Arbitration Agreement prevails, Stamping can wait.

A seven Judge bench of the Supreme Court of India recently passed a comprehensive judgment delineating the principles on enforceability of arbitration agreements contained in unstamped contracts. The judgment will have wide ramifications.

Bird’s eye view of the ‘issue’

A seven Judge Bench of the Hon’ble Supreme Court of India in Re Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996 (Act) and the Indian Stamp Act, 1899 (Stamp Act)[1] has recently accorded its ‘stamp’ of approval by upholding the enforceability of an arbitration agreement contained in an unstamped/inadequately stamped contract.

The chequered history of the subject can be traced back to the year 2011, when a two Judge Bench of the Supreme Court[2] held that an arbitration agreement in an unstamped contract could not be acted upon.

More recently, in 2019, a coordinate Bench of the Supreme Court[3] propounded the view that an arbitration agreement in an unstamped commercial contract would not exist as a matter of law and could not be acted upon until the underlying contract was duly stamped. The rationale was that an agreement does not become a contract unless it is duly stamped.

Thereafter, in 2021, a three Judge Bench of the Supreme Court[4] approved the reasoning of the two Judge Bench above while observing that existence and validity of arbitration agreements are intertwined, and an arbitration agreement does not exist if it does not satisfy the mandatory requirements under law.

It was then, in 2021 again, that a three Judge Bench of the Supreme Court in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[5] doubted the correctness of the view that an arbitration agreement will be rendered invalid, unenforceable or non-existent, if the underlying contract is unstamped. The Court referred the issue to a Constitution Bench comprising 5 Judges of the Supreme Court.

The Constitution Bench, in the first half of 2023[6] by majority of 3:2 held that an unstamped instrument, not being a contract and not enforceable in law, cannot exist in law. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped. The Court appointing an arbitrator under Section 11 of the Act, which deals with the Court’s power to appoint an arbitrator, must examine and impound an unstamped or insufficiently stamped instrument.

The controversy on enforceability of an arbitration agreement in an unstamped contract was not laid to rest despite the authoritative ruling of the Constitution Bench as it was largely perceived that the issue of stamping in the context of existence and validity of an arbitration agreement is stirring up strife rather than promoting the cause of arbitration.

Considering the larger ramifications and consequences of the majority view in N N Global Mercantile (P) Ltd. (Supra), the Supreme Court placed the matter before a seven Judge Bench to reconsider the correctness of the view expressed by the five Judge Bench.

Stamp Act and its effect on enforceability of agreements

The procedure contemplated by the Stamp Act facilitates the collection of revenue. It permits instruments to be impounded not only by persons in charge of a public office or those who are empowered by law to receive evidence but also by any person who is empowered to receive evidence by consent of parties, such as arbitral tribunals.

Section 35 of the Stamp Act is significant to the issue at hand. It stipulates that an instrument shall not be acted upon, registered or authenticated if the instrument is not duly stamped. Once appropriate amount of stamp duty has been paid and the instrument has been endorsed in terms of the procedure under the Stamp Act, the instrument can be admitted into evidence.

The Distinction

In the course of its verdict, the Supreme Court carved a fine distinction between admissibility of an instrument in evidence and its validity and enforceability in law. When an agreement is void, it leads to questions of its enforceability in a Court of law. Whereas, when an agreement is inadmissible, it leads to the question whether a Court can rely or consider it as evidence while adjudicating a case.

The conflation of distinction between enforceability and admissibility by the Constitution Bench of the Supreme Court in N N Global Mercantile (P) Ltd (Supra), has been disapproved by the seven Judge Bench of the Supreme Court. Pertinently, an intrinsic examination of the scheme of the Stamp Act reveals that the statute is concerned with admissibility of a document in evidence in contrast to the nature of document for the purpose of its enforceability under the Indian Contract Act, 1872 (Contract Act), which inter-alia deals with conditions when an agreement is enforceable as a contract.

The very fact that the Stamp Act itself provides for the manner in which a defect of non-stamping/inadequate stamping can be cured before the instrument can be relied upon in evidence is conclusive proof that an unstamped/inadequately stamped instrument is not rendered void. For there is no procedure by which a void agreement can be cured.

The principle of minimal judicial interference

Section 5 of the Arbitration Act provides the extent of judicial intervention by Courts in the arbitral process. Party autonomy and settlement of disputes by an arbitral tribunal are the hallmarks of arbitration law. Section 5 limits judicial interference by permitting the Courts to exercise their supervisory role in a minimal manner and to the extent so provided in the statute.

Through judicial interpretation, it is envisaged that the role of Courts in arbitral proceedings is not altogether excluded but rather transformed into that of an enforcer and implementer of the arbitral process.

The Supreme Court has observed that Section 5 of the Arbitration Act has two facets, a positive and a negative. The positive facet vests judicial authorities with jurisdiction over arbitral proceedings in matters expressly allowed in or dealt with under Part I of the Arbitration Act, which deals with domestic arbitrations. The flip side to this approach is that judicial authorities are prohibited from intervening in arbitral proceedings in situations where the arbitral tribunal has been bestowed with exclusive jurisdiction.

Accordingly, the approach of a judicial authority to examine the validity of an arbitration agreement at the stage of appointment of an arbitrator, in terms of its enforceability by conflating the concepts of admissibility and enforceability under the Stamp and Contract Acts respectively has been circumscribed in view of Section 5 above.

An arbitral tribunal’s authority to rule on its own jurisdiction is not to be trammeled by Courts at the referral or appointment stage. Every provision of the Arbitration Act must be construed in view of Section 5 of the said Act to give true effect to the legislative intention of minimal judicial intervention.

The ‘Kompetence’ of an arbitral tribunal

The concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement.

The concept of separability ensures that an arbitration agreement survives the invalidity or termination of the underlying contract since it reflects the presumptive intention of the parties to distinguish the underlying contract from the arbitration agreement.

The separability presumption has found statutory recognition in terms of Section 16 of the Arbitration Act, which deals with the competence of an arbitral tribunal to rule on its jurisdiction. Section 16 envisages that when parties to a contract append their signatures thereto, they are regarded in effect as independently appending their signatures to the arbitration agreement. As such, parties to an arbitration agreement have mutually intended to confer jurisdiction on the arbitral tribunal to determine questions as to jurisdiction and substantive contractual disputes between them.

In view of the mechanism of Section 16, there is statutory permissibility of an arbitral tribunal to rule on its on jurisdiction including whether the issue of non-stamping of a document would impinge on a tribunal’s jurisdiction to proceed any further. The issue of sufficiency of stamping can thus be examined as a preliminary issue by the tribunal being a matter potentially affecting its jurisdiction.

In express terms, the Supreme Court has held that the corollary of the doctrine of competence-competence is that courts may only examine whether an arbitration agreement exists on the basis of the prima facie standard of review. The nature of objections to the jurisdiction of an arbitral tribunal on the basis that stamp-duty has not been paid or is inadequate is such as cannot be decided on a prima facie basis. Accordingly, the objections of this kind have been relegated to the jurisdiction of an arbitral tribunal.

Harmony between the Stamp Act and the Arbitration Act

During the submissions, apprehensions were expressed that the interests of the revenue will be jeopardized if the findings of the Constitution Bench are disturbed. Since, the findings gave teeth to the provisions of the Stamp Act.

The Court carried out a detailed analysis of the operability of the Stamp Act and Arbitration Act. It then decided to harmonize the two statutes by ensuring efficacy of the arbitration process without compromising the interests of the revenue.

Therefore, the objection to non-stamping/inadequate stamping on a document has been permitted to be kept alive albeit before the arbitral tribunal. Merely because reference to arbitration is made on the basis of an unstamped document does not entail non payment of stamp duty ever, during the course of the arbitral process.

The verdict then clarifies that Courts are not abdicating their duty to ensure protection of revenue interests but an equanimity is being created by giving effect to the principle of minimal judicial interference under Section 5 of the Arbitration Act.

Summarily, certain principles have been expressed while giving precedence to the Arbitration Act at the stage of appointment of an arbitrator and referral to arbitration over the Stamp Act. These are, the prima facie standard applicable to appointment and referral, the purpose of the Stamp Act is to protect the interests of revenue and not arm litigants with a weapon of technicality by which they delay the adjudication of the lis and the interpretation of the law must give effect to the purpose of the Arbitration Act in addition to the Stamp Act.

Comment

In no uncertain terms has the seven Judge Bench clarified that provisions on stamping of documents are not to be used as a weapon of technicality which trammels the arbitration process at the pre-constitution stage.

With its observations that the validity of an agreement or its enforceability cannot be conflated with the issue of admissibility of such an agreement, it will be interesting to follow how arbitral tribunals deal with issues of unstamped/inadequately stamped instruments since the objection on this issue has been preserved to be taken before arbitral tribunals.

The verdict sets out clearly delineated principles which animate the law on arbitration in India and these are reflective of the intention to proscribe judicial interference in the arbitral process. The Court has engineered the principles of modern arbitration law by giving due deference to arbitral tribunals to decide issues pertaining to arbitration agreements as well as the substantive rights of parties.

The decision is a welcome one, both from the standpoint of removal of bottlenecks in the arbitration process at the time of constitution of an arbitral tribunal and sacrificing technical pleas at the altar of party autonomy and competence-competence. At the same time, by laying the onus on arbitral tribunals to exclusively deal with the issue of stamping and other preliminary issues of jurisdiction, can it really be said that arbitration will be the cost-effective substitute of litigation. Hopefully, the practical nuances will work out to prevent a tempest in a teapot situation.

 

 

Authors

	Sumeet Lall  Partner, CSL Chambers  Sumeet.Lall@cslchambers.com
	Sidhant Kapoor Legal Director, CSL Chambers Sidhant.Kapoor@cslchambers.com

 

**CSL Chambers, is an associated firm of Clyde & Co LLP, a Full Service Global Law Firm.

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