By Nidhisha Garg

Background

The Indian Supreme Court’s (Supreme Court) decision in ‘In re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899’(N. N. Global III) was hailed when it was passed in December 2023 as it finally put to rest the long-standing controversy surrounding the validity of arbitration agreements contained in underlying agreements which were unstamped or improperly stamped.

In N.N. Global III, the Supreme Court held that an arbitration agreement contained in an unstamped/insufficiently stamped agreement is not invalid, but merely inadmissible in evidence so long as the defect re stamping is not cured. The judgment assumed importance at the time as Indian courts had long grappled with this aspect due to the intricate issues which arose when principles of contract law, stamping provisions, and evidence law intersected with that of the arbitration act. Therefore, in a remarkable display of judicial scholarship and constitutional prowess, the seven-judges in N. N. Global III undertook an elaborate exercise of balancing these overlapping interests.

The Supreme Court concluded that the 1899 Indian Stamp Act (Stamp Act) is a mandatory fiscal statute whose provisions cannot be ignored. However, the Court stated that a defect in stamping does not affect the validity or existence of an agreement; it only makes the agreement inadmissible as evidence until the defect is cured. In view of the tribunal’s jurisdiction under the principle of kompetenz-kompetenz enshrined in Section 16 of the 1996 (Indian) Arbitration and Conciliation Act (Arbitration Act), and the principle of separability – under which an arbitration agreement is considered separate and independent from the underlying contract – the Arbitration Act must prevail by virtue of the non-obstante clause in Section 5. Accordingly, the Supreme Court held that although the defect in stamping must ultimately be cured, it is for the arbitral tribunal to determine whether such a defect exists and to direct the parties to remedy it before admitting the agreement in evidence and proceeding with the arbitration.  

However, even after close to two years of N. N. Global III, there remains a dearth of literature on the importance of the Supreme Court’s observations in the context of international commercial arbitrations (ICA). Foreign tribunals have time and again had to grapple with preliminary objections on the un-stamping/insufficient stamping of underlying agreements containing an arbitration clause. Though authorities are yet to provide any pointed guidance in this regard, this article makes a humble attempt to analyze the issue.

^{“Supreme Court of India 01” by Subhashish Panigrahi is licensed under CC BY-SA 4.0.}

Construct of the Indian Stamp Act, 1899

Extra-territorial applicability

The Stamp Act is the domestic law governing the payment of stamp duties on instruments. While the Stamp Act per se does not have any extra-territorial applicability, Section 3 provides that a stamp duty is leviable on certain instruments executed outside India. This includes instruments accepted, paid, or presented for acceptance or payment in India, as well as those endorsed, transferred or otherwise negotiated within India. It also applies to instruments executed outside of India but pertaining to property situated in India or to any matter or thing to be done in India and is received in India for that purpose. Therefore, instruments containing an arbitration agreement for an ICA, although executed by individuals or entities situated outside India, will be exigible to payment of stamp duty in India, should they fall within the aforementioned categories.

Payment of Stamp Duty

In view of the Supreme Court’s decision in Great Offshore Limited v. Iranian Offshore Engineering and Construction Company, it is now trite that Section 7 of the Arbitration Act (Arbitration Act) does not require arbitration agreements providing for an ICA to be stamped. This is in view of Part – II of the Arbitration Act which is in turn modelled on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention). Article II(2) of the New York Convention recognizes arbitration agreements as valid so long as they are in writing and signed by the parties. This is reinforced by Article II(3), which provides that courts of Contracting States must refer the parties to arbitration unless the agreement is found to be null and void, inoperative, or incapable of being performed. Therefore, the validity of arbitration agreements in the context of an ICA may be challenged only on universally accepted defences. Signatory states are often dissuaded from imposing further/additional idiosyncratic norms towards validity of arbitration agreements.

However, as elaborated below, an argument may still be made that though non-stamping may not affect the validity of the arbitration agreement, the underlying agreement is nonetheless required to be stamped before the arbitral tribunal admits it in evidence.

Consequences of non-payment of stamp duty

Under Section 33(2), every person who by law or consent of parties, is authorized to receive evidence (Authority), is required to satisfy itself as to the adequate stamping of every instrument produced before it.

Further, under Section 35, short of payment of the requisite stamp duty, an instrument exigible to stamp duty cannot be admitted in evidence nor can such instrument be acted upon by the Authority unless the stamp duty along with the penalty prescribed thereunder is duly paid.

Thereafter, in terms of Section 38, the Authority is required to send such instrument to the Collector with a certificate stating the amount of duty paid and the penalty levied along with such amount.  

Interestingly, under Section 36 of the Stamp Act, where an unstamped/insufficiently stamped instrument has already been admitted into evidence, such instrument shall not be called into question on the defect of stamping at any stage during such proceeding except as provided in Section 61.

Interplay Between the Stamp Act and an International Arbitration

A combined reading of the provisions of the Stamp Act with N. N. Global III leaves little doubt that an unstamped/insufficiently stamped agreement, though not invalid, is inadmissible in evidence and must not be acted upon until the stamp duty is paid. As such, in an ideal situation, the objection with respect to stamping, if taken promptly upon the constitution of the arbitral tribunal, must be sufficient cause for the tribunal to first impound the instrument and proceed only once the defect re stamping is cured. In this regard, the phraseology used under the Stamp Act is helpful as the Authority can be any person who is authorised to take evidence by law or by consent of parties. Since the reference of a dispute to arbitration and the consequent appointment of the arbitral tribunal are premised solely on the parties’ consent, there is no ambiguity that no additional authority is required to be delegated upon the tribunal for this purpose. Despite this, the manner in which this transpires during an ICA is not without its fair share of impediments.

Imputing knowledge of the Indian Stamp Act to foreign tribunals

The first and foremost barrier is apprising a foreign tribunal of the provisions of the Stamp Act. In the absence of judicial precedent/authority, foreign tribunals may be reluctant to accept the argument that a defect of stamping makes both the arbitration agreement and the underlying agreement inadmissible. They may also be hesitant to accept the argument that any arbitration proceeded otherwise would directly contravene the Stamp Act as well as N. N. Global III.  

On the bright side, in an intervention application filed by the Singapore International Commercial Centre (SIAC) before the Supreme Court in N. N. Global III, detailed submissions were pressed on the principle of kompetenz-komptenz to let arbitral tribunals adjudicate upon objections relating to stamping. Therefore, foreign arbitral institutions and tribunals are not entirely oblivious of N. N. Global III.

When does the problem arise?

Where a tribunal, invoking Section 61 of the Stamp Act, proceeds with the arbitration despite a stamping defect, the issue is likely to surface only at the stage of enforcement in India. Under Section 48 of the Arbitration Act, enforcement of a foreign award may be refused if the award is opposed to public policy. The Stamp Act, being a fiscal statute having a direct bearing on revenue collection, forms a part of India’s fundamental public policy; as does the seven-judge constitution bench decision of the Supreme Court in N. N. Global III. At the enforcement phase, the Indian court also reviews the arbitration agreement under Section 47 of the Arbitration Act. Therefore, in view of lex fori, an enforcement court in India would be well within its remits to refuse enforcement of an award premised on an unstamped agreement.

Cross-Jurisdictional Analysis

In the context of domestic arbitrations, Indian courts have opined that arbitral awards cannot be interfered with merely because they are passed by relying upon unstamped agreements/documents. Unfortunately, however, Indian courts are yet to delve into whether a similar analogy can be extended to an ICA.

Like India, the domestic stamp laws of most other common law jurisdictions also preclude admissibility of an instrument in the absence of stamping. However, in the rare situations when this issue has sprung up in the context of enforcement of arbitral awards, courts have attempted to not let this defect hinder the enforcement. For instance, in Hallen v. Angledal, the New South Wales Supreme Court, rejected the award-debtor’s objection of the agreement being unstamped during enforcement by relying upon the exception carved out in Section 29(4) of their Stamp Duties Act, 1920 which permitted admissibility of an instrument in evidence by a person not primarily liable to pay the stamp duty thereunder.

Similarly, in the case of Norske Atlas Insurance Company Ltd v. London General Insurance Co Ltd, the King’s Bench Division observed that an insufficiently stamped marine insurance policy as per the then English legislation was admissible as evidence to establish the arbitration agreement. Moreover, as the reinsurance contract was valid under Norwegian law, the award derived its validity from it.

Yet again in Musawi v. RE International (UK) Ltd, the Chancery Division observed that in the absence of an undertaking by the solicitors to pay the stamp duty, the agreement is inadmissible, and no claim can be based on it.

“It is incumbent that Indian parties in ICAs and their legal representatives underscore the provisions of the Stamp Act to the registrar/court of the arbitral institution and/or the tribunal at the earliest opportunity.”

_{Nidhisha Garg}

The Way Forward

With more Indian parties resorting to foreign seated arbitrations, this issue is bound to arise. It is incumbent that Indian parties in ICAs and their legal representatives underscore the provisions of the Stamp Act to the registrar/court of the arbitral institution and/or the tribunal at the earliest opportunity. This way, once a substantial number of foreign arbitral institutions and their panel of arbitrators become aware of the implications of the Stamp Act, tribunals would gradually lean towards accepting the objections of un-stamping/insufficient stamping at a preliminary stage and be amenable to impounding such agreement before proceeding with the arbitration.

As for the basis on which a foreign tribunal may be urged to accept this preliminary objection, it would be prudent to fall back on the four laws of international commercial arbitration, i.e., the law of the contract (substantive law), the law of the seat (curial law), the law of the arbitration agreement and the law that recognises and enforces the award. Therefore, even if none of (i), (ii) and (iii) are Indian law, still having regard to (iv), the tribunal is required to take cognizance of the Stamp Act. Merely by choosing a foreign governing law, parties cannot circumvent the mandatory provisions of the Stamp Act, which is a fiscal statute and constitutes an integral part of India’s public policy.