The Author, Adv Himanshu Goel, is a legal researcher attached to a judge of the Delhi High Court and is also pursuing an LLM.
One of the issues that continues to perplex the arbitration practitioners and Courts even after the judgment of a Constitution Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd (5J) is whether an arbitration clause embedded in a duly stamped agreement or an agreement exempted from payment of stamp duty is liable to be severe and stamped separately.
This issue stems from the fact that an arbitration clause in an agreement is treated as a separate agreement from the underlying agreement. Section 7(b) of the Arbitration and Conciliation Act, 1996 states that an arbitration agreement may be in the form of an arbitration clause “in a contract”. Section 16(1)(a) of the A&C Act states that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. In N.N. Global (5J), the Supreme Court has held that an arbitration agreement, in its own right, is exigible to stamp duty.
Relying on this finding in N.N. Global (5J), it is oft being argued before the Courts that even if an instrument is duly stamped or exempted from payment of stamp duty, the arbitration clause contained therein still needs to be separately stamped under Schedule 1 of Article 5(c) of the Indian Stamp Act, 1899, on the basis that the arbitration clause is an independent agreement.
However, this line of argument is flawed. In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (2J), which judgment has been approved in the N.N. Global (5J), the Supreme Court held that the Stamp Act applies to the agreement or conveyance as a whole and it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. It was further held that under the Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped.
The view taken in Garware (2J) was found to be erroneous by the Supreme Court in N.N. Global v. Indo Unique Flame Ltd. (3J), wherein the Supreme Court held that an arbitration agreement is distinct and independent from the underlying substantive contract and doctrine of separability of the arbitration clause on the registration of the substantive contract, ought to have been followed even with respect to the Stamp Act. It was further held that an arbitration agreement in itself is not chargeable to payment of stamp duty. However, since Garware (2J) had been cited with approval in Vidya Drolia & Ors. v. Durga Trading Corporation(3J), the findings in Garware (2J) was referred to a Constitution Bench of five judges.
Constitution Bench of the Supreme Court in N.N. Global (5J), was posed with the following reference:
“Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”
The Supreme Court held that the reasoning in N.N. Global (3J) for disapproving of Garware (2J), that “the arbitration clause would be non-existent in law and unenforceable till the stamp duty is adjudicated and paid on the substantive contract, is [again] on the premise that the arbitration agreement is a separate agreement under the Stamp Act, which is not exigible to stamp duty, which we have found is not the case in law.” In other words, the fiction under Section 16 of A&C Act that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract is limited for the purposes mentioned therein; for the purpose of the Stamp Act, it is impermissible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. Stamp Act applies to the agreement or conveyance as a whole.
The Supreme Court also tested the proposition laid down in N.N. Global (3J) and held that even proceeding on the basis that an arbitration clause is a separate agreement, would be of no avail in a case where the arbitration clause and the main agreement are both exigible to stamp duty. The Court observed that in such a scenario an arbitration clause, being the arbitration agreement, would require to be stamped. It was further observed that an interpretation requiring stamping of the arbitration clause and leaving the main agreement unstamped, when it is required to be stamped, will plainly encourage parties to contravene the mandate of the Stamp Act.
To conclude, it is only when the parties enter into a standalone arbitration agreement that the stamp duty is payable on the same. The finding of the Supreme Court that an arbitration agreement, in its own right, is exigible to stamp duty has to be seen in this light. N.N. Global (5J) does not in any manner narrow down the scope of Garware Wall Ropes (2J) rather it expressly approved the same. It therefore follows that if the agreement (which contains an arbitration clause) is duly stamped or exempted from payment of stamp duty that is the end of matter; an arbitration clause embedded in the said agreement is not liable to be severe and stamped separately.
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