An arbitration agreement is a creation of a contract and is thus governed by the Arbitration & Conciliation Act, 1996(‘ACA’), The Indian Contract Act, 1872 and The Indian Stamp Act, 1899 (‘Stamp Act’). The Stamp Act provides that an unstamped instrument cannot be acted upon unless duly stamped. As a deviation from this, ACA provides for the validity of an arbitration agreement and does not mandate complying with the provisions of the Stamp Act.
Due to this jigsaw of the legislations, there have been a series of cases which have attempted to answer the validity of an unstamped arbitration agreement. The case of Great Offshore held that the objective of ACA is to ensure minimal judicial intervention and held that “adding stamps, seals and other formalities to an arbitration agreement was antithetical to this objective”. The case of Geo-Group validated an unstamped arbitration agreement. As opposed to this, SMS Tea Estates invalidated an arbitration clause contained in an unstamped contract. Building upon this, Garwareheld that arbitration clauses in unstamped contracts would be unenforceable. Vidya Drolia upheld both the decisions of Garware and SMS Tea Estates.
In contrast, NN Global held that the absence of stamp duty will not be a valid ground for the unenforceability of an arbitration agreement. By a majority of 3:2, NN Global 2 overruled NN Global 1 and held that an unstamped arbitration agreement will be void and unenforceable. In a recent case, In Re: The Interplay, the SC has finally settled the law and has incorporated the doctrine of separability and competence – competence. The paper attempts at looking at the validity of an unstamped arbitration agreement through the lens of these doctrines and its implications.
THE DOCTRINE OF SEPARABILTY
An arbitration agreement can be in the form of a clause in a contract or a separate agreement in itself. But, regardless of the form, the parties sign the same with a presumption that in case of any dispute arising out of the contract, the parties will have an arbitration proceeding (in effect, excluding the court’s jurisdiction). This expectation of the parties, is essentially the ‘Presumption of Separability’. This presumption holds that the validity or existence of the contract will not affect the arbitration agreement and the identities of the contract. The arbitration agreement and the contract are to be treated separately, wherein the former deals with the substantive rights and obligations and the later lays down the procedural framework.
This presumption becomes relevant in the context of an unstamped arbitration agreement. For an arbitration agreement to be valid, Section 35 of the Stamp Act mandates stamping whereas Section 7 of ACA only mandates that it be in writing and duly signed. This raises the question of “whether an arbitration agreement is required to be stamped to be valid and enforceable?”
Globally, the courts have enforced the presumption of separability and have held it to be at the core of arbitration laws. If the parties to an arbitration agreement need to approach courts every time a contract is deemed to be invalid, then in effect, the tribunals will be excused of jurisdiction and the entire purpose of arbitration will be undermined.
The case of NN Global 2 negated this doctrine and gave precedence to the procedure established by the Stamp Act. As an implication, the Stamp Act had an overriding effect over the ACA. Parties opt for arbitration to essentially do away with the traditional court formalities and ironically the pressure of procedural compliance was reinstated by NN Global 2. Reading in stamping, registration and other procedural formalities were undermining Section 7, ACA.
To solve this conundrum, the SC in, In Re: The Interplay, has overruled NN Global 2. In effect, the termination of the underlying contract will not render an arbitration agreement inoperative in line with the separability presumption. The Court has ruled in favour of applying separability and held that “The above position of law is contrary to the separability presumption which treats an arbitration agreement as separate from the underlying contract”.
THE DOCTRINE OF COMPETENCE – COMPETENCE
The presumption of separability compliments the doctrine of competence-competence. While the former ensures that the validity of the underlying contract does not affect the jurisdiction of the Tribunal , the latter limits the jurisdiction of courts in this regard.
The Doctrine of Competence – Competence has both positive and negative connotations to it. The positive aspect upholds the parties’ autonomy in choosing the arbitrator to resolve their disputes and deters them from instituting suits at courts delaying the arbitral process. The negative aspect carries the same ratio but from the perspective of courts. It suggests that the courts should refrain from entertaining challenges to jurisdiction of the arbitral tribunal before the arbitrators themselves have had the opportunity to do so. As much as it is recognized that the judicial machinery renders its essential support to the process of arbitration, the paradox of arbitration seeking to release itself from the clutches of the judiciary persists. To this, the courts have consistently sustained the statement of object and reasons of the ACA being to minimize judicial intervention in arbitration proceedings and respect party autonomy to settle through arbitration and not litigation.
In this judgment, the Apex court dealt with the question of whether a tribunal can effectively exercise its jurisdiction to settle the claims between the parties if the stamp duty is unpaid on the underlying instrument. Arguments to the contrary were made stating that the credibility of the court rested on the foundation that negated expediency, viewing the Apex court as a means and ends institution.
Further, it was contended that the court did not possess appropriate jurisdiction to rule on the matter. CJI Chandrachud and Justice Kaul remarked on the large ramifications of the issue awaiting an appropriate case to decide and held, upon applying the doctrine of competence-competence, that the arbitral tribunal must have the first opportunity to decide on the issue of stamping. The Apex court whilst agreeing to stamping being a revenue related issue, categorically held that it is a curable problem. While, drawing a clear distinction between the words ‘examination’ and ‘ruling’ as used in Section 11and Section 16 of the ACA respectively, the court held that the first examination will be undertaken by the arbitrator. This results in thwarting forward the process of arbitration.
Thus, In Re: The Interplay has restrained the exercise of powers by the judicial authorities under Section 8 and Section 11 of ACA emphasizing the legislative intent behind Section 5 of the ACA.
CONCLUSION
It is a well settled law that the ACA is no longer viewed as an ouster statute but one which favours the remedy of arbitration so as to de-clog the extremely burdened civil courts. This underlying jurisprudence has been used to support the arguments involving the doctrine of separability and the doctrine of competence-competence.
In a judgment whilst commenting on the arbitration proceedings under the 1940 Act, it was noted that the challenge to arbitral proceedings in Courts have made “lawyers laugh and legal philosophers weep”. In a more recent judgment, it was observed that several applications under Section 11 of the Act were decided and disposed of after a period of four years, which defeated the purpose of the amended Act.
Amidst continuing state of affairs, a refreshing change was seen in a dissenting opinion, by way of holding that non-stamping or insufficient stamping of the substantive contract or instrument would not render the arbitration agreement non-existent in law and unenforceable, for the purpose of referring a matter to arbitration. This judgment in In Re: The Interplay takes a step forward in making India a pro-arbitration hub.
The authors are penultimate-year law students at Jindal Global Law School.
Good analysis. --- Seshachary