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ndia has for the last several years sought to attract parties to use its various arbitration institutions like the Mumbai Centre for International Arbitration (MCIA), the Delhi International Arbitration Centre (DIAC), the International Arbitration and Mediation Centre, Hyderabad (IAMC) and the Nani Palkhivala Arbitration Centre (NPAC) among others. However, the best-laid plans of the Indian Government in promoting Indian arbitration institutions may have gone awry due to the interpretation of a fiscal statute by the Supreme Court.A five-Judge Constitution Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. held that if a contract containing an arbitration agreement or clause though chargeable with stamp duty, is not stamped, or is inadequately stamped, then the arbitration clause along with the contract is unenforceable in law. The Supreme Court, relying on Article of the , noted that even a standalone arbitration agreement arrived at by way of exchange of correspondence in terms of Section of the may attract stamp duty. An arbitration clause whether appearing as a clause in a contract or as a standalone agreement, would only be enforceable if it has been duly stamped, failing which the document would be considered void. The Supreme Court held that any court acting under Section of the is bound to impound the document if the same is not stamped or insufficiently stamped under Sections and of the .
Under Section of the , all instruments executed in India attract stamp duty. Further, all instruments executed outside India would be chargeable with stamp duty when brought inside India if they relate to any property situate in India or relate to any matter or thing done or to be done in India. As a result, any contract or arbitration agreement whether executed in India or outside, if brought into the territory of India for the purpose of enforcing the arbitration agreement therein, would be chargeable with stamp duty.
N.N. Global case confirmed two earlier decisions of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd. and held that the non-payment or inadequate payment of stamp duty on the contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable. Prior to SMS Tea case , stamping of a document could only be raised at the stage of testing the admissibility of documents during the trial and did not affect the enforceability of the arbitration clause contained in the document. Relying on the separability of an arbitration agreement, the courts would previously enforce an arbitration agreement and leave the question of validity or enforceability of a contract to be decided by the arbitrator. Therefore, parties did not face any hurdle in the enforcement of the arbitration agreement even if contained in an unstamped document. However, by holding that even the arbitration clause is invalid, the Supreme Court has shifted the examination of stamping to the reference stage.
The decision creates a conundrum regarding an arbitration agreement executed outside India. Instruments executed outside India would naturally not have been stamped according to the Indian fiscal laws. Furthermore, such an instrument would be valid, lawful, and enforceable until brought into India to enforce the arbitration agreement. However, once brought into India it shall become void and unenforceable until the defect of adequate stamping is cured. Additionally, depending on the jurisdiction where the document is relied upon to enforce the arbitration clause contained therein, the of that State would be applicable to the instrument. For instance, the would be applicable to an instrument produced in Mumbai. The stamp authorities having the jurisdiction to adjudicate the instrument would be of that State. While the substantive provisions of the in all States are similar, the fiscal fee applicable to an instrument varies. Furthermore, the stamping authorities have their own adjudication, penalty levying and appeal procedures. A party seeking to refer its disputes to an arbitration institution would have to familiarise itself with the State or provincial stamping laws where the institution is located and reconcile with the procedural delays in having an instrument adjudicated.
One of the biggest collateral damage of N.N. Global decision is institutional arbitration (both entertaining domestic and foreign arbitrations). In the case of institutional arbitrations, a request for reference is made to the institute and not to the courts. Most institutional rules provide that a request for arbitration shall be made to an appointing authority named under the rules along with a copy of the arbitration agreement. The respondent is entitled to challenge the constitution of the Tribunal, the validity of the arbitration agreement or the jurisdiction of the institution to entertain the reference even before the constitution of the Tribunal. For instance, Rule 20.1 of the MCIA Rules allows the respondent to object to the existence or validity of the arbitration agreement, or to the competence of the MCIA to administer an arbitration before the Tribunal is appointed. In case of an objection, the Registrar shall determine if a reference to such an objection is to be made to the Council. The Council upon receiving such reference “shall” decide if it is prima facie satisfied that a valid arbitration agreement under the rules may exist, failing which the proceedings shall be terminated.
Similar rules are found in almost all institutional arbitrations. The Supreme Court’s decision holds that no steps in furtherance of an unstamped or inadequately stamped instrument can be taken since the instrument is not enforceable in law and does not exist in law. Accordingly, such an instrument cannot be relied upon to accept any reference, nor can the institution derive its jurisdiction from the consent of the parties under such an agreement.
In cases where parties are before courts under Section of the , the courts are empowered to impound the documents under Section of the and send them for adjudication by the relevant stamp authority. Until the documents are stamped, Section 11 proceedings may remain in abeyance. However, in the case of institutional arbitrations, where the challenge lies before the appointing authority, the authority is neither entitled to impound the instrument nor send it for adjudication by the stamp authorities. This is because the appointing authority is neither an authority entitled to receive evidence nor the authority in charge of a public office as referred to in Section of the . Moreover, unlike courts, the institution rules do not entitle the appointing authority to keep the proceedings in abeyance until the defect of stamping is cured. This creates an imbalance between the remedy available to those who approach the courts under Section of the to refer disputes to arbitration and those who refer disputes to institutions.
Since under the most institutional rules, like the MCIA Rules, if the appointing authority is prima facie not satisfied that a valid arbitration agreement exists, then the proceedings “shall” be terminated, the appointing authority, now after N.N. Global decision, is bound to not only hold that a valid arbitration agreement does not exist but also terminate the proceedings. This is followed by rather serious consequences. On one hand, the proceedings cannot be kept in abeyance, on the other neither the institutional rules nor the provide for the revival of a proceeding after termination. Furthermore, due to inherent delays in having an instrument adjudicated by the stamp authorities, it is possible that by the time an instrument is cured of the defect, the claim itself is barred by limitation.
The decision in N.N. Global case while safeguarding revenue and preserving the mandate under the , leaves the parties who have consented to refer their disputes to an institutional arbitration without any enforceable remedy possibly even after the stamping defect is cured. The is a fiscal Act. Sections and of the provide a mechanism to protect revenue. However, it appears that due to such a hypertechnical interpretation of a fiscal statute, a respondent will be armed with a weapon that may result in the denial of substantive rights of the other party. Furthermore, it has the potential of leaving the claimant, who would otherwise have a valid right under the contract, with no remedy to enforce its right.
N.N. Global case leaves the parties referring disputes to an institution more vulnerable than those who seek to refer disputes to an ad hoc Arbitral Tribunal to be constituted under Section of the . Therefore, until the legislature steps in to even the playing field and resolves the issue, institutional arbitrations in India may cease to be a preferred mechanism of dispute resolution.
† Counsel, Bombay High Court and Doctoral Candidate, Queen’s University, Faculty of Law, Kingston, Ontario, Canada. Author can be reached at deeptipanda19@gmail.com.
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Mumbai Centre for International Arbitration Rules, 2016, R. 20.1 < >. [pending uploading].
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