Contracting with Indian parties? Don’t ignore stamp duty.

The Constitutional Bench of the Supreme Court of India last week delivered a judgment that has significant consequences for parties seeking to enforce arbitration clauses in India.

In NN Global Mercantile Private Limited v Indo Unique Flame Limited, the Court held (by a 3-2 majority) that an arbitration clause is invalid if it is contained in a contract that is liable for stamp duty under Indian law, and has not been stamped or adequately stamped.

NN Global and Indo Unique Flame had entered into a contract set out in a Work order, which required the provision of a cash guarantee.

A dispute arose as to whether the guarantee had become payable, and NN Global approached a court seeking an injunction restraining the cashing of the guarantee. Indo Unique Flame pointed out that the work order contained an arbitration clause, and asked that the dispute be referred to arbitration.

The Work order, however, had not been stamped, and it was common ground that it was chargeable for stamp duty under the Stamp Act 1899. Section 35 of the Stamp Act provides that “No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped”.

The principal question that the Supreme Court (which is India’s ultimate court of appeal) was called upon to determine was whether the doctrine of the separability of the arbitration clause applied in these circumstances. Under the arbitration law of most countries, where an arbitration clause is contained in a larger contract, it is treated as if it were a separate agreement, so that the invalidity of the larger contract does not (necessarily) render the arbitration clause invalid. This is a useful fiction designed to empower arbitral tribunals to rule on the validity or invalidity of the larger contract. This is reflected in section 16 of the Indian Arbitration Act 1996, which provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract” so that “a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

The majority in the Supreme Court accepted that the arbitration clause was separable from the rest of the Work Order; but that, it thought, was not the relevant question. Instead, it held, the effect of section 35 of the Stamp Act was that it was not able to accept into evidence any part of the Work Order, so that it was not possible for Indo Unique Flame to prove that an arbitration agreement existed.

It's doubtful whether this judgment has implications beyond the interplay of two Indian statutes, except for this: anyone who has a contract with an Indian counterparty, containing an arbitration clause, should be careful to consider whether the agreement is chargeable with stamp duty in India: because a failure to stamp will have grave consequences if it becomes necessary to enforce either the arbitration clause, or an eventual award, in India.