Whether Court Has To Look Into The Adequacy Of Stamp Duty Paid On An Arbitration Agreement At The Stage Of Section 9 Application

Introduction

The issue of whether a court should consider the adequacy of stamp duty paid on an arbitration agreement during a Section 9 application under the Arbitration and Conciliation Act, 1996 (hereinafter 'ACA') has been a topic of diverse judicial opinions. A notable juncture in the legal landscape was reached with the Constitutional bench's pronouncement in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited¹, wherein, while dealing with Application under Section 11 of the ACA, the Hon'ble Supreme Court confirmed that the non-payment of stamp duty renders an arbitration agreement unenforceable. However, with respect to Section 9, the Court expressly stated - “We make it clear that we have not pronounced on the matter with reference to Section 9 of the Act.”

In the wake of pronouncement of the Constitutional Bench decision, the Bombay High Court (hereinafter 'Bombay HC'), in its judgment in L&T Finance v. Diamond Projects², meticulously analyzed the effect of unstamped documents drawing on a trajectory of prior cases and statutory provisions. This decision navigates the delicate balance between evidentiary and non-evidentiary stages, especially concerning the admissibility of unstamped documents at the stage of Section 9 applications.

This decision of the Bombay HC has been tacitly affirmed through the recent 7-judge Bench Supreme Court (hereinafter 'SC') judgment In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899,³ a decision which has caused a seismic shift in the juridical terrain, conclusively settling the legal question on stamping of arbitration agreements.

Scope of Section 9 of the Act

Section 9 of the ACA allows parties to seek interim remedies from the court before, during, or after commencement of arbitral proceedings but before enforcement of the arbitral award. These measures act as vital protective mechanisms in the ACA, aimed at securing claims through securities, guarantees, or other court determined measures.

Understanding the scope of section 9 is essential as the Bombay HC's reasoning hinges on the distinct scope of sections 9 and 11 and the varied treatment of applications under these sections. Given the urgent nature of interim reliefs resorted to before the courts, they would require immediate intervention by the judiciary to further the intention of the legislature, which would not be to denude the powers of a court, as has been highlighted in Arcelor Mittal Nippon Steel India Ltd. v Essar Bulk Terminal Ltd.,⁴

Position of Section 9 applications prior to N.N. Global

Before the 7-judge bench decision became part of the larger picture, it would have been a risk to presume a conclusive determination of the validity of unstamped agreements in relation to a request for interim reliefs under the ACA. While stamping vis-ŕ-vis section 11 had been the subject matter of a catena of judgments, the same could not have been said about section 9.

As an attempt to bridge this gap in jurisprudence, a chronological account of adjudications by the Indian courts has been relied on by the Bombay HC, illustrating the different spheres in which the two sections operate.

The outset of these decisions can be traced to a Full Bench decision of the Bombay HC in Gautam Landscapes v. Shailesh S. Shah,⁵ where the court placed section 9 and 11 on the same pedestal holding that the legislative intent behind enactment of the Act would be conflicted if an issue raised under the Stamp Act is awaited till its conclusion in either of the provisions. This decision, however, went on to be partially overruled with the pronouncement of Garware Wall Ropes v. Coastal Marine Constructions & Engineering⁶, in terms of an application under section 11.

This issue was further deliberated upon by the Bombay HC in Saifee Developers v. Shanklesha Constructions⁷, where the court distinguished Garware Wall Ropes (Supra), saying that a decision has not been rendered on the legal status of an unstamped agreement at the stage of a section 9 application and is only in terms of a Section 11 application. As a result, Gautam Landscapes (Supra) was granted a partial approval to the extent of validity of an interim relief application under section 9.

Interestingly, the HC interpreted Garware Wall Ropes (Supra) to be a binding precedent on them in terms of letting a Section 9 petition continue, even though no legal principle in a positive sense had been enunciated to that effect.

Reference to N.N. Global

The three-judge bench in M/s.N.N.Global Mercantile v. M/s.Indo Unique Flame⁸ upset the prevailing position of law relying on the Doctrine of Separability of an Arbitration Agreement to hold that non-payment of stamp duty, being a curable defect, would not render it unenforceable, since the agreement has its independent existence from the commercial contract in question.

As far as providing interim relief under section 9 is concerned, it was categorically held that when a Contract/Instrument is unstamped, the Court may grant ad-interim relief to safeguard the subject matter of the arbitration, while directing the parties to take necessary steps for payment of requisite stamp duty within a time-bound manner.

This issue was further considered by a Constitutional Bench in the same case, only to overturn the decision and the reasoning of the three-judge bench by a 3:2 majority. It was propounded that “even an arbitration agreement on its own may be required to be stamped”. This inevitably leads to the conclusion that on consideration of provisions under the Contract Act, Stamp Act and Arbitration Act, any arbitration agreement which is unstamped would have a non-existent legal status and hence would not be open to the courts to adjudicate upon in terms of a petition under section 11.

However, a careful reflection is needed on the concluding remarks of the court where it specifically mentions that adjudication has been made on the scope of section 11 and not on section 9, something which is outside the present scope of consideration before the court.

Ruling of the Bombay HC

Justice Bharati Dangre's extensive analysis, considering the effect of unstamped documents through a trajectory of previously decided cases and provisions of the Maharashtra Stamp Act, its corresponding provisions in the Indian Stamp Act, 1899 along with relevant sections from the ACA, provides a nuanced perspective.

The reasoning on which Justice Dangre places reliance majorly emanates from admissibility of documents and the stage at which that is necessary to be done. Justice Dangre agrees with the argument that the Stamp Act itself, particularly, section 33 read with section 34 contemplates a difference in evidentiary and non-evidentiary stages, talking about the authority who is authorized to receive and admit in evidence, such unstamped document.

When the validity of a document under section 11 is under question, the line of cases starting with SMS Tea Estates v. Chandmari Tea⁹ do not inspect the defect of unstamping as a curable one. Consequently, if the instrument is found to be not duly stamped, it would be “stillborn” and the arbitration clause therein will not kick-in. The Court shall then impound the document and follow the procedure until the stamping as per the provisions of the Stamp Act is done, and only then can the document be admitted before the court, for any purpose.

Per contra, the same principle will not be applicable to section 9 wherein petitions for interim relief are inherently applications which are required to be disposed of on expeditious basis as they act in aid of final relief.¹⁰ Entertaining a section 9 application has three limbs to it, namely, a prima facie case, balance of convenience in favour of the interim relief and irreparable injury or loss if such relief in not granted, which clearly demonstrates the court's duty to protect the minor and the subject matter of the arbitration under section 9(1).

The Bombay HC decision vis-ŕ-vis the 7-bench verdict

Leaning on principles from the Contract Act and ACA, the Court highlighted the difference between inadmissibility and voidness, and its interplay with the Stamp Act, a violation of which would lead the agreement to be inadmissible and not void, that too with the defect being 'curable'. Moreover, as a fiscal measure, the legislative intent behind the Stamp Act is to secure revenue for the State on certain classes of instruments. It is not enacted to arm a litigant with 'a weapon of technicality' and impede the process of judicial determination of rights.

The Hon'ble Supreme Court has revived the reasoning of the three-judge bench judgment bringing up fundamental postulates such as minimal judicial interference, separability of the arbitration agreement, and kompetenz-kompetenz to justify the harmonious construction of the provision of the statutes in question. According to the court, Section 8 and 11 of the ACA and the principles behind them will gain a certain precedence over the other statutes, the Act being a special statute.

The SC talked about Section 9 as a stage where a limited judicial intervention over the substantive dispute is stipulated in the Act. However, the court placed reliance on the same principles as other provisions making it evident that courts are not required to deal with the issue of stamping at the stage of granting interim measures under Section 9, and hence, granting acceptance to the reasoning and conclusions arrived at by the Bombay HC.

Conclusion and Analysis

The legal trajectory surrounding the adequacy of stamp duty paid on arbitration agreements during Section 9 applications has clarified significantly. The Constitutional bench's ruling in N.N. Global Mercantile set a precedent, deeming non-payment of stamp duty as rendering arbitration agreements unenforceable. Subsequent to this, the Bombay High Court's nuanced analysis in L&T Finance v. Diamond Projects and the 7-judge Bench Supreme Court decision clarified that the stamping issue need not be addressed at the Section 9 stage. The emphasis on minimal judicial interference, the urgency of interim reliefs, and the protection of the subject matter of arbitration provides a clearer perspective on this complex legal question. The consensus now favors addressing stamping concerns in a subsequent stage of the arbitration process, offering clarity and coherence to the legal framework.

Footnotes

1. N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2023) 7 SCC 1.

2. L&T Finance Limited v. Diamond Projects Limited & Ors; Comm. Arbitration Petition No. 1430 of 2019.

3. In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899; Curative Petition No, 44 0f 2023.

4. Arcelor Mittal Nippon Steel India Ltd v. Essar Bulk Terminal Ltd; Civil Appeal No. 5700 of 2021 (Supreme Court of India).

5. Gautam Landscapes Pvt. Ltd. v. Shailesh S. Shah, 2019 SCC OnLine Bom 563; gave approval to Universals Enterprises v. Deluxe Laboratories Pvt. Ltd. 2017(2) ALLMR 779.

6. Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209.

7. Saifee Developers (P) Ltd. v. Shanklesha Constructions, 2019 SCC OnLine Bom 13047.

8. M/s.N.N.Global Mercantile (P) Limited Vs. M/s.Indo Unique Flame Ltd. & Ors2021(4) SCC 379

9. SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66.

10. Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 SCC 125

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