Interplay between Arbitration Agreements under:

THE ARBITRATION AND CONCILIATION ACT 1996;

THE INDIAN STAMP ACT 1899 AND

THE INDIAN CONTRACT ACT, 1872

Arbitration Petition No. 25 of 2023

Dr. D.Y. Chandrachud, CJI

1. Preliminary issue:

An instrument which is unstamped or insufficiently stamped is inadmissible in

evidence and cannot be acted upon in terms of its provisions.

Arbitration agreements are often embedded in underlying instruments or

substantive contracts.

When an application is made for the appointment of an arbitrator, an objection

is raised on the ground that the arbitration agreement is inadmissible because it
is in an instrument which is unstamped or inadequately stamped.

The primary issue that arises is whether such arbitration agreements would be
non-existent, unenforceable, or invalid if the underlying contract is not stamped.

Case: N.N. Global Mercantile (P) Ltd. V. Indo Unique Flame Ltd.

3 Judge Bench called upon in a SLP to determine the enforceability of an

arbitration agreement contained in an unstamped work order.

The Bench, speaking through Justice Indu Malhotra, held that an arbitration
agreement, being separate and distinct from the underlying commercial
contract, would not be rendered invalid, unenforceable, or non-existent.

The Court held that the non-payment of stamp-duty would not invalidate
even the underlying contract because it is a curable defect.
 A) REFERENCES

Judgments referred to by the Court:

SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd:

A 2 judge bench of this court held that an arbitration agreement in an

unstamped document could not be acted upon.

A 2-Judge Bench in Garware Wall Ropes V. Coastal Marine Constructions

& Engg. Ltd.

relied on SMS Tea Estates (supra) to hold that an arbitration agreement in an

unstamped commercial contract would not “exist” as a matter of law and could
not be acted upon until the underlying contract was duly stamped

The Hon’ble SC held that when the following sections are read together:

Section 11(6-A) [ARBITRATION & CONCILIATION ACT, 1996] states the

procedure when a party fails to act as required under the procedure, then the
appointment of an arbitrator shall be made by the arbitral institute designated by
the SC.

Section 7(2) [ARBITRATION & CONCILIATION ACT, 1996] mandates that

An arbitration agreement may be in the form of an arbitration clause in a
contract or in the form of a separate agreement.

Section 2(h) [INDIAN CONTRACT ACT, 1872] states that an agreement

enforceable by law is a contract.

It would make it clear that an arbitration clause in an agreement would not

exist when it is not enforceable by law.

While referring to the United India Insurance Co. Ltd. v. Hyundai Engg. &
Construction Co. Ltd. Judgment, the Bench stated that 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.

Thereafter, a three-Judge Bench of this Court in Vidya Drolia v. Durga Trading

Corporation cited in Garware Wall Ropes stated that an arbitration agreement
exists only when it is valid and legal.

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.

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.

Judgment in N.N. Global 2: The requirement of stamping does not render an instrument void.
It only makes the instrument inadmissible in evidence until the defect is cured in accordance
with the provisions of the Stamp Act.

THE SCC

5 Judge Bench

N.N. Global Mercantile Pvt. Ltd. (Apellant)

V.

Indo Unique Flame Ltd. (Respondent)