N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.

Supreme Court of India · 25 April 2023 · 5 judges

Overruled in whole or in part by In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 (2023), which says: “The decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled.”

By majority, an arbitration agreement in an instrument chargeable with stamp duty that is unstamped or insufficiently stamped does not exist in law and cannot be acted upon until the instrument is validated under the Stamp Act.

Facts

The first respondent sub-contracted work to the appellant by a work order containing an arbitration clause. When the first respondent invoked the appellant's bank guarantee, the appellant sued, and the first respondent applied under Section 8 of the Arbitration Act for reference. One objection was that the work order was unstamped, so the arbitration agreement was unenforceable. A three-judge bench, in 2021, held that non-payment of stamp duty on the main contract did not invalidate the arbitration agreement, disagreeing with SMS Tea Estates and Garware Wall Ropes. Since a coordinate bench in Vidya Drolia had affirmed Garware, it referred to a Constitution Bench whether the bar in Section 35 of the Stamp Act, 1899 renders an arbitration agreement in an unstamped instrument non-existent, unenforceable or invalid pending payment of duty.

Questions before the Court

Whether an arbitration agreement contained in an instrument chargeable to stamp duty, which is unstamped or insufficiently stamped, is non-existent, unenforceable or invalid until duty is paid.
Whether a court acting under Section 11 of the Arbitration Act, given Section 11(6A), must impound an unstamped instrument under Sections 33 and 35 of the Stamp Act or may leave stamping to the arbitrator.
Whether the view in SMS Tea Estates and Garware Wall Ropes, and the 2021 three-judge decision in N.N. Global, state the law correctly.

What the Court held

The view in SMS Tea Estates, as followed in Garware, on the effect of an unstamped contract containing an arbitration agreement is correct. The 2021 three-judge decision in N.N. Global was wrongly decided in holding otherwise.
An instrument exigible to stamp duty that is not stamped is not a contract enforceable in law under Sections 2(g) and 2(h) of the Contract Act and cannot exist in law. Paragraphs 22 and 29 of Garware, and Vidya Drolia to the extent it approved them, were approved.
Section 11(6A) confines the court to examining the existence of an arbitration agreement, but does not displace its duty under the Stamp Act. If the original instrument produced is unstamped, the court acting under Section 11 must impound it under Section 33.
Sections 33 and 35 of the Stamp Act render an arbitration agreement in an instrument chargeable to duty non-existent in law until the instrument is validated, and it cannot be acted upon until duty and penalty are paid and a certificate issues under Section 42.
A certified copy relied on under the Section 11 Scheme must show the stamp duty paid; if it does not, the court should not act on it.

Why it matters

The Constitution Bench, by a 3:2 majority, reaffirmed SMS Tea Estates and Garware Wall Ropes and held that the three-judge decision in N.N. Global (2021) was wrongly decided. It requires a court acting under Section 11 to impound an unstamped instrument and treats the arbitration agreement in it as non-existent until stamped. The minority would have left stamping questions to the arbitral tribunal under Section 16 and overruled SMS Tea Estates.

In the Court's words

Copied from the official judgment; each passage links to its page.

“The view taken in SMS Tea Estates (supra) as followed in Garware (supra) and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other Charities v. Bhaskar Raju and Brothers and others36 as to the effect of an unstamped contract containing an Arbitration Agreement and the steps to be taken by the Court, represent the correct position in law as explained by us hereinbefore. N.N. Global (supra) was wrongly decided, when it held to the contrary and overruled SMS Tea Estates (supra) and Garware (supra).”

K.M. Joseph, J.Page 137 of the judgment

“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.”

K.M. Joseph, J.Page 138 of the judgment

“We further hold that the provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.”

K.M. Joseph, J.Page 139 of the judgment

“Any shirking of the statutory duty by the Court under Section 11 to act in tune with the peremptory statutory dictate of the Stamp Act, appears to us unjustifiable. Such abdication of its plain duty is neither contemplated by the Law-Giver nor would it be justifiable as causing the breach of Section 11(6A).”

K.M. Joseph, J.Page 128 of the judgment

Provisions interpreted

Sections 33 and 35, Indian Stamp Act, 1899
Section 42, Indian Stamp Act, 1899
Section 11(6A), Arbitration and Conciliation Act, 1996
Section 7, Arbitration and Conciliation Act, 1996
Sections 2(g) and 2(h), Indian Contract Act, 1872

Related judgments

Follows Vidya Drolia v. Durga Trading Corporation (2020)“To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware (supra) is approved.” (page 138)

Case and bench

Parties: M/s. N.N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd.
Case: Civil Appeal Nos. 3802-3803 of 2020
Decided: 25 April 2023
Bench: K.M. Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy, C.T. Ravikumar
Opinions: Majority 3:2. K.M. Joseph, J. wrote for himself and Aniruddha Bose, J.; C.T. Ravikumar, J. fully endorsed that opinion with an addendum. Ajay Rastogi, J. and Hrishikesh Roy, J. dissented in separate opinions.