In the words of Richard Cobden, “At all events, arbitration is more rational, just, and humane than the resort to the sword”. Arbitration stands as a cornerstone in the edifice of the Indian Judiciary, offering a crucial alternative dispute resolution mechanism that not only expedites the resolution process but also alleviates the burden on courts. The Indian Judiciary has consistently taken efforts towards securing the independence of arbitration proceedings to ensure effective implementation of arbitration and the functioning of arbitral tribunals. The interplay between the Arbitration and Conciliation Act, 1996, the Indian Stamp Act, 1899 and the Indian Contract Act, 172, with respect to the validity and legality of unstamped arbitration agreements has been a long-standing conundrum. Recently, on 13th December 2023, a seven-judge bench of the Hon’ble Supreme Court of India pronounced a verdict that unanimously upheld the validity of an unstamped arbitration agreement. This article aims to analyse the judgment and its implications on the arbitration law in India.
In the common parlance, arbitration agreements or clauses are often inserted as a part of enforceable contracts or underlying instruments. When an application is made for appointment of an arbitrator, the same is being rejected on the grounds that the arbitration agreement is not appropriately or adequately stamped. The paramount issue that arises is whether such arbitration agreements or clauses will be considered as invalid and unenforceable if the underlying contract is unstamped or not adequately stamped.
Background
In the case of N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[1] a three-judge bench of the Hon’ble Supreme Court had held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent because of non-payment of stamp duty. Further, the bench had held that even the underlying contract will not be invalidated since the non-payment of stamp duty is a curable defect. This judgment was in contradiction to the view taken by the Hon’ble Supreme Court in the cases of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd[2] , Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd[3] and Vidya Drolia v. Durga Trading Corporation[4] where it was held that an arbitration agreement in an unstamped commercial contract would not “exist” as a matter of law and could not be acted upon until the underlying contract was duly stamped.
Prior to the judgment in the N N Global case, a curative petition was filed seeking reconsideration of the case, Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers[5] in which the Hon’ble Supreme Court had upheld the view that an unstamped arbitration agreement is invalid.
Further, the three-judge bench referred the question of legality of unstamped arbitration agreements to a constitutional bench in the case of N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[6] (“N N Global II”) where the majority of the bench reversed the decision of the three-judge bench and ruled that an unstamped instrument containing an arbitration agreement is void under section 2(g) of the Indian Contract Act, 1872 and an arbitration agreement can be acted upon only after it is duly stamped.
Subsequently, a three-Judge Bench of the Hon’ble Supreme Court issued notice in a petition for the appointment of an arbitrator in Seka Dobric v. SA Eonsoftech Private Limited[7] (“arbitration petition”).
In consideration of the new ruling established by the constitutional bench in the N N Global II and the larger ramifications of the decision, the curative petition and the arbitration petition were referred to a seven-judge bench of the Hon’ble Supreme Court to provide a final and comprehensive judgment on the legality of unstamped arbitration agreements.
Submissions of the Petitioners
- Section 11(6A) of the Arbitration Act explicitly limits the court’s authority to examining the existence of an arbitration agreement, excluding scrutiny of stamping adequacy under Section 33 of the Stamp Act.
- The arbitral tribunal has the competence to rule on its own jurisdiction including on issues pertaining to stamping and the inclusion of the non-obstante clause in Section 5 of the Arbitration Act limits the judicial intervention of courts in the arbitral process and must be read harmoniously with the provisions of the Stamp Act.
- The deficiency in stamping is a curable defect and is a temporary affliction in nature which cannot affect the validity of the arbitration agreement.
- The doctrine of separability recognizes that an arbitration agreement is a self-contained agreement, distinct from the underlying contract.
- The adjudication of stamp duty is a time-consuming process. Mandating the court under Section 11 of the Arbitration Act to adjudicate on the issue of stamp duty would be against the goal of expeditious appointment of arbitrators contained under Section 11(13) of the Arbitration Act.
Submissions of the Respondents:
- The curative petition is not maintainable because none of the pleaded grounds meet the requirements set out in Rupa Ashok Hurra v. Ashok Hurra[8]. Since the curative petition is not maintainable, the reference to a seven-Judge Bench is without jurisdiction.
- Under Section 11 proceedings, Section 33 of the Stamp Act imposes a mandatory obligation on courts to seize an unstamped or inadequately stamped instrument. Until the required stamp duty and penalty are paid, such an instrument cannot be accepted as evidence or given any legal effect.
- The principle of separability contained in Section 16 of the Arbitration Act implies that an arbitration agreement can be treated as a distinct agreement only for the purpose of determining its validity or enforceability.
- The expression “examination” used in Section 11(6A) contemplates the examination of the validity of an arbitration agreement, including the examination of sufficiency of stamping.
Supreme Court’s Ruling:
- Arbitral Autonomy and Minimum Judicial Interference:
The Hon’ble Supreme Court had observed that ‘arbitral autonomy’ which is an inherent component of the dynamic arbitration law, is the contractual freedom of the parties to an arbitration agreement to bestow the arbitral tribunal with the right to decide and settle the dispute between the parties. Arbitral tribunals in India are given substantial freedom to determine and adjudicate the disputes between the parties including the power to decide on the existence and validity of the arbitration agreement. The parties to an arbitration agreement explicitly agree to renounce their right to litigation and right to be bound by procedural law since as per section 19 of the Arbitration and Conciliation Act, 1996, the arbitral tribunals are not bound by the Code of Civil Procedure 1908 or the Indian Evidence Act 1872 and have the power to conduct the proceedings as they deem appropriate in cases where the parties have not agreed on the procedure.
The Hon’ble Supreme Court also extensively discussed the applicability of the principle of ‘minimum judicial interference’ in the context of international law, i.e., the New York Convention and the Model Law and under Section 5 of the Arbitration and Conciliation Act, 1996. The Model Law states that courts shall only intervene in the arbitral proceedings with respect to matters that are not covered in the Model Law, whereas section 5 of the Arbitration act begins with a non-obstante clause and limits the extent of judicial interference only to the extent specified in Part I of the act. The Hon’ble Supreme Court analysed the positive and negative facets enumerated in section 5 of the act and further observed that:- The primary intent of the enactment of the Arbitration and Conciliation Act, 1996 is to reduce the intervention of courts,
- The role of courts shall be limited to supporting the arbitration process, and
- The entire Arbitration and Conciliation Act, 1996 ought to be interpreted in the light of section 5 to give true effect to the legislative intention of minimal judicial intervention.
- Difference between ‘Admissibility’ and ‘Voidness’ in law:
The Hon’ble Supreme Court distinguished between ‘admissibility’ and ‘voidness’ in law, clarifying that a void agreement is not enforceable, while admissibility pertains to whether it can be presented in court as evidence. The court emphasized that voidness and inadmissibility are not necessarily correlated. Even a void agreement, like one in restraint of trade, can be admissible in evidence if enforcement is attempted.
Further, the Court criticized the N.N. Global decision for improperly conflating ‘enforceability’ and ‘admissibility’ in upholding Sections 33 and 35 of the Stamp Act. It pointed out that Section 35 clearly prohibits the admission of duty-chargeable instruments in evidence, while Section 42 allows subsequent endorsement upon paying the required stamp duty, making the instrument admissible. The Court concluded that the Stamp Act doesn’t render unstamped instruments ‘void’ but only ‘inadmissible,’ a curable defect under the Act, in contrast to the irreparable ‘voidness’ in an agreement. - The doctrine of Competence-Competence and Separability under section 16 of the Arbitration and Conciliation Act, 1996:
The Hon’ble Court introspected on the positive and negative facets of the doctrine of competence-competence which states that arbitral tribunals will be empowered to make a final ruling on their own jurisdiction, with no subsequent judicial review of the decision by any court. The Court further observes that though section 16 gives priority to the arbitral tribunal to determine all issues pertaining to its jurisdiction based on the principle of competence-competence, the tribunal’s decision is subject to judicial review at the stage when an award is challenged under section 34. The negative aspect of the competence-competence doctrine which has been widely accepted by Indian Courts implies that courts should avoid considering challenges to an arbitral tribunal’s jurisdiction until the arbitrators themselves have addressed the issue.
In light of the above, the Supreme Court clarified that the jurisdiction of an arbitral tribunal encompasses deciding all initial matters related to its authority, including assessing the adequacy of stamping. The court deemed this stance consistent with Sections 33 and 35 of the Stamp Act, as an arbitral tribunal, authorized by the “consent of parties” to admit evidence, has the authority to impound and scrutinize instruments.
The Supreme Court further acknowledges the doctrine of separability in section 16 of the Arbitration and Conciliation Act, 1996, whereby the arbitration agreement is considered separate from its underlying contract. The court further goes on to compare the applicability of the doctrine in different countries including UK, USA, Singapore and other international conventions.
Judgment:
With the aforesaid observations, the Hon’ble Supreme Court held that unstamped arbitration agreements are inadmissible in evidence under section 35 of the Indian Stamp Act but are not void or unenforceable. Further, making courts address stamp duty payment issues in Section 11 (arbitrator appointment) or Section 8 (arbitral reference by judicial authority) petitions goes against the Arbitration Act’s legislative intent and any objections pertaining to the stamping of an arbitration agreement shall fall within the ambit of the arbitral tribunal. The seven-judge bench of the Hon’ble Supreme Court overruled the judgments in SMS Tea Estates, andNN Global II to the extent they are contrary to the observation of the bench.
Final Thought:
This judgment of the Hon’ble Supreme Court has provided the much-needed clarity to the issue of validity of unstamped arbitration agreements in alignment with the need to protect the independence of arbitral tribunals from excessive judicial intervention thereby facilitating the further advancement of arbitration law in India.
[1] (2021) 4 SCC 379
[2] (2011) 14 SCC 66
[3] (2019) 9 SCC 209
[4] (2021) 2 SCC 1
[5] (2020) 4 SCC 612
[6] (2023) 7 SCC 1
[7] Arbitration Petition No. 25 of 2023
[8] (2002) 4 SCC 388
