Introduction
A seven-judge Constitutional Bench of Hon’ble Supreme Court in its recent judgment in Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 (‘Re: Interplay’), settled the debate surrounding unstamped arbitration agreements to hold that, notwithstanding that the underlying contract is unstamped, arbitration agreements would not be rendered void or void ab initio or unenforceable. However, unstamped or inadequately stamped agreements would not be admissible in evidence under Section 35 of the Stamp Act.
Backdrop of the Ambiguity
The conundrum concerning the admissibility and enforceability of unstamped arbitration agreement arose in a three-judge bench of Supreme Court N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd (‘NN Global-1’). The Bench overruled its previous ruling in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (‘Garware Walls’) and clarified that non-payment of stamp duty on the substantive commercial contract will not render the arbitration agreement unenforceable, invalid or non-existent. It emphasized that the absence of proper stamping on an arbitration agreement could be rectified.
However, the conclusions in the Vidya Drolia v. Durga Trading Corpn., (‘Vidya Drolia’) by a coordinate bench upheld the decision in the Garware Walls, and the matter, among other things, arose the issue regarding whether the failure to pay stamp duty on the commercial contract would render the arbitration agreement invalid. By a majority of 3:2, a 5-judge constitution bench of the Supreme Court of India addressed this issue in NN Global-2. The ruling stated that an unstamped instrument, subject to stamp duty and containing an arbitration clause, doesn’t qualify as a legally enforceable contract under Section 2(h) of the Indian Contract Act 1872 (‘Contract Act’). Therefore, it cannot be enforced as per Section 2(g) of the Contract Act. Furthermore, the court held that Sections 33 and the restriction outlined in Section 35 of the Stamp Act 1899 (‘Stamp Act’), applicable to instruments liable for stamp duty under Section 3 of the Stamp Act’s Schedule, would invalidate the arbitration agreement in such a document, unless the instrument is validated in accordance with the Stamp Act. This approach hindered the initiation of arbitration proceedings and the formation of arbitral tribunals.
In a recent development, a 5-judge Constitution Bench, in Bhaskar Raju & Brothers v. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram Other Charities, expressed doubts about the correctness of NN Global 2. Recognizing the broader repercussions and consequences arising from the majority stance in the NN Global-2 in the appointment of arbitrators under Section 11(6A), the proceedings came before a seven-Judge Bench via curative petition.
Deconstructing Re: Interplay
Before delivering the operative part of the judgment, the Hon’ble Bench provided clarification on the maintainability of reference of the constitutional question to a seven-judge bench. Connoting the issue to have seminal importance in the field of business and commerce in the country, the Bench validated the reference and decided the issue to be left open on facts. The Bench mandated a change in the cause title to: “In Re: Interplay between the arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899,” to highlight the core focus on the relationship and interaction between arbitration agreements as per the Arbitration and Conciliation Act of 1996 and the stipulations outlined in the Indian Stamp Act of 1899.
Doctrine of separability and competence-competence
The Bench encapsulated the concept of separability presumption harmonizing with the Kompetenz-Kompetnz doctrine underlying Section 16 of the Arbitration Act. Accordingly, an arbitration agreement would stand independently, unaffected by the legality, invalidity, or termination of the overarching contract. Not only does the doctrine upholds the validity of an arbitration agreement but also empowers the tribunal to assert jurisdiction, decide on its own authority, and validate the arbitration agreement’s existence amidst challenges to the underlying contract’s validity. In a prior ruling, the Supreme Court in NN Global-2 declined to invoke this doctrine within the framework of Sections 33 and 35 of the Stamp Act.
Resolving Dilemma between inadmissibility and voidness
The Court drew a distinction between inadmissibility and voidness in law. In accordance with Section 2(g) of the Contracts Act, agreements unenforceable by law is said to be void. However, the admissibility of a document revolves around whether it can be introduced in a legal proceeding and whether the court can rely upon it. In essence, while an agreement may be devoid of legal standing and unenforceable, it could still hold relevance as admissible evidence in a court of law.
Here, it is important to note that, Section 35 of the Stamp Act renders a document inadmissible and not void. Instruments chargeable with duty, i.e., if they are not properly stamped or unstamped, are only inadmissible not void. Furthermore, Section 42(2) emphasizes that duly stamped instruments are admissible in evidence. This means that the document retains its legal validity but cannot be admitted as evidence in court proceedings unless the stamp duty deficiency is rectified. Unlike void agreements, for which no procedure exists to cure their invalidity, the Stamp Act offers a framework for rectifying the deficiency in stamp duty payments, thereby allowing the document to regain admissibility. Therefore, Bench in Re: Interplay held that non-payment of stamp duty is a curable defect and thereby overruled the judgment in NN-Global 2 which blurred the vital distinction between enforceability and admissibility.
Moreover, the Bench clarified the position established in Vidya Drolia, which inaccurately asserted that, following the 2019 Amendment Act, Section 11(6A) would no longer apply. Consequently, a differentiation arises between the term 'validity' found in Section 8 and the term 'existence' in Section 11 of the Arbitration Act. Section 11(6A) obligates the referring court to assess solely the existence of the arbitration agreement and is prohibited from delving into the agreement's validity based on stamping.
Reconciling Arbitration v. Revenue
Next, the Hon’ble Court was faced with a challenge to reconcile the Arbitration Act, aimed at ensuring an effective arbitration process with minimal court intervention, and the Stamp Act, focused on state revenue. Attempting to uphold the functionality and efficiency of both laws, the Court held that:
I. The Arbitration Act will take precedence in matters concerning arbitration agreements, as it is well-established legal principle that a general law must yield to a special law. Additionally, Section 5 of the Arbitration Act contains a non-obstante clause, asserting legislative intent to limit judicial interference during arbitration by prioritizing its provisions over other concurrent laws.
II. The appointment of an arbitral tribunal will not by itself validate an agreement in which arbitration clause is contained. The legitimate concerns regarding stamp duty revenue are not defeated because the arbitral tribunal retains jurisdiction to function within the framework provided by the Stamp Act. After the arbitral tribunal is appointed, it can impound the agreement under the Stamp Act’s Section 33 and collect evidence with parties’ consent as per Section 35. This upholds the competence-competence principle, ensuring arbitration remains a swift alternative to lengthy court proceedings.
III. The essence of the Stamp Act is preserved as the applicable duty must be settled prior to making the concerned agreement admissible and before the dispute between the involved parties is adjudicated. In this process, Courts uphold a policy of minimal interference (as per Section 5 of the Arbitration Act), a prima facie standard (as stipulated in Sections 8 and 11 of the Arbitration Act), and align with the Stamp Act's objective. This approach aims to prevent delays arising from technicalities that could impede dispute resolution while safeguarding the interests of revenue.
The Bench, further highlighted Arbitral Autonomy and notion of Judicial Non-Interference as fundamental pillars within the dynamic realm of arbitration law. The principles encapsulate the freedom granted to parties involved in an arbitration agreement, empowering them to confer upon the arbitral tribunal the authority to resolve potential disputes between them. At its core, they seek to honor the genuine intentions of parties by steering clear of the constraints
posed by local judicial biases.
Concluding Remarks
In conclusion, the recent Supreme Court judgment marks a pivotal departure from the prior NN Global 2 scenario. The NN Global 2 ruling had cast an additional burden on courts, causing setbacks in arbitrator appointments and tarnishing India’s reputation as an arbitration-friendly jurisdiction. The reversal in Re: The Interplay is a welcome stride forward, reinstating the original intent of the Arbitration Act to furnish a swift remedy and endorsing arbitration as the preferred dispute resolution mechanism.
This pro-arbitration stance not only dispels uncertainties surrounding unstamped or insufficiently stamped arbitration agreements but also aligns India with global arbitration norms. The judgment ensures that stamping issues won’t impede courts’ exercise of powers under Sections 8 and 11 of the Arbitration Act, fostering a more streamlined approach. The competence-competence principle receives renewed emphasis, underscoring that stamp duty objections should be addressed by the arbitral tribunal once constituted,
rather than prematurely by the courts.
The ramifications of the 7-Judge Judgment extend to institutional arbitration, rectifying the oversight of NN Global 2 regarding the authority of arbitral institutions to appoint arbitrators. This rectification fortifies the framework of institutional arbitration, addressing longstanding challenges and promoting procedural efficiency.
In practical terms, the judgment empowers arbitral tribunals to ascertain the fate of unstamped or inadequately stamped arbitration agreements, even authorizing them to impound such agreements if necessary. This shift triggers a plethora of questions concerning the adequacy of stamp duty paid, potentially impacting the efficiency of arbitral proceedings. The arbitral ecosystem must swiftly adapt to this reality by arming itself to adeptly handle these matters.
As stakeholders navigate this new legal landscape, it becomes crucial to recognize the delicate equilibrium achieved by the court. The intersection of arbitration and stamping laws, once a source of ambiguity, is now a terrain of legal clarity. It is a testament to the judiciary’s commitment to fostering a robust and efficient dispute resolution framework while safeguarding the interests of all parties involved.
[1]Anubhav Patidar is a 4th Year Student pursuing B.B.A. LL.B. (Hons.) at Narsee Monjee Institute of Management Studies. (anubhav.patidar585@nmims.edu.in)
[2]Sarthika Singhal is a 3rd Year Student pursuing B.A. LL. B at Damodaram Sanjivayya National Law University. (sarthikasinghal@dsnlu.ac.in)
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