Stamped Out Or Not: Finality To The Issue Of Unstamped Arbitration Agreement

Reference to the Court

The seven judge bench was referred the issue, by a five judge bench in a curative petition^[3] filed considering the larger ramifications and consequences of the view of the majority in NN Global 2. The curative petition was filed seeking reconsideration of the judgment passed by three judge bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers^[4] that cited SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd^[5] (“SMS Tea Estates”) with approval, and reversed the decision of a High Court to refer the parties to arbitration relying on insufficiently stamped lease deed.

Indian Stamp Act, 1889

The Stamp Act lays down the provisions for stamping of an instrument, and duty is casted on the Courts to ensure necessary stamping of an instrument, which is unstamped or insufficiently stamped. The Court discussed on the legislative intent behind the enactment of Chapter IV of the Stamp Act, and the provision that necessitated impounding of an instrument which, in the opinion of the Court is chargeable with duty but is not duly stamped^[6]. Further, the Court focused on Section 35 of the Stamp Act which rendered unstamped and insufficiently stamped instruments inadmissible in evidence, and this was of particular significance to the issue before the Court.

1. Inadmissibility and voidness: A difference was carved out between the validity and enforceability of an instrument in law and its enforceability in evidence. The Court noted that when an instrument is inadmissible, then the Court may or may not consider or rely upon it while adjudicating, however a void instrument renders it unenforceable in a court of law. Therefore, the Court held that paying inadequate duty or not paying it, would only render an instrument inadmissible in evidence and not void, and the same is a curable defect.

The Arbitration and Conciliation Act, 1996

“It is to be expeditious where the law is slow, cheap where the law is costly, simple where the law is technical, a peacemaker instead of a stirrer-up of strife.”^[7]

The enactment of the Arbitration Act done with the aim of providing speedy, efficient and binding resolution to parties who have submitted the dispute to arbitral tribunal in regard to their substantive obligations, and was enacted to consolidate the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. Through this enactment, India was brought under a pro-arbitration regime that was in consonance with UNCITRAL Model Law, New York Convention and Geneva Convention.

A. Arbitral autonomy and minimum judicial interference: While dealing with the Act, the Court opined on the principle of arbitral autonomy, that gives freedom to the parties to an arbitration agreement to refer the dispute to arbitration, and give authority to the tribunal to decide dispute between the parties. This arbitral autonomy is inter-linked with the principle of judicial non-interference which prescribes for conduct of arbitral proceedings without unnecessary interference by the national courts. This principle of minimum judicial interference was developed so that the parties can submit their disputes to the arbitral tribunal having less formal and more flexible procedure.

However, judicial interference is not excluded altogether, but is only limited to situations that requires assistance of judicial authorities for successful implementation and enforcement of arbitral process^[8].

B. Separability of the Arbitration Agreement: The separability of the arbitration agreement from the underlying instrument is one of the salient features of arbitration law, and according to this principle an arbitration agreement is juridically independent from the underlying contract in which it is contained^[9]. This separability is based on the following factors:

i. Intention of the parties to refer the dispute to arbitration, including dispute over the validity of the instrument.

ii. Preventing unwilling party to submit to arbitration, by alleging validity of the instrument.

iii. Insufficiency in completion of formalities with respect to the instrument should not affect the validity of arbitration agreement.

The Court, further traced the evolution of this principle in international context:

1. United Kingdom: There was a gradual development of the separability presumption in English Law which started with the decision of House of Lords in Heyman vs Darwins^[10] wherein it was held that an arbitration agreement being materially different from the substantive contract, can survive its termination. Further, the separability presumption has also been given legislative sanction vide Section 7, the UK Arbitration Act, 1996 that states that an arbitration agreement that forms part of another agreement shall not be regarded as invalid, non-existent or ineffective because the other agreement is invalid, and it shall for that purpose be treated as a distinct agreement.
2. United States of America: In US as well, the Courts have time and again upheld the separability doctrine with respect to both international and domestic arbitration. Further, the US Federal Arbitration Act also presupposes the arbitration agreement being distinct from the underlying contract. In Prima Paint Corporation vs Flood & Conkling Mfg. Co.^[11], the US Supreme Court upheld the separability presumption by holding that
   “arbitration clauses as a matter of federal law are 'separable' from the contracts in which they are embedded.”
3. Singapore: The doctrine has been statutorily recognized vide the country's Arbitration Act, 2001. Under Section 21 of the Act, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other forms of the contract.
4. International Conventions: Under the New York Convention, the arbitration agreement is presumptively separate from the underlying contract, and no express provision has been provided. However, since one of the articles of the convention provides for refusal of arbitral award on the ground that the arbitration agreement is not valid under the law to which the parties have subjected to or under the law of the country where the award was made, provides for separability of arbitration agreement as the article presumes that international arbitration agreements could be subjected to different national laws than the underlying contract. Further, the UNCITRAL Model Law expressly provides for separability of arbitration agreement.

C. Doctrine of kompetenz-kompetenz: The doctrine of kompetenz-kompetenz originally developed in Germany, which traditionally meant that the arbitrators can decide on their jurisdiction, and the same shall be subject to no judicial review. However, some of the countries had later on expanded the scope of this doctrine, and brought it under the ambit of judicial review as well. In India, the previous arbitration act allowed the parties to challenge the existence or validity of an arbitration agreement. The current Arbitration Act recognizes this doctrine, as Section 16 specifically provides that an arbitral tribunal has the power to rule on its own jurisdiction which also includes deciding on the existence or validity of the arbitration agreement. However, the recognition of the doctrine under the Act is only restricted to pre-arbitral stage, as after an award is passed the same can be challenged under Section 34 of the Act wherein one of the grounds for challenge can be that the arbitration agreement is not valid under law. Further, the negative connotation of this doctrine applies to courts that suggests that challenge to the jurisdiction of the arbitral tribunal should be decided by the arbitrator first, and until the arbitrator had the chance to do so, the courts should refrain from entertaining any such challenge. Therefore, the Court held that the principle of negative competence-competence also requires that the tribunal shall first decide on the issue of stamping.

Harmonious construction of the Arbitration Act, the Stamp Act and the Contract Act

It is quite possible that inconsistencies or contradictions may arise between two or more statutes and in such situations, the courts are tasked with harmonious interpretation of inconsistent or contradictory statues. The Apex Court, in the present reference, was called upon to harmonize the provisions of Arbitration Act and the Stamp Act. While doing so, the Court noted that the objective of the Arbitration Act is to inter alia ensure speedy, cost effective and efficacious resolution of dispute submitted for arbitration whereas, the objective of the Stamp Act is to secure revenue for state. The Court relied on the judgment in State of Tamil Nadu v. M K Kandaswami^[12], wherein it was held that harmonious interpretation should not defeat the purpose of the statute or render it ineffective, and ruled that the Arbitration Act will have primacy over the Stamp Act or the Contract Act due to the following reasons:

1. Contract Act and Stamp Act are general laws, whereas Arbitration Act is a special law.
2. Section 5 of the Arbitration Act provides the non-obstante clause that excludes the precedence of any other law/provision over the Arbitration Act. Therefore, courts can only intervene unless the same is specifically provided under the Arbitration Act and since, impounding of an instrument is not provided under the Arbitration Act therefore, the court cannot do so. Therefore, the Court differed with the decision in NN Global 2 that ruled that court must give effect to Section 33 and 35 of the Stamp Act in a proceeding under Section 11 of the Arbitration Act.
3. The concern of loss of revenue is not defeated, as the arbitral tribunal has the power to get the issue of deficient stamp duty rectified in pursuance of the provisions of the Stamp Act.
4. Stamping of an instrument has not been provided by the Parliament, as a pre-condition to the existence of valid of arbitration agreement even though the Parliament was aware of the Stamp Act, when the Arbitration Act was being enacted.

The Court while stating the above, ruled that the decision in NN Global 2 only gives primacy to the provisions of Stamp Act, and prioritises the objective of the Stamp Act at the expense of the Arbitration Act. This in turn destroys the very purpose of the Arbitration Act i.e. to provide speedy and efficacious alternative dispute resolution system, as the impounding of an instrument at the stage of Section 8 or 11 of the Act will lead to delay in commencement of the arbitration.

Based on its findings, Supreme Court further ruled that the judgments passed in SMS Tea Estates and Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited^[13] (“Garware”) has been wrongly decided.

Restoration of the true intention of the Arbitration Act

In NN Global Mercantile Private Limited v. Indo Unique Flame Limited ^[14] (“NN Global 1”), the three-judge bench had affirmed the separability doctrine, and had held that non-payment of stamp duty would not invalidate the arbitration agreement. This was in consonance with the intention of promoting arbitration, and making India a pro-arbitration regime with minimum judicial interference. However, since the view taken by the three judge bench differed from the one passed in Vidya Drolia v. Durga Trading Corporation^[15], therefore the same was referred to the five judge bench that passed the decision in NN Global 2.

The view taken by the five judge bench in NN Global 2 had the effect of increasing the burden on courts, and delay the process of appointment of arbitrator which in turn would have delayed the process of resolution of dispute through arbitration. The passing of the judgment in NN Global 2 had launched the arbitration regime in India in the opposite direction when compared to countries all over the world that had upheld the validity of arbitration agreement, in an underlying instrument/contract. Further, it had impacted the image of the country as an arbitration-friendly jurisdiction, as the Courts had started to implement the judgment in NN Global 2 by impounding unstamped or deficiently stamped agreements that had reference to Arbitration as mode of dispute resolution, that were in various forms such as purchase orders, invoices and other such agreements.

However, the passing of the present judgment and overruling the view taken in NN Global 2 is a welcome step, as it has restored the intention of the Arbitration Act to provide efficacious and speedy remedy, and promote arbitration as a means of dispute resolution. Further, the judgment will also positively impact the position of India as an arbitration friendly or pro-arbitration regime, as it is also in consonance with the view taken by courts in foreign jurisdictions that have upheld the separability doctrine.

Authors: Nihit Nagpal (Associate Partner) And Shubham Tripathi (Associate Advocate) at SS Rana & Co. Views are personal.

1. 2023 LiveLaw (SC) 1049 ↑

2. 2023 LiveLaw (SC) 343 ↑

3. Bhaskar Raju and Brothers vs Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram, Curative Petition (C) No.44/2023 ↑

4. (2020) 4 SCC 612 ↑

5. (2011) 14 SCC 66 ↑

6. Section 33 of the Indian Stamp Act, 1889 ↑

7. Redfern and Hunter on International Arbitration (7th edn, Oxford University Press, 2023) 3. ↑

8. Union of India v. Popular Construction Co., (2001) 8 SCC 470; P Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539. ↑

9. Redfern and Hunter on International Arbitration (7th edn, Oxford University Press, 2023) 81. ↑

10. [1942] AC 356 ↑

11. 388 US 395 (1967) ↑

12. (1975) 4 SCC 745 ↑

13. (2019) 9 SCC 209 ↑

14. 2023 LiveLaw (SC) 343 ↑

15. (2021) 2 SCC 1 ↑