Stamp Duty on Arbitration Agreements

21st March, 2024 - 7:20 am Categories: Stamp Duty 0 Comments

ABSTRACT

The article deals with the changes that took place in the arbitration in India relating to the stamp duty issue through the analysis of the new judgement (October 2023) of NN Global Mercantile v. Indo Unique Flame case[1], which overturn the five-judges bench decision of the same case delivered in April 2023. The paper shortly and precisely deals with the issue and the judgement of the court and what principles were used by the court in order to reach the decision.

INTRODUCTION

The case revolves around the validity of the agreement unstamped and unenforceable by the stamps act. The brief facts of the case are: Karnataka Power Corporation Ltd. (KPCL) first gave Indo Unique a contract for coal washing. Indo Unique used a State Bank of India (SBI) bank guarantee to make this deal safe. To N.N. Global Mercantile (Global Mercantile), Indo Unique subsequently subcontracted the shipment of coal. There were provisions in the subcontract requiring Global Mercantile to put up a security deposit and an arbitration clause for resolving disputes.

KPCL invoked the bank guarantee as a result of disagreements that emerged under the primary contract. The bank guarantee that Global Mercantile supplied as part of the subcontract was also used by Indo Unique. The Nagpur Commercial Court was the first in a long line of judicial actions that followed this. Using a writ petition submitted in accordance with Articles 226 and 227 of the Indian Constitution, the Commercial Court’s ruling was contested in the Bombay High Court.

The Bombay High Court rejected the Commercial Court’s conclusions, upholding the existence of a binding arbitration agreement and approving the filing of an application under Section 8 of the 1996 Arbitration and Conciliation Act. The claim that fraudulent invocation of the bank guarantee couldn’t be settled through arbitration was likewise rejected. The question of the enforceability of the arbitration agreement because the subcontract lacked stamping was postponed for consideration during the arbitration hearings. Global Mercantile filed a special leave case with the Supreme Court of India after becoming displeased with the Bombay High Court’s ruling.

The petition was heard by the three judge bench of the supreme court which declared that, in arbitration issues, stamp duty on the main contract is essential to hold the arbitration clause valid and cannot be separated from the contract. A curative petition was filed and was referred to seven judge bench and hence this petition.

ISSUES

1. Whether the arbitration clause in above facts will be valid in the agreement which was unstamped and unenforceable under the Stamps Act?
2. Whether arbitration clause can be separated from the main contract?

RULES

Section 11 of the Arbitration and Conciliation Act, 1996.

JUDGEMENT

The Supreme Court stressed the importance of the separability and kompetenz-kompetenz concepts in modern arbitration law in its ruling. It made extensive use of international arbitration procedures from well-known arbitration centres including the UK, US, and France. The Arbitration and Conciliation Act’s guiding principles, the 1985 UNICITRAL Model Law, were emphasized by the court as essential to preserving. The Court further noted that the 2015 change to Section 11 of the Act was made with the intention of reducing judicial interference in the arbitration process.

In contrast to their previous petiton, the Supreme Court chose a different approach. According to the Court, the arbitration clause in the principal commercial contract is not invalidated or rendered ineffective by the non-payment of stamp duty. To support this viewpoint, the Court established a harmonious interpretation that reconciled the applicable Stamp Act’s required clauses with its obligation to respect arbitration agreements. In order to correct the errors in its earlier decision in the Garware case[2], the Court mainly relied on the separability concept. Additionally, it highlighted that any unpaid or incomplete stamp duty may be made up, therefore there was no need to suspend the arbitration until the unpaid stamp duty was made.

As a result, the Court changed its mind about its earlier position as demonstrated in the NN Global Mercantile v. Indo Unique Flame case[3] and SMS Tea case[4] and disagreed with the conclusions made in the Garware case[5]. In Vidya Drolia v. Durga Trading Corpn.[6], a parallel bench had only lately reiterated the view taken in the Garware case, the Court noted.

In response to the second question, the court said that the arbitration clause stand separate from the contract and the validity of the contract does not define the correctness of the arbitration clause.

RULES OF INTERPRETATION

HARMONIOUS INTERPRETATION: means interpretating two statutes harmoniously or together without making any of them redundant. The purpose of this rule is to prevent the conflict between two laws. In this case, Hon’ble justice use this rule to interpret Sec 11 and the stamps act and provided the above judgement.

MISCHIEF RULE OF INTERPRETATION: The judges applied the “mischief rule” also known as purposive interpretation. Herein, the court taken into consideration the legislative intent behind the Sec 11 of the arbitration, while pronouncing the judgement and thereby overruled the previous judgements.

PRECEDENT RULE: The court followed the decisions of the larger bench while deciding the issue number two.

CONCLUSION

The fundamental meaning of the kompetenz-kompetenz and separability principles has been elucidated by the Supreme Court through persuasive argument. In addition to reiterating the Arbitral Tribunal’s right to establish its own jurisdiction, this clarification seeks to safeguard legally binding arbitration agreements. The invalidity of the arbitration agreement and objections to its arbitrability have sometimes been incorrectly treated as separate issues by Indian courts, resulting to jurisdictional problems with arbitral tribunals. It has given a new horizon altogether to the arbitration in India.

This decision has greatly decreased the unjustified court intrusion that frequently happened during applications submitted under Sections 8, 9, and 11 of the Act, improving the overall effectiveness of the arbitration process for India’s business community. The Court’s ruling, in my opinion, is consistent with international norms and increases India’s chances of becoming a popular location for international commercial arbitration. The Court has also shown its dedication to maintaining the ideals of the 1985 UNCITRAL Model Law and respecting India’s commitments under the 1958 New York Convention.

It is essential to remember that international arbitration is regulated by universal legal principles that go beyond the specificities of national judicial and legislative systems. The ruling of the Indian Supreme Court in the Global Mercantile case has greatly increased trust in India’s developing arbitration regime among the world’s business community.

Author: Anshika Bhadauria, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, Curative Petition (C). No. 44/2023.

[2] Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.,9 SCC 209 (2019).

[3] 2023 SCC OnLine SC 620

[4] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., 14 SCC 66 (2011).

[5] Supra note 01.

[6] Vidya Drolia v. Durga Trading Corpn.,2 SCC 1 (2021).