Is An Arbitration Clause In An Unstamped Agreement Enforceable?Supreme Court 7-Judge Bench Reserves Judgement

A seven judge bench of the Supreme Court today reserved its judgement on the issue whether an unstamped/insufficiently stamped arbitration agreement was unenforceable. The bench comprising CJI DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice B R Gavai, Justice Surya Kant, Justice JB Pardiwala, and Justice Manoj Misra was hearing a curative against its 2020 ruling in Bhaskar Raju and Brothers and Anr V. s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Ors.

While hearing the curative petition, the validity of the judgment delivered by a 5-judge bench in April this year in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors arose for consideration. In NN Global, a Bench comprising Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar had answered the reference on the issue by a 3:2 majority. The majority had decided that an instrument which is not stamped cannot be said to be a contract enforceable in law within the meaning of S. 2(h) of the Contract Act. On September 26, a 5-judge bench had referred the issue to a larger bench to revisit the correctness of NN Global.

Yesterday, the bench of seven had renamed the case title of the reference as "In re interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899". 

Courts Can Only Determine Existence Of Agreement, Not Validity: Petitioners

Senior Advocate Arvind Datar had commenced the arguments yesterday and had argued that existence of an arbitration agreement and validity of the arbitration agreement were two different concepts. Asserting that nullity was a de jure concept which could exist in fact and not in law, he argued that under Section 11 of the Arbitration and Conciliation Act, 1996, the power of the court was confined to the examination of the existence of the agreement and not to the validity of the same. Thus, the court only had to determine if an agreement existed. The same, he stated, could be done by dissecting the nature of correspondence between the parties, including telecommunication, statements, zoom calls etc. However, the validity of the agreement was for the arbitrator to decide upon. He submitted that the ambit of Section 16, which deals with the competence of an arbitral tribunal to rule on its jurisdiction, was wide enough to allow the Arbitrator to make considerations with respect to the stamping of the document. He pointed out that as per Section 16, apart from jurisdiction, the Arbitrator is contemplated to rule on objections with respect to the ‘existence and validity of the arbitration agreement’, while under Section 11(6A), which deals with appointment of arbitrators by Courts, the consideration is ‘confined to the examination of the existence of an arbitration agreement’.

On a similar vein, Senior Advocate Gourab Banerji, in his arguments stated that the purpose of Section 11 was to impose a "self-restraint in not deciding". He stated that there existed a "laxman rekha" which limited the court in deciding upon the validity of an arbitration agreement. He added that while the final say undoubtedly was with the court, determination of validity of the agreement was not the final stage, it was the first stage and had to be decided by the arbitrator.  "If the majority in NN Global is accepted, forget arbitration, anyone can turn around and say that this agreement is void," he stated. 

Today, Senior Advocate Darius Kambhatta, furthering his submissions relied upon the 'doctrine of separability' to argue that even if an agreement was null and void, the arbitration agreement within it would still survive as it was 'separate'. He asserted that this doctrine was housed in Sections 7(2), 7(5), and 16 of the Arbitration and Conciliation Act. He also relied upon the competence-competence principal for his submissions. As per the Competence-Competence doctrine, an arbitral tribunal has the jurisdiction to decide upon any dispute regarding its own jurisdiction. As per his arguments, with these two doctrines applied, the arbitral tribunal's authority to decide on its own jurisdiction would exist irrespective of whether the agreement containing the arbitration agreement had been held as null or void. He also argued that under the Stamp Act, the non-stamping of an agreement did not result in the transaction being voided. He added that non-stamping of an agreement was also a curable defect. 

Supreme Court In Its Curative Jurisdiction Could Not Have Referred NN Global To Larger Bench: Respondents

Senior Advocate Shyam Divan, appearing for the respondents, commenced his arguments by questioning the Supreme Court five judge bench's decision of referring the matter to a seven judge bench in its curative jurisdiction. It may be recalled that a five judge bench of the Supreme Court, while hearing a curative petition filed against the 2020 judgment in Bhaskar Raju and Brothers and Anr V. s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Ors. had doubted the validity of the judgment delivered in M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors and referred the matter to a seven judge bench. In his arguments, Divan asserted that the court's curative jurisdiction could only be exercised with regards to injustice done in an individual cause. He argued that the Supreme Court was "a means and ends institution" and was very particular about the means and the ends when it came to courts below, government authorities, citizens, and most importantly itself. He added that this was because "the reputation and credibility of our institution rests on the foundation that we reject expediency. We reach those ends by permissible means."

Questioning the jurisdiction of the court to entertain the matter, he asked–

"Are we in the realm of appellate jurisdiction? No. Is it review jurisdiction? No. Are we in an original restriction? No. Are we in a jurisdiction of discretionary appeal? No. Are we in a jurisdiction of an opinion that the President of India seeks for reference? No. Are we to transfer jurisdiction? The answer is again no. So then what is the jurisdiction?" 

Justice Kaul responded to the same and asked–

"When a five judge Constitution bench has found the view of an earlier five judge bench prima facie incorrect, is a reference to 7 judge bench not called for?"

Divan responded by stating that a reference could be called for but in a case of appropriate jurisdiction. CJI interjected and remarked–

"When a position of law is liable to cause grave public injury, public uncertainty, and grave imbalance in the world of business investment, the point should not be left to future litigation. It is the duty of the court to seize upon the opportunity and see to the end of it all."

However, Divan reiterated that a curative petition was with regards to injustice in a particular individual cause. He stated that for court to exercise its curative jurisdiction, it had to get past a "three rung ladder"– first rung was the disposal of the case it self, second rung was there must be a disposal as far as the review was concerned, and the third rung was the curative petition. "You cannot bypass these three rungs," he submitted. 

He argued that this "very narrow jurisdiction" of the court could be exercised when the NN Global case was first doubted, then it went for a review, and then if the court still believed that a wrong had been done, it could exercise its curative jurisdiction. He also stated that renaming the petition as "In re interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899", the nature of jurisdiction did not change. He asked if in case of an incorrect position of law being made, "can the court constitute a larger bench, put out a label of 'in re' and then decide to overrule it?" He stated that this cold not be permitted and could only done in appropriate cases. To this, the CJI said–

"The impact of a wrong precedent could be severe."

Background

In 2020, the Supreme Court, in the case Bhaskar Raju and Brothers and Anr V. s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Ors had observed that an arbitration clause in an agreement which is required to be duly stamped, if not sufficiently stamped, cannot be acted upon by the Court.

Case Title: In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 in C.A. No. 1599/2020