INTRODUCTION

Arbitration is a widely recognized alternative dispute resolution mechanism in India, governed by the Arbitration and Conciliation Act, 1996. The Act provides a framework for the enforcement and conduct of arbitration proceedings. It allows parties to resolve their disputes outside the traditional court system, with the aim of faster and more efficient resolution. 

Stamp duty laws, on the other hand, are governed by individual state governments in India. These laws determine the rates and applicability of stamp duty on various documents. Historically, stamp duty laws did not specifically address the issue of stamp duty on arbitration agreements. However, in recent years, some states have taken the view that arbitration agreements are subject to stamp duty. 

The significance of stamp duty for arbitrations lies in the potential financial burden it imposes on the parties involved. Stamp duty rates can be substantial, depending on the state and the amount involved in the arbitration agreement. Imposing stamp duty on arbitration agreements adds an additional cost to the process, which may discourage parties from opting for arbitration as a dispute resolution mechanism. This is particularly true for high-value commercial disputes where the stamp duty can be significant. 

The application of stamp duty to arbitration agreements has faced legal challenges. The Supreme Court of India has taken a pro-arbitration stance and has consistently upheld the principle of party autonomy in choosing arbitration as a means of dispute resolution. The court has held that stamp duty should not be applicable to arbitration agreements since they do not create or extinguish any rights in immovable property, which is the typical subject matter of stamp duty. 

However, despite the Supreme Court's position, some state governments have persisted in levying stamp duty on arbitration agreements. This has resulted in a lack of uniformity and inconsistency across the country, leading to confusion and disputes regarding the validity and enforceability of arbitration agreements. 

Efforts have been made to address this issue. In 2019, the Central Government introduced amendments to the Arbitration and Conciliation Act to clarify that arbitration agreements would not be liable to pay stamp duty. The amendments aimed to provide a uniform approach across all states and ensure that stamp duty does not impede the growth of arbitration in India. However, the implementation of these amendments is dependent on the respective state governments adopting them into their local stamp duty laws. 

SUPREME COURT RULING IN NN GLOBAL 

In the case of NN Global, the Supreme Court made a significant ruling regarding arbitration agreements and stamp duty. They stated that an arbitration agreement is considered a separate and distinct contract, independent of the main agreement. This means that the arbitration agreement itself does not require payment of stamp duty. According to the doctrine of separability, the arbitration agreement can exist and be enforceable even if the main agreement (the substantive agreement) is not valid or has issues. The arbitration agreement stands on its own and is not affected by any problems with the main agreement. 

Based on this ruling, if a dispute arises, either the court or the arbitrator can refer the matter to arbitration based on the separate arbitration agreement. This can happen even if the main agreement is not properly stamped or does not have sufficient stamp duty paid. However, there is a requirement to comply with stamp duty laws. The court or arbitrator must impound (take possession of) the unstamped or insufficiently stamped main agreement and refer it to the Collector of Stamps. The Collector of Stamps is responsible for determining and collecting the appropriate stamp duty according to the relevant stamp act.  

A significant implication arises. It states that if the main agreement (the substantive agreement) has not paid the required stamp duty or if the stamp duty paid is insufficient, the arbitration agreement within that main agreement is not automatically invalidated. This means that the arbitration process can still proceed, and either party can invoke the arbitration agreement to seek interim relief as provided by the law. However, it is important to note that the Supreme Court clarified that the full resolution of the rights and obligations of the parties under the main agreement can only happen after the issue of non-payment or insufficient stamp duty is resolved.  

POSITION PRIOR TO NN GLOBAL 

In the NN Global case, the Supreme Court expressed a different opinion from the previously accepted position regarding arbitration agreements in unstamped or insufficiently stamped documents. Before NN Global, it was generally believed that an arbitration agreement in such documents would be considered void and inseparable from the main agreement. 

There were a series of judgments, starting with SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd., that supported this position. This was further emphasized in the Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited case, which gained significant attention. It was later affirmed in the Vidya Drolia & Ors. v. Durga Trading Corporation case. However, the NN Global case brought a different perspective. The Supreme Court diverged from the previous position and stated that the arbitration agreement within an unstamped or insufficiently stamped document would not be rendered void and could still be enforced separately from the main agreement. 

In the NN Global case, the Supreme Court not only had a different opinion from the previous cases but also questioned the correctness of the ruling in Garware and its subsequent affirmation in Vidya Drolia. It is important to note that the judgment in Vidya Drolia was delivered by a bench of similar strength as NN Global. 

Due to these conflicting views, the Supreme Court referred the issue of whether an arbitration agreement is considered "non-existent, unenforceable, or invalid" until the stamp duty on the main contract or instrument is paid to a larger bench. This means that the court decided to have a larger group of judges review and decide on this matter. 

However, in making this decision, the Supreme Court explicitly overruled the ruling in SMS Tea Estates, which was a case decided by a two-judge bench. This means that the previous ruling in SMS Tea Estates is no longer considered valid. 

THE CONFUSING POSITION THAT APPEARS 

In the NN Global case, the Supreme Court overruled the earlier judgment in SMS Tea Estates. However, this decision may not have been entirely correct. This is because just 11 months before NN Global, another bench of the Supreme Court, in the Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Ors. v. Bhaskar Raju and Brothers & Ors. case, upheld and affirmed the principles laid down in SMS Tea Estates. 

The NN Global bench was aware that Garware had been affirmed by a coordinating bench of three judges in the Vidya Drolia case. Despite this knowledge, the NN Global bench expressly overruled SMS Tea Estates, even though it had been approved in Dharmaratnakara. It seems that during the hearing of NN Global, the bench was not made aware of the Dharmaratnakara judgment. 

Interestingly, it appears that the subsequent decisions on the arbitrability and payment of stamp duty have not referred to the Dharmaratnakara case. This has led to an inconsistent and problematic situation for courts and arbitrators, as there is a lack of clarity and consensus on the issue. 

CONCLUSION: 

The discussion so far suggests that it could be argued that the bench in NN Global should not have overruled the SMS Tea Estates judgment. This is because the Dharmaratnakara case had already approved and upheld the SMS Tea Estates principles. In terms of judicial propriety, it would have been more appropriate for the NN Global bench to refer the entire range of decisions, including Garware and Vidya Drolia, to a Constitution bench for further examination and resolution. 

During the ongoing process of determining the reference in the NN Global case, courts, particularly High Courts when dealing with Section 11 Applications, and arbitrators when entering into reference or handling Section 16 Applications, may have to make decisions regarding two possible arguments: 

1. They may have to consider which judgment should be followed as the correct interpretation of the law. They will need to weigh the arguments put forth in Garware (along with the affirmation in Vidya Drolia) against the judgment in NN Global. However, this determination will be made pending the final adjudication of the reference by the larger bench. 

2. In a more extreme argument, they may have to consider whether the NN Global judgment is legally flawed or "per incuriam." This argument suggests that NN Global should be considered invalid or bad in law because it failed to take into account a judgment by a coordinating bench of similar strength, namely Dharmaratnakara. 

The law regarding stamp duty and arbitrability is currently uncertain and lacks clarity. The NN Global case and the existence of the Dharmaratnakara judgment have created a peculiar situation. This means that the legal landscape in this area is unclear and unfamiliar territory, as these judgments have introduced conflicting views and have not been thoroughly tested or resolved.