Resolving The Conundrum Of Enforceability Of Unstamped Arbitration Agreements

In a recent groundbreaking decision, a seven judge bench decision of the Hon’ble Supreme Court, has delivered a significant ruling that the Court can appoint arbitrators even on unstamped or inadequately stamped agreements. The seven bench decision titled as “In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899” has disagreed with the 5 judge bench in NN Global (2) which which had held that the courts cannot appoint arbitrators on unstamped arbitration agreements.

There are two opinions in this decision: the majority opinion, delivered by J. DY Chandrachud, and a concurring opinion, delivered by Justice Khanna, marks a pivotal moment in the legal and commercial landscape.

Key Conclusions:

The comprehensive conclusions reached by the majority view are as follows [1]:

• Agreements lacking proper stamping are deemed inadmissible under Section 35 of the Stamp Act, but they are not automatically void, void ab initio, or unenforceable.

• Non-stamping or inadequate stamping is merely a curable defect.

• Objections related to stamping should be addressed by the arbitral tribunal, and not by the court under Section 8 or Section 11 of the Arbitration Act

• NN Global Mercantile Pvt Ltd v Indo Uniqie Flame Ltd (2023) 7 SCC 1 (‘NN Global 2’) and SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 (‘SMS Tea Estates’), have been overruled.

• Paras 22 and 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 (‘Garware Wall Ropes’) have been overruled.

Maintainability of the Petition:

The court, in determining the maintainability of the petition, relied upon the exception laid down in the case of Central Board of Dawoodi Bohra Community v. State of Maharashtra (2005) 2 SCC 673 (‘Dawoodi Bohra’) that ‘if the matter has already come up before a bench of larger quorum, and that bench itself feels that the view of the law taken by a bench of lesser quorum requires reconsideration, then by way of exception and not as a rule and for reasons given by it, it may proceed to hear the case’[2]

The majority held that the interpretation and application of arbitration law in India, which in turn has implications for business and commerce in the country merits reliance upon the exception laid down in Dawoodi Bohra (supra)[3]

Inadmissibility vs. Voidness:

The crux of the court's reasoning lies in distinguishing between inadmissibility and voidness[4].

Dealing with Para-109 of NN Global 2 (supra), the court held that the 5 judge bench was erroneous as it conflated the distinction between enforceability and admissibility [5].

The majority held that:

• Merely because an agreement is void, does not impact its admissibility in evidence.[6]

• While Section 35 of the Stamp Act renders a document inadmissible, it does not render the underlying agreement void.

• Section 2(j) of the contract act is not attracted when an instrument is rendered inadmissible under Section 35 of the Stamp Act, and the result of the latter is not to render an unstamped agreement unenforceable[7].

Separability Principle and Jurisdiction under Section 16:

The issue of stamping was considered a preliminary jurisdictional matter falling within the arbitral tribunal's purview.

The court underscored the separability principle under Section 16 of the Arbitration Act, asserting that the arbitration agreement remains valid independently of the underlying contract's validity[8].

The majority expressly held that the reasoning given by NN Global 2 (supra) that the separation principle was not applicable to Section 33 and 35 of the Stamp Act is against the separable presumption incorporated under Section 16 of the arbitration act[9].

Affirming the decision of Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455, (‘Northern Coal Field’), the majority held that the scope of an arbitral tribunal’s authority under Section 16 is wide enough to comprehend all preliminary issues affecting jurisdiction, including the sufficiency of adequacy of stamping.[10]

The court also relied upon the principle of negative kompetenz-kompetenz to support the reasoning.[11]

Section 11(6A) and Examination of Arbitration Agreements

Examining the scope of Section 11(6A) of the arbitration act, the court clarified that Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 (‘Vidya Drolia’) is erroneous to the extent that it proceeded on the premise that Section 11(6A) has been omitted, even when this omission was not really notified [12]

Elaborating more on this Section, it was held that the scope of examination under this Section must be confined to the existence of an arbitration agreement on the basis of Section 7 and that the validity of an arbitration agreement in view of Section 7 should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing [13]

Harmonious Construction of Laws:

Relying upon Hindustan Steel Ltd. v. Dilip Construction Co., (1969) 1 SCC 597 (‘Hindustan Steel’), the court held that the purpose of the Stamp Act is not to arm a litigant with the weapon of technicality to meet the case of his opponent, but is to merely secure the revenue of the State[14].

On the other hand, the primary principles on which the Arbitration and Conciliation Act, 1996 is based are the principles of party autonomy[15] and the principle of minimum judicial interference[16] which are specifically incorporated under Section 5 of the Arbitration Act. Thus, the majority held that every provision of the arbitration act ought to be construed in view of the objects of Section 5 of the act, which is to minimise judicial intervention[17].

The majority held that the arbitration act will have primacy over the Stamp Act and contract act[18]. This was done relying upon two rules of interpretation:

• Firstly, the court relied upon the doctrine of Generalia specialibus non derogant to hold that the Arbitration Act which is a special law, will prevail over the Indian Contract Act and Stamp Act, which are general laws[19].

Thus, the court held that that sections 35 and 33 could not be allowed to operate in the proceedings under Section 11 or Section 8 and held that the interpretation of NN Global 2 (supra), rendered Section 5 otiose[20].

• Secondly, the court relied upon the fact that the Parliament was aware of the Stamp Act when it enacted the arbitration act and held that the Stamp Act does not specify stamping as a pre-condition to the existence of a valid arbitration agreement.[21]

The court contrasted the phrase ‘existence of the arbitration agreement’ appearing in Section 11(6-A) of the Arbitration Act  with Section 33(2) of the Stamp Act which also uses the word “examine.”[22]

Harmonizing the three statutes, the court held that the issue of stamping being decided under Section 16 of the Arbitration Act by the Arbitral Tribunal would take care of objects of both the acts, since the object of realisation of stamp duty is not really defeated, and at the same time, arbitration proceedings are not stalled[23].

It also held that allowing such an objection to be taken at the time of Section 8 or Section 11 application, would defeat the intention of the arbitration act as the question whether the stamp has not been paid or has been underpaid is a question that can only be decided after adducing strong enough evidence[24]

Further, the interests of revenue are not jeopardised in any manner because the duty chargeable must be paid before the agreement in question is rendered admissible and the lis between the parties is adjudicated[25]

Certified copy of the Arbitration Agreements

Finally, the majority also clarified the law laid down in Jupudi Kesava Rao and Hariom Agrawal to hold that an arbitration agreement certified copy is not rendered void or unenforceable only because it is unstamped or insufficiently stamped[26], and thus the referral court under Section 11 is not required to examine whether a certified copy of the agreement/ instrument/ contract discloses the fact of payment of stamp duty on the original[27]

Conclusion

This landmark decision clarifies the long standing debate as to whether unstamped arbitration agreements can be acted upon. It also establishes a harmonious framework for the interplay between the Arbitration Act, Stamp Act, and Contract Act. The legal community has grappled with uncertainties regarding the fate of such agreements, and this decision provides much-needed clarity. At the same time, this decision leaves open other questions as to interplay between Section 9 and Section 17 of the arbitration act and the Stamp Act, which may be hopefully resolved by a future bench.

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[1] Para 224

[2] Para 27

[3] Para 28, In Re Arbitration

[4] Para 44, In Re Arbitration

[5] Para 47, In Re Arbitration

[6] Para 45, In Re Arbitration

[7] Para 53, In Re Arbitration

[8] Para 112, In Re Arbitration

[9] Paras 113 – 114, In Re Arbitration

[10] Para 126, In Re Arbitration

[11] Para 132, In Re Arbitration

[12] Para 152, In Re Arbitration

[13] Para 154, In Re Arbitration

[14] Para 60, In Re Arbitration

[15] Para 64 – 68, In Re Arbitration

[16] Paras 69 – 82, In Re Arbitration

[17] Para 82, In Re Arbitration

[18] Para 166, In Re Arbitration

[19] Para 167, In Re Arbitration

[20] Para 175, In Re Arbitration

[21] Para 177, In Re Arbitration

[22] Para 177, In Re Arbitration

[23] Para 184, In Re Arbitration

[24] Para 185, In Re Arbitration

[25] Para 195, In Re Arbitration

[26] Para 217, In Re Arbitration

[27] Para 218, In Re Arbitration