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  • Writer's pictureRahul Narayan

C&M E-ALERT: Validity of arbitration clause in an unstamped or insufficiently stamped instrument



A seven-judge bench of the Supreme Court has unanimously held that an unstamped or insufficiently stamped instrument does not hinder the Court from examining the existence of the arbitration clause within such an instrument for the purposes of appointing an arbitrator or referring the parties to arbitration.


A. BACKGROUND


The question whether a court can appoint an arbitrator based on an arbitration clause contained in an unstamped instrument has had a chequered legal history. Previously in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd[1], a two-judge bench of the Supreme Court had held that an arbitration agreement in an unstamped contract cannot not be acted upon. In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd[2], the Supreme Court reaffirmed the decision in SMS Tea Estates and held that an arbitration agreement in an unstamped contract would not “exist” in law and, therefore, cannot not be acted upon until the underlying contract is sufficiently stamped. This position was later reiterated by a three-judge bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation[3].

However, in NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[4] ('NN Global 1'), the Supreme Court disagreed with the findings of the court in the above judgments. It held that an arbitration agreement, being a separate agreement from the underlying contract, would not be rendered non-existent due to a deficiency in stamp on the main instrument.

Since the contrary decision in Vidya Drolia was also delivered by a bench of three judges, the issue was ultimately referred to be determined by a bench of five judges in NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[5] ('NN Global 2'). In NN Global 2, the Supreme Court, with a majority of 3:2, held that an unstamped instrument, not being a contract and not enforceable in law, cannot legally exist. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped.


The Supreme Court's decision in NN Global 2 was perceived as a departure from its pro-arbitration stance and a minimal-judicial intervention approach. Considering that the reference from a five-judge bench raised questions of seminal importance regarding the interpretation and application of arbitration law in India, with implications for business and commerce in the country, the Supreme Court, constituting a bench of seven judges, decided to resolve the controversy. In the paragraphs below, we discuss the findings reached by the Supreme Court in its judgments.


B.  POINTS OF DISCUSSION


a.    Validity of unstamped / insufficiently stamped arbitration agreement

Interpreting the provisions of the Stamp Act, the Supreme Court observed that the effect of non-payment of stamp duty on an instrument renders the said instrument inadmissible and not void[6]. The Stamp Act considers non-payment of stamp duty as a curable defect and provides a mechanism for curing the defect. Therefore, an insufficiently stamped arbitration agreement cannot be considered void or invalid. As such, the Supreme Court held that, in view of the provisions of the Stamp Act, the insufficiently stamped agreement is inadmissible in evidence; however, it is not non-existent in law.


b.    Principle of Minimal Judicial Interference

The principle of judicial non-interference in arbitral proceedings is fundamental to both domestic and international commercial arbitration. This principle entails that arbitral proceedings are carried out pursuant to the agreement of the parties or under the direction of the arbitral tribunal without unnecessary interference by the national courts. The Arbitration and Conciliation Act, 1996 (“Arbitration Act”), recognizes this principle and provides that no judicial authority shall interfere except as provided in the Arbitration Act itself.

Despite the clear mandate of the Arbitration Act, the courts in India, time and again, expanded the scope of judicial interference at the stage of appointment of an arbitrator. Even the law providing for the reference of disputes to arbitration, as it existed prior to the amendment of the Arbitration Act in 2015[7], enabled a court to examine preliminary objections such as arbitrability of disputes, validity of agreements, etc. at the time of appointing an arbitrator. However, the 2015 Amendment limited the power of the court to only examine the existence of an arbitration agreement. Recognizing this, the Supreme Court held that the referral court at the Section 11 stage should not examine or impound an unstamped or insufficiently stamped instrument but rather leave it for determination by the Arbitral Tribunal. In arriving at this conclusion, the court also observed that NN Global 2 rendered the provision of Section 5 of the Arbitration Act[8], which provides for minimal judicial interference, otiose and therefore, is not a good law.


c.    Negative competence-competence

In addition to the principle of minimal judicial interference, the Court also noted that both international arbitration law and domestic law prioritize the arbitral tribunal by permitting them to initially decide challenges to their authority instead of the courts. The sequitur of this is that the court should refrain from entertaining challenges to the jurisdiction of the arbitral tribunal before the arbitral tribunal themselves have had an opportunity to do so. This principle, known as negative competence-competence, the Court held, requires it to leave the issue of stamping to be decided by the arbitral tribunal itself in the first instance, as it would be subjected to subsequent review by the court.

The issue with respect to an unstamped or insufficiently stamped agreement now has to be raised before the arbitrator under Section 16, and the decision delivered by the arbitrator will be amenable to challenge before the court under Section 34, if any, preferred by a party assailing the arbitral award.


d.    Separability of the arbitration agreement

The concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction that acknowledges the separate nature of an arbitration agreement. In this regard, the Court examined the laws in jurisdictions such as the United Kingdom, the USA, and Singapore, and held that the separability presumption contained in Section 16 of the Arbitration Act:

  • Encapsulates the general rule on the substantive independence of an arbitration agreement;

  • Confers jurisdiction on the arbitral tribunal to determine questions regarding jurisdiction as well as substantive contractual disputes;

  • Treats an arbitration agreement contained in an underlying contract as distinct from the other terms of the contract; and

  • Allows the arbitral tribunal to assume jurisdiction and decide on its own jurisdiction by determining the existence and validity of the arbitration agreement.


C.   CONCLUSION


December has been a consequential month in Indian arbitration law. The Supreme Court began the month with its much-awaited Constitution Bench in Cox and Kings, which dealt with the Group of Companies doctrine and how to bind non-signatories to an arbitration. It ends with this 7-judge bench that re-affirms two fundamental principles of arbitration law- kompetenz kompetenz as well as the separability of arbitration agreements. in a manner that reduces the scope of judicial inquiries before appointment of an arbitrator. Both judgments reaffirm a central tenet of recent Indian arbitration law- both in terms of legislative action and by judgments- to reduce the scope of pre-judicial inquiry under Section 11 or 8 of the Arbitration Act and to have these issues looked at by arbitrators under section 16.     

The In the NN Global-3 decision the Court has drawn a nuanced but logical distinction between the admissibility of an agreement in evidence (which is not possible when the agreement is unstamped or understamped) and the use of the arbitration clause in an unstamped agreement. It affirms the central point of both the Stamp Act and the Arbitration Act. In this regard, a notable gap was identified in the interpretation of Section 5 in NN Global 2, as it lacks a cogent rationale for excluding Sections 33 and 35 of the Stamp Act in Section 11 and 8 proceedings under the Arbitration Act.

Importantly, the NN Global-3 decision affirms that unstamped agreements are not inherently void. Instead, their deficiencies are deemed curable, facilitated by the comprehensive impounding procedure. This recognition of the remediable nature of stamping irregularities aligns with a more pragmatic approach to arbitration agreements.

 

In a significant departure, NN Global-3 explicitly declares the precedents set by SMS Tea Estate (supra) and NN Global 2 (supra) no longer valid in law. Additionally, it overturns specific portions of Garware Wall Ropes (supra), specifically Paragraphs 22 and 29, signalling a transformative shift in the legal landscape concerning unstamped arbitration agreements.

This judgment works both in terms of legal theory and provides a practical solution to a problem that had vexed Indian arbitration jurisprudence for too long.



[1] (2011) 14 SCC 66

[2] (2019) 9 SCC 209

[3] (2021) 2 SCC 1

[4] (2021) 4 SCC 379

[5] (2023) 7 SCC 1

[6] Indian Stamp Act 1899, Section 35

[7] Arbitration and Conciliation Act 1996, Section 11(6-A) “The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”

[8] Arbitration and Conciliation Act 1996, Section 5 “Extent of judicial intervention. —Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part”.


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