Stamping Requirements and the Validity of Arbitration Clauses:

Examining the Indian Legal Landscape

Abstract

The Arbitration and Conciliation Act, 1996 was enacted to streamline the procedure of
dispute resolution in the new age to better suit the realities. The Principles of speedy disposal,
party autonomy and minimal judicial interference were enshrined statutorily and envisioned
to help resolve disputes of commercial disputes in a time-efficient manner. It has become a
targeted goal of the current government to turn India into a hub of arbitration and limit the
scope of judicial interference in arbitration, a malaise that has plagued the lower judiciary of
the country. However, the interplay of Indian Stamp Act, 1899 and the Arbitration Act in
recent times has opened a pandora’s box that seeks answers to questions such as
arbitrabitality of disputes, existence of an arbitration agreement and doctrine of separability.
The focal point of the discourse has been to determine the effect of non-stamping of
arbitration agreements on arbitral proceedings and most importantly, the enforcement of
arbitral awards in India. The development of a defined tenet of this aspect of arbitration is
important as it determines the very use of the mechanism as a tool of speedy disposal of
disputes between parties. The essay seeks to explore the interplay of Stamping Act and
Arbitration Act.

Keywords: Arbitration, Stamp Act, Party Autonomy.

 1. INTRODUCTION

Arbitration and Conciliation Act, 19961(“Arbitration Act”) was enacted in 1996 following a
United Nations recommendation to implement the United National Commission on
International Trade Law (UNCITRAL) Model Law to all member states. The 1996 Act
considerably deferred many provisions of the model law onto itself, such as: the definition
and form of arbitration agreement, the competence of the arbitral tribunal to rule on its own
jurisdiction, the duty of the judicial authority to refer parties to arbitration among others. The
Arbitration Act, most importantly, had imbibed into itself one of the cornerstone principles of
arbitrations i.e party autonomy. This principle acts as the guiding light to the provisions of
the Arbitration Act such as Section 192, which allows parties to determine to procedure for
the arbitral proceeding. A crucial manifestation of the principle of the principle of party
autonomy is the power of the parties to seek recourse from judicial authority to refer the
parties to an arbitration under Section 8 of the Arbitration Act. Section 83 posits that a
judicial authority can refer the parties to arbitration, if asked to do so by a party, “unless it
finds that prima facie no valid arbitration agreement exists.”

The power of the judiciary at this point of a dispute is immense as it determines the pace at
which the dispute between the parties is resolved. More often than not, arbitration clauses or
agreements are invoked by parties engaged in works contracts such as Engineering, Procuring
and Construction contracts (EPC contracts), Build, Operate and Transfer Contracts (BOT
Contracts) etc. This effectively means that projects of national and regional importance are
put on hold due to delay in the judicial proceedings. Therefore, the role of the judiciary is to
adjudge on the issue of the existence of a “valid arbitration agreement” and the
“arbitrability” of the dispute and do so at a reasonable pace.

The key phrase that has kept the judiciary searching for the proverbial needle of truth in the
haystack of confusion is “it finds that prima facie no valid arbitration argeement exists.” The
Supreme Court in M. Dayanand Reddy v AP Industrial Infrastructure Ltd.4 ruled that the
existence of a valid arbitration agreement can be determined by the facts and circumstances
of the case and requires a perusal of the intention of the parties. This interpretation of

1
The Arbitration And Conciliation Act, 1996, No. 26, Acts Of Parliament, 1996(India).
2
Id.
3
Id.
4
M. Dayanand Reddy v AP Industrial Infrastructure Ltd, (1993) 3 SCC 137
identifying the intention of the parties has remained a crucial part in understanding the phrase
has remained true right from the 1940 Act5. Multiple decisions of the court such as K.K Modi
case6, Vimal Kishor Shah7 case and Emaar MGF Land case8 read the same principle in the
Arbitration Act jurisprudence.

The developments of Section 8 of the Arbitration Act, hence, were largely tied to defining
what an arbitration agreement constituted under the definition of Section 79. The issue of the
existence of an arbitration agreement was explored in great detail in Viman Kishor10. The
Apex Court in the case adjudged that “in order to constitute a valid, binding and enforceable
arbitration agreement, the requirements…….. have to be satisfied strictly. These
requirements….. are: 1) There has to be an agreement. 2) It has to be in writing. 3)Parties
must sign such agreement 4)Such agreement must contain an arbitration clause.

This raises the question about the extent of judicial intervention on Section 8 as to what else
could raise questions on the existence of a valid arbitration agreement. The answer came in
the form of a statutory obligation found in a pre-independence legislation. This will be
discussed in the next chapter.

2. STAMP THAT AGREEMENT! - STAMPING REQUIREMENTS OF ARGEEMENT

Stamp duty and the requirement imposed under the Indian Stamp Act,189911 is essential to
understanding Section 8 of Arbitration Act. The concept of stamps was that documents which
are to be signed upon require a fee to be paid called as the Stamp Duty. In the case of
contracts, the document is said to be executed when both the parties sign it. This, in essence,
meant all commercial contracts between the parties require the payment of stamp duty. The
concept as a whole was introduced by the British for the purpose of revenue collection. The
provisions of the Stamp Act point to an indelible fact that the act was enacted to ensure that
commercial transactions between parties generate a revenue for the state as well as give the
document a legal standing in the eyes of the law. This is reflected in Chapter IV of the Stamp

5
The Arbitration Act, 1940, No. 10, Acts of Parliament (India).
6
K.K Modi v. K.N Modi (1998) 3 SCC 573
7
Vimal Kishor Shah v. Jayesh Dinesh Shah & Ors, (2016) 8 SCC 788.
8
Emaar MGF Land v. Aftab Singh, (2019) 12 SCC 751.
9
Supra note 1.
10
Supra note 3.
11
The Indian Stamp Act, 1899, No. 2, Act of Parliament (India).
Act as it provides for situations when instruments are not properly stamped. Particularly,
Section 3312 provides that if a person with the authority granted by law is produced with an
instrument that he believes is to be stamped but is not properly stamped, then he/she may
impound the same, staying the execution of that instrument. There exists a strict bar by
Section 35 of the Stamp Act to admitting any insufficiently stamped into evidence. The
Supreme Court in the case of Hindustan Steel Ltd v Dilip Construction Company13
summarized the concept and held that:

“The Stamp Act is a fiscal measure enacted to secure revenue for the State on certain
classes of instruments: It is not enacted to arm a litigant with a weapon of technicality
to meet the case of his opponent. The stringent provisions of the Act are conceived in
the interest of the revenue once that object is secured according to law, the party
staking his claim on the instrument will not be defeated on the ground of the initial
defect in the instrument. Viewed in that light the scheme is clear. Section 35 of the
Stamp Act operates as a bar to an unstamped instrument being admitted in evidence
or being acted upon……”

This requirement of the Stamp Act makes it so that commercial agreements must be stamped
properly to be admissible as evidence in eyes of the law. The question as to reference to
arbitration by a judicial authority of an unstamped agreement containing an arbitration
agreement came upto consideration in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P)
Ltd.,14. The Apex Court in the case held that:

“Having regard to Section 35 of the Stamp Act, unless the stamp duty and penalty due
in respect of the instrument is paid, the court cannot act upon the instrument, which
means that it cannot act upon the arbitration agreement also which is part of the
instrument.”
The position taken by SMS Tea Estates15 case clearly laid down that the court cannot act
upon a document or the arbitration clause in the agreement if it is not properly stamped. This
position was upheld in the landmark case of Garware Wall Ropes Ltd. v. Coastal Marine

12
Id.
13
Hindustan Steel Ltd v Dilip Construction Company (1969) 1 SCC 597.
14
SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd (2011) 14 SCC 66.
15
Id.
Constructions & Engg. Ltd16.The interpretation of the law gained acceptance by the Court
again in multiple cases1718.

The question of existence also had significant impact on Section 11(6A) of the Arbitration
Act. The section allowed for parties to seek appointment of an arbitrator from High Court or
Supreme Court in case the party with the inherent power to appoint an arbitrator doesn’t act
upon it. The SMS interpretation of Stamping requirements was further explored in the case of
Vidya Drolia and Other v Durga Trading Corporation19 where the Supreme Court,relying
upon Garware Wall Ropes20 had held that:
“When an arbitration clause is contained “in a contract”, it is significant that the
agreement only becomes a contract if it is enforceable by law. We have seen how,
under the Stamp Act, an agreement does not become a contract, namely, that it is not
enforceable in law, unless it is duly stamped. Therefore, even a plain reading of
Section 11(6-A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the
Contract Act, would make it clear that an arbitration clause in an agreement would
not exist when it is not enforceable by law. This is also an indicator that SMS Tea
Estates has, in no manner, been touched by the amendment of Section 11(6-A).”

Hence, it was clear that the principle enshrined in SMS Tea Estate had survived even when
tested on the anvil of the 2016 amendment and the 2019 amendment21 and the effect it had on
Section 11 or so it seemed.

3. POST VIDYA DROLIA:CONUNDRUM IN THE COURT

The developments in Section 8 moved at break-neck speed Vidya Drolia. The question as to
the existence of Arbitration agreement and arbitrability of subject matter were no doubt
connected to each other but the larger issue of non-stamping of arbitration agreement
remained clear ever since SMS Tea Estates.

16
Supra note 16.
17
Naina Thakkar v. Annapurna Builders, (2013) 14 SCC 354.
18
United India Insurance Company Limited and Another v. Hyundai Engineering and Construction Compnay
Limited and Others, (2018) 17 SCC 607.
19
Vidya Drolia and Other v Durga Trading Corporation, (2021) 2 SCC 1.
20
Supra note 16.
21
The Arbitration and Conciliation (Amendment) Act, 2019, No 33, Parliament of India (India)
However, with the constant evolution in understanding of the relationship between the
Arbitration Act and Stamp Act came the next seismic shift. The Supreme Court looked into
this issue again in form of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd(NNG 1)
and in its subsequent developments.22

3.1 NNG 1 - FIRST SALVO

NNG 1 fundamentally changed the existing understanding of the interplay between the acts
and relied heavily on the doctrine of separability and kompetenz-kompetenz.

After the appellants lost their appeal under Article 226 and 227 in Bombay High Court on a
issue of invocation of bank guarantee, there were 3 issues the Apex court had to deal with of
which only one issue is pertinent to the essay i.e whether an arbitration agreement contained
in an unstamped and unenforceable agreement can be enforced.

The Apex Court, a decade after SMS Tea Estates, disagreed with the rationale laid down in its
earlier judgement and looked at the arbitral jurisprudence of countries of US, UK and France
who,too, had followed the UNICITRAL Model law. The court held that the non-payment of
stamp duty was a curable defect and that a strict interpretation of the provisions of the Stamp
Act cannot be read harmoniously with the provisions of Arbitration Act. The rationale drew
its strength from the fact that the 2016 Amendment of the Arbitration Act23 stripped the court
of the power to look at issues such as arbitrability and enforceability of agreement in the pre-
reference stage. The Supreme Court ruled on no uncertain terms that Patel
Engineering24,which had held the Apex Court, was empowered to look into preliminary
enquiry under Section 8 and 11, was legislatively revoked in the 2016 amendment and, hence,
has to be seen in that light. The powers of such examination were firmly laid in the hands of
the arbitrator.

NNG 1 had marked the end of the jurisprudence laid in SMS Tea Estates and delivered a pro-
arbitration judgement and upheld the fundamental principles of Kompetenz-Kompetenz and

22
N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd, (2021) 4 SCC 379
23
The Arbitration and Conciliation (Amendment) Act, 2016, No 3, Act of Parliament (India)
24
SBP & Co. v. Patel Engineerig. Ltd and Another, (2005) 8 SCC 618.
Separability in Arbitration. NNG 1 had, however, held that Vidya Drolia was to be
authoritatively decided by a constitutional bench of the Supreme Court.

3.2 NNG 2 - ROUND 2

In less than 3 years of NNG 1, the Apex Court in N.N. Global Mercantile Private Limited v.
Indo Unique Flame (NNG 2)25 in a 3:2 judgement overruled NNG 126 and held that deficient
payment of stamp duty on an agreement where such payment of stamp duty is mandatory will
deem the said agreement unenforceable in law. This applied to both agreements which
contained arbitration clauses as well as standalone arbitration agreements. The court further
held that the ratio laid down in SMS Tea Estates followed in Garware and approved in Vidya
Drolia was correct. The rationale of the court was that the very act of judicial authority
receiving the defectious instrument was an act of receiving evidence, and therefore is barred
by Section 33 of the Stamp Act. The court, in its majority decision, further elaborated that the
court is bound to act under its duty of Section 33 of the Stamp Act and impound the
instrument upon examination.

NNG 2 explained in great detail the applicability of the doctrine of Kompetenz-Kompetenz in

situation of defectious instruments. The Apex Court expounded upon the nuance between
void, voidable contract and invalid agreement. It held that the matter of a void and voidable
may be adjudged by an arbitrator while deciding upon the merits of the dispute. However, an
invalid agreement in eyes of the law is barred to acted upon by the Stamp Act as long as its
defects are not cured by the payment of the requisite stamp. The provisions of the Stamp Act
along with the ruling in Vidya Drolia made it so that unstamped instruments are effectively
invalid in eyes of the law. The court relied on the case of Imambi v. Khaja Hussain27 to
elaborate upon this point by ruling that an invalid contract doesn’t equate to a nullity in eyes
of the laws .

25
N.N. Global Mercantile Private Limited v. Indo Unique Flame,(2023) 7 SCC 1.
26
Supra note 13.
27
Imambi v. Khaja Hussain, 1987 SCC OnLine Kar 252.
Most consequentially, the Apex Court clarified that the Stamp Act was not a procedural law
and that the penalties under the Stamp Act are not to be waived as matters of procedure. On
this assertion, the court held that:

“We would find that an agreement, which is unenforceable on account of a

substantive law, which would include the Stamp Act, would not be a contract,
applying Section 2(h) of the Contract Act…… As long it remains an unstamped
instrument, it cannot be taken notice of for any purpose, as contemplated in Section
35 of the Stamp Act. It remains unenforceable.……. In law, it is bereft of life. It is
“not enforceable in law”. In the said sense, it also cannot exist in law. It would be
void. Our view in this regard that voidness is conflated to unenforceability receives
fortification from Section 2(j) of the Contract Act which renders a contract which
ceases to be enforceable void.”

This meant that an instrument, as long as it remains unstamped is unenforceable in law and
cannot be acted upon by the Court. The judgement was criticized by legal luminaries for its
anti-arbitration stance28.

3.3 NNG 3 - FINAL SALVO

In less than 8 months after NNG 2, the Apex court in In Re: Interplay Between Arbitration
Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act
189929(NNG 3) overruled the NNG 2. The 7 judge bench unanimously agreed that
“Agreements which are not stamped or are inadequately stamped are inadmissible in
evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void
ab initio or unenforceable.” with Justice Sanjiv Khanna providing additional justification of
the final conclusion. Furthermore, the court overruled the decision in NNG 2 and SMS Tea
Estates along with paragraphs 22 and 29 of Garware Wall Ropes30. The decision came from

28
Yammanur S, “Narrowing down the Rigors of N.N. Global: Approach of Indian High Courts and Recent
Developments” Arbitration & Dispute Resolution - India (October 18, 2023)
<https://www.mondaq.com/india/arbitration--dispute-resolution/1376540/narrowing-down-the-rigors-of-nn-
global-approach-of-indian-high-courts-and-recent-developments>.
29
In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The
Indian Stamp Act 1899, 2023 INSC 1066.
30
Supra note 16.
a curative petition filed in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar
Chattram v. Bhaskar Raju and Brothers31

The judgement went to a deep discussion into the doctrine of Kompetenz-Kompetenz and
ruled that Section 16 of the Arbitration Act follows Section 16 of the Model law. It empowers
the arbitral tribunal to rule upon its own jurisdiction. The Court ruled that the invalidity of
arbitration agreement can be challenged in front of the tribunal under subsection (2) and (3)
of Section 16 of the Arbitration Act. It placed great importance on the doctrine and held that
the purpose of the doctrine was to minimize judicial intervention. Hence, it can be seen that
the decision of the parties to seek arbitration to settle their disputes at the very outset of
creating a contractual relationship between them and not let the courts interfere with it
became a focal point in holding the doctrine to be supreme. The Court further observed that
the ambit of Section 16 was wide enough to adjudge on the issue of sufficiency of stamping.

Most Consequentially, the Apex Court in this case remarked that there should be harmonious
interpretation between the provisions of the Stamp Act and the Arbitration Act. The Apex
Court relied upon the case of Kandla Export Corporation v. OCI Corporation32,wherein
questions upon the interaction between the Arbitration Act and Commercial Courts Act,
201533 were tested. The Court had ruled that the effect of both the acts was speedy resolution
of disputes and answered that an interpretation of law which goes against a principle cutting
across the two statutes must not be condoned. Similarly, the court ruled that the Arbitration
Act is a special act which seeks to comprehensively cover both international and domestic
arbitration and conciliation and that the legislature was aware of its status juxtaposed with the
existence of the Stamp Act when it was enacted. It is in this context that it was determined
that non-enforceability of non-stamped document cannot be considered to be a legal position,
keeping in mind the limited scope of judicial intervention under Section 534 and the
aforementioned rationale.

NNG 3 remains the final chapter of an issue initially discussed more than a decade back and
finality upon the issue has seemingly been delivered.

31
Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers, 2023
SCC OnLine SC 1303.
32
Kandla Export Corporation v. OCI Corporation, (2018) 14 SCC 715.
33
The Commercial Courts Act, 2015, No. 4, Acts of Parliament, 2016
34
Supra Note 1.
 4. ANALYSIS AND CONCLUSION

SMS Tea Estates had ruled upon a fundamental issue of 2 conflicting laws. The contours of
that judgement were challenged by the legislature in the 2016 amendment and the decisions
of the judiciary following it sought to create a pro-arbitration environment in the country. The
twist and turns of the judiciary post Vidya Drolia was in effect a struggle to understand the
very essence of arbitration as a mechanism and the powers of the court in that process. It is
without a doubt that arbitrations and likewise mechanisms are of utmost importance for
speedy disposal of disputes, however there is a bitter sweet taste to the whole affair. To
negate a law, however archival, to a procedural hindrance speaks poorly of the judicial
attitude towards the legislation.

On the other hand, stamping remains a curable defect and of the kind which can easily be
dealt with. During the entire saga, the Apex Court was steadfast on its ground that stamping
is a curable defect. It is in such discussions that the author opines that NNG 2 came at a
reasonable conclusion by providing the party at fault to clear the defect of stamping within 45
days. This allows for the parties to move forward with the arbitration process as well comply
with the provision of both the acts in a holistic manner.

While the author is in awe of the judgement and the legal principles expounded in NNG 3,
the fact remains that there was effectual judicial activism in the matter. Without the will of
the people manifested by the legislature being exercised, the judiciary has made the Stamp
act a toothless tiger. What remains to be seen is whether the current position of the law
remains settled for long, considering this was an episode lasting well over a decade.