tea Co, (2011) 14 SCC 66;
• Garware Wall Ropes v Coastal Marine Constructions, (2019) 9 SCC 209.

OBSERVATIONS AND FINDINGS OF THE APEX COURT

Non-Stamping Does Not Render a Document Invalid or Nonexistent.

• “194. The interpretation accorded to the Stamp Act by this Court in the present judgment does not allow the law to be flouted. The arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The interpretation of the law in this judgment ensures that the provisions of the Arbitration Act are given effect to while not detracting from the purpose of the Stamp Act. 195. The interests of revenue are not jeopardised in any manner because the duty chargeable must be paid before the agreement in question is rendered admissible and the lis between the parties adjudicated. The question is at which stage the agreement would be impounded and not whether it would be impounded at all. The courts are not abdicating their duty but are instead giving effect to:
  • a. The principle of minimal judicial intervention in Section 5 of the Arbitration Act;
  • b. The prima facie standard applicable to Sections 8 and 11 of the Arbitration Act; and
  • c. The purpose of the Stamp Act which is to protect the interests of revenue and not arm litigants with a weapon of technicality by which they delay the adjudication of the lis.
  • d. The interpretation of the law must give effect to the purpose of the Arbitration Act in addition to the Stamp Act.” (bold in original).

Referral Court (Sec. 11 & 8 Stage) is Not Constrained From Acting Upon Certified Copy

The Apex Court held as under:

• “217. An arbitration agreement or its certified copy is not rendered void or unenforceable because it is unstamped or insufficiently stamped. We accordingly clarify that the position of law laid down in Jupudi Kesava Rao (supra) and Hariom Agrawal (supra) cannot constrain a referral court at Section 11 stage (as well as Section 8 stage) from acting upon a certified copy of an arbitration agreement and referring the parties to arbitral tribunal.”

Referral Court Not to Impound Unstamped Stamped Instrument

The Apex Court further held as under:

• “218. The discussion in preceding segments indicates that the referral court at Section 11 stage should not examine or impound an unstamped or insufficiently stamped instrument, but rather leave it for the determination by the arbitral tribunal. When a party produces an arbitration agreement or its certified copy, the referral court only has to examine whether an arbitration agreement exists in terms of Section 7 of the Arbitration Act. The referral court under Section 11 is not required to examine whether a certified copy of the agreement/ instrument/ contract discloses the fact of payment of stamp duty on the original. Accordingly, we hold that the holding of this Court in SMS Tea Estate (supra), as reiterated in N N Global 2 (supra), is no longer valid in law.”

Conclusions of the Apex Court

• “224. The conclusions reached in this judgment are summarised below:
  • a. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
  • b. Non-stamping or inadequate stamping is a curable defect;
  • c. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
  • d. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and
  • e. The decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) are overruled to that extent.”

Conclusion

In any event, the legislatures (and the courts also) – as they are duty bound to ponder the welfare of the ‘downtrodden which is the majority’ – will have to consider whether the following are ground realities-

• 1. The majority of Execution Petitions that come before the Execution (civil) Courts are for realisation of amounts below Rupees 10 Lakh ; and the lion’s share of it is filed by the persons who are engaged, directly or indirectly, in Money Lending activity, or initiated by similar “Service Providers”; and the opposite parties thereof belong (comparatively) to lower strata.  
• 2. A large number of Execution Petitions that come before the Execution (civil) Courts are that from the uncontested Arbitration Awards from “Outside-States”.
• 3. There is no effective “legal frame” (rules) for fixing remuneration of the Arbitrators.

---