India: An Unstamped Arbitration Agreement; In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act, 1996 And The Indian Stamp Act, 1899

INTRODUCTION

For quite some time now, the Hon'ble High Courts across the country as well as the Hon'ble Supreme Court of India were faced with a peculiar point of law, i.e., whether an unstamped Arbitration Agreement is valid and capable of being enforced?. The peculiarity/complexity arises out of the interplay of 3 (three) different statutes i.e., The Arbitration and Conciliation Act, 1996 ("A&C Act), The Indian Stamp Act, 1899 ("Stamp Act") and The Indian Contract Act, 1872 ("Contract Act").

The Hon'ble High Courts have rendered contradictory judgments on the said point. In fact, there have been varying obiters of the Hon'ble Supreme Court on this legal principle. A brief tabulation of the said varying opinions is as under:

THE NN GLOBAL 2 CONTROVERSY

The judgment of NN Global 2 met with almost immediate criticism, with critics calling the judgment a step backward and against the legislative intent of the A&C Act of providing a mechanism for speedy and effective resolution of disputes.

On 26 September 2023, a five-judge bench of the Supreme Court agreed to reconsider the decision in NN Global 2 in view of its "larger ramifications and consequences" and as such, the matter was referred to a 7 (seven) judge bench of the Hon'ble Supreme Court.

REVISIT OF NN GLOBAL 2 BY THE SEVEN JUDGE BENCH

SUBMISSIONS

The counsels appearing for the Petitioners submitted that the majority decision in NN Global 2 was incorrect. They argued that the power of the Court under the A&C Act at the stage of reference is very limited and the Court under Section 11(6A) of the A&C Act could only determine the existence of an arbitration agreement and nothing more. The Petitioners further contended that non-stamping or insufficient stamping of an agreement was a 'curable defect' which does not go to the root of the validity of the Agreement in question. Lastly, the Petitioners argued that an arbitration clause contained in an agreement stood independent of the said agreement and as such, the invalidity of the agreement would not automatically invalidate the arbitration clause.

On the other hand, the Counsels appearing for the Respondents NN Global 2 is correct and is in line with the position adopted by the Hon'ble Supreme Court in SMS Tea Estates and Garware Wall Ropes which ought not to be disturbed. They further contended that under Section 11(6A) of the A&C Act, the referral court has to prima facie examine both the existence and validity of an arbitration agreement.

On the aspect of the Stamp Act, the Respondent argued that Section 33 casts a mandatory requirement on courts under Section 11, A&C Act proceedings to impound an unstamped or insufficiently stamped agreement. Such an instrument cannot be admitted in evidence or otherwise be acted upon till the stamp duty and requisite penalty is paid. It was further contended that the expression "examination" used in Section 11(6A) contemplated the examination of the validity of an arbitration agreement, including the examination of sufficiency of stamping. Lastly, they also claimed that an arbitration clause could not be severed from the main contract.

CONSIDERATION BY THE HON'BLE SUPREME

The Hon'ble Supreme Court, in its quest to answer the issue under consideration, harmoniously constructedthe A&C Act, the Stamp Act and the Contract Act, and in the process, rendered findings on the following legal principles:-

(i) Admissibility vs. Enforceability of an Agreement

The Hon'ble Supreme Court differentiated between the inadmissibility and voidness of an agreement. The enforceability of an agreement as per Section 2(g) of the Contract Act means an agreement not enforceable by law, i.e., a void agreement, whereas, the admissibility of a particular document refers to whether or not it can be introduced into evidence. An agreement can be void without its nature as a void agreement having an impact on whether it may be introduced in evidence.

Whereas, an agreement falling foul of Section 35 of the Stamp Act for either not paying duty or paying insufficient duty is rendered inadmissible, and not void; the non-payment of stamp duty being a curable defect.

(ii) Special Act or a General Act: The Test Propounded & the Principle of Separability

Tanya Aggarwaladd the four - five pointer test - Para 169 of the judgment

And then state the observation as to how Arbitration Act is the special act visavis the Stamp and the Contract Act

The Hon'ble Court held that the A&C Act is a self-contained code and when a self-contained code sets out a procedure, the applicability of a general legal procedure would be impliedly excluded. As such, provisions of other statutes cannot interfere with the working of the A&C Act, unless specified otherwise.

It was observed that in the context of the case, the arbitration act is the special Act as :-

• the issue is whether unstamped arbitration agreements are rendered unenforceable and not all agreements.
• the arbitration act is a self contained code
• Section 5 of the Arbitration Act contains a non-obstante clause and Sections 33 and 35 of the Stamp Act cannot take precedence over the A&C Act in Section 8 and 11 proceedings.

The well-established principle of separability was also touched upon by the Hon'ble Court wherein the Court held that since the arbitration agreement and the underlying contract are considered to be two separate agreements, the insufficiency in fulfilling formalities of the underlying contract would not result in the invalidity of the arbitration agreement.

(iii) Section 33 and Section 35 of the Indian Stamp Act: Whether Directory or Mandatory

...Para 191 of the Judgment

(iv) Interplay of the A&C Act, the Stamp Act and the Contract Act: A Harmonisation

The analysis of the Hon'ble Court was driven by the principle that the issue is not whether the agreement containing the arbitration agreement is to be impounded by what is the relevant stage for the same.

Examination of the Existence and not Validity of an arbitration agreement under Section 11(6A) of the A&C Act, 1996

The Hon'ble Court in NN Global 2 relied upon Section 11(6A) of the A&C Act in order to reach its conclusion that a contract "must also, needless to say, fulfil the requirements of the Contract Act". The Hon'ble seven judge bench while disagreeing with this holding stated that a plain reading of Section 11(6A) makes it evident that it is referring to an arbitration agreement. They further held that the usage of the word "confine" in the said section indicated the intention of the legislature to limit the jurisdiction of the courts at the stage of the appointment of an arbitrator. As such, the Hon'ble Court held that even though it is correct that an arbitration agreement has to be in accordance with the Contract Act, the authority empowered to adjudicate whether the requirements of the Contract Act are met or not is the arbitral tribunal under Section 16 of the A&C Act.

Principle of Minimum Judicial Interference

One of the main objectives of the A&C Act is to minimize the supervisory role of courts in the arbitral process. Party autonomy and settlement of disputes by an arbitral tribunal are the hallmarks of arbitration law and Section 5 is the embodiment of this principle. Section 5 is of aid in interpreting the extent of judicial interference under Sections 8 and 11 of the A&C Act as Section 5 contains a general rule of judicial non-interference.

The Hon'ble Court noted that Section 5 uses the expression "in matters governed by this Part" which circumscribes the scope of judicial intervention to matters expressly governed by Part I of the A&C Act. The matters governed by Part I inter alia include Section 8, Section 9, Section 11, Section 27 and Section 34. Further, Section 5 contains a non-obstante clause which limits the extent of judicial intervention in respect of matters expressly provided under the A&C Act.

The doctrine of competence-competence

The doctrine of competence-competence allows the tribunal to decide on all substantive issues arising out of the underlying contract, including the existence and validity of the arbitration agreement. Section 16 of the A&C Act recognises the said doctrine as Section 16 empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of arbitration agreement.

The Hon'ble Court also discussed the negative aspect of the said doctrine which instructs the courts to limit their interference at the referral stage by deferring to the jurisdiction of the arbitral tribunal in issues pertaining to the existence and validity of an arbitration agreement. The issue of stamping being a jurisdictional issue, is to be decided by the arbitral tribunal and not the courts.

The question of enforceability survives that pendign the curingof the defect which renders it inadmissible.

Conclusion:

The Hon'ble Supreme Court speaking through Hon'ble Mr. Chief Justice D.Y. Chandrachud unanimously held that an unstamped or inadequately stamped agreement is inadmissible but not unenforceable, and the same is therefore, a curable defect. The Hon'ble Court observed that the question of law before it is whether an unstamped arbitration agreement, particularly, is rendered unenforceable pending the payment of stamp duty so as o interpose a bar on the referral court to refer the parties to arbitration and not whether all agreements, generally, are rendered unenforceable, Accordingly, the Hon'ble Court held that the Arbitration Act being the Special Act vis-à-vis the Stamp Act, its provisions, particularly, Section 5 (non-obstante clause) read with Section 16 (legislated to promote the principle of komptez-komptez) would prevail and any objections in relation to stamping of the agreement would fall within the ambit of the Arbitral Tribunal, and the same would not fall for determination under Section 8 and 11 of the Act; the courts being concerned only with in the prima facie existence of the arbitration agreement at the stage of Section 8 or 11 of the Act.

Having said that, we may also take a bird's eye view of the parameters of consideration before the Arbitral Tribunal in the exercise of its powers to determine its own jurisdiction under Section 16 of the Act, on the ground of existence and validity of the arbitration agreement insofar as its Stamping is concerned:-

1. The Arbitral Tribunal has authority to receive evidence by the consent of the parties in terms of Section 35 of the Stamp Act and thus, continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The stage of Section 16 of the Act would be the stage at which an unstamped or inadequately stamped arbitration agreement would become susceptible to be impounded; goes without saying that as per the fundamental principles of the Stamp Act, such objection as to the inadequacy or absence of stamp must be taken at the first instance, before the same is admitted in evidence.
2. The objection to jurisdiction of the Tribunal on the basis of stamp duty cannot be decided on a prima facie basis. The Arbitral Tribunal would be required to undertake a detailed consideration of evidence and submissions and return a reasoned finding on law and facts; such assessment would be two pronged: upon the admissibility of the agreement on the ground of compliance with the Indian Stamp Act and upon the validity and enforceability of the agreement in accordance with the Indian Contract. Notably, it was observed that the prima facie view as to existence of an arbitration agreement by the referral court still allows the Arbitral Tribunal to examine the issue in-depth.

We would like to add that the step towards acknowledging arbitration as a speedy and efficacious remedy with minimum judicial intervention is a welcome move. However, at the same time, the Hon'ble Supreme Court by eliminating the examination into the validity of the arbitration agreement and observing the examination into the existence of the arbitration agreement as a prima facie examination, open to an in depth analysis by the Tribunals, has put more pressure and time constraints on the Arbitral Tribunals expected to complete the proceedings within twelve months from the date of competition of pleadings.

Issues / Concepts of Law:

1. Admissibility and Enforceability
2. Special Act and General Act
3. Section 33 of Stamp Act - Directory or Mandatory

4.Interplay of the Act: Impounding: issue not whether to be impounded but the relevant stage (include 11 6A, existence and not validity, competence principle etc.)

5. any other issue / principle of law you located.

Can adopt this structure as well. Will just have put your contents under these headings. Might also help in shortening.

because this can be found everywhere. WOuld have been a good addition in a longer article

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.