On December 13, 2023, a 7 Judge Constitution Bench of the Supreme Court in In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44 of 2023 (“7J Judgment”) unanimously held that the judgment in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Ors. (2023) 7 SCC 1 (“NN Global 2”) was incorrect and that objections in relation to stamping of arbitration agreements ought not to be decided by a court under Sections 8 or 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Mr. Darius J. Khambata, Senior Advocate, led arguments on behalf of Singapore International Arbitration Centre (“SIAC”). The AZB team comprising Mr. Vijayendra Pratap Singh, Senior Partner, Mr. Abhijnan Jha, Partner, Ms. Shreya Choudhary, Associate and Mr. Ankitesh Ojha, Associate, represented the SIAC before the Constitution Bench.

Background 

The conundrum around the validity of the unstamped or insufficiently stamped arbitration agreement has persisted in India for some time. Courts, in particular, have found themselves stuck in intractable difficulties when faced with an unstamped or insufficiently stamped arbitration agreement at a pre-reference stage of arbitration.

The judgments that have significantly shaped the discourse on this issue are SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (“SMS Tea Estates”)^[1], Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (“Garware”)^[2], and NN Global 2. In SMS Tea Estates, the Division Bench of the Supreme Court held that if the document is found to be not duly stamped, Section 35 of the Stamp Act, 1889 (“Indian Stamp Act”) bars the said document from being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. Subsequently, in Garware, a Division Bench of the Supreme Court reiterated the same view. Finally, a 3-judge bench of the Supreme Court in Vidya Drolia v. Durga Trading Corpn.^[3], (“Vidya Drolia”) affirmed the judgment in Garware.

History of NN Global 1 and 2

In N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Others^[4], (“NN Global 1”), the 3-Judge bench of the Supreme Court of India ruled that the non-payment of stamp duty on the substantive commercial contract did not render the arbitration agreement contained in the contract unenforceable or invalid. Moreover, N.N. Global 1 clarified that the doctrine of Competence Competence as recognised under Section 16(1) of the Arbitration Act unambiguously bestows arbitral tribunals with the authority to rule on their jurisdiction, including objections related to the existence, validity, and scope of the arbitration agreement.

In view of the findings in the Vidya Drolia case by a coordinate bench, which affirmed the judgment in Garware Walls case, the issue, inter alia, as to whether non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement was referred to a larger bench.

A Constitution Bench of the Supreme Court (by a 3:2 majority) in NN Global 2 overruled the judgment in NN Global 1 to hold inter alia that:

1. An unstamped agreement, including an unstamped arbitration agreement, would not be enforceable in law (on account of non-compliance with the Indian Stamp Act, a substantive law). Therefore, by virtue of Section 2(h) of the Indian Contract Act, 1872 (“Indian Contract Act”), the unstamped arbitration agreement is not a “contract” and by virtue of Section 2(g) of the Indian Contract Act, it is also “void”.
2. The doctrine of separability which autonomizes an arbitration clause from the contract in which it is contained would not save even a stamped arbitration clause if the main contract was unstamped.
3. Even assuming that the doctrine of separability applied, the arbitration agreement/ clause would still need to be stamped.
4. Non-payment of stamp duty was curable upon impounding under Section 33 read with Section 42(2) of the Indian Stamp Act and that once impounded “108..the instrument regains life,[and] the bar in Section 35 of the Stamp Act is removed permanently”.
5. Even at the pre-reference stage, i.e., at the stage of an application under Sections 8, 11 or Section 45 of the Arbitration Act, a court may impound a non-stamped or insufficiently stamped arbitration agreement.

Importantly, the judgment significantly eroded the doctrine of separability. In fact, it stopped commencement of arbitration at the inception itself, as it prevented the very constitution of arbitral tribunals. This is because the majority held that issues relating to stamping ought not to be left to the arbitral tribunal for its determination and ought to be impounded by the court itself as per Section 33 read with Section 38 of the Indian Stamp Act.

While deciding an identical issue in a Curative Petition No. 44 of 2023 [Bhaskar Raju & Brothers v. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram Other Charities], a 5-judge Constitution Bench of the Supreme Court doubted the correctness of the NN Global 2 case and referred the matter to a seven judge bench.

The key takeaways from the 7J Judgment are as under:

Validity of unstamped/ insufficiently stamped arbitration agreement

The effect of non-payment of stamp duty on an instrument renders the said instrument inadmissible and not void. Section 35 of the Indian Stamp Act itself makes this position clear as it states that ‘No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped’. The term “admitted in evidence” refers to the admissibility of the instrument and does not go to its validity.

As such, the Stamp Act considers non-payment of stamp duty as a curable defect. This is evident from Section 42 of the Indian Stamp Act which provides a mechanism for curing the defect. It is settled that the question of curing a void agreement would not arise. Therefore, an insufficiently stamped arbitration agreement cannot be said to be void or invalid.

Doctrine of separability and competence competence

Doctrine of separability as recognised internationally ensures that the arbitration agreement remains valid in the face of the invalid underlying agreement. This also ensures that the arbitral tribunal gets to decide on the issue regarding validity of an arbitration agreement.

Doctrine of separability and the principle of competence competence as enshrined under Section 16 of the rbitration Act are interlinked. The doctrine of separability gives effect to the doctrine of competence competence.

Parties to an arbitration agreement mutually intend to confer jurisdiction on the arbitral tribunal to determine questions as to jurisdiction as well as substantive contractual disputes between them. The separability presumption gives effect to this by ensuring the validity of an arbitration agreement contained in an underlying contract notwithstanding the invalidity, illegality, or termination of such contract.

The validity of the arbitration agreement in face of the invalidity of the underlying contract allows the arbitral tribunal to assume jurisdiction and decide on its own jurisdiction by determining the existence and validity of the arbitration agreement.

The principle of competence competence also has a negative connotation. The negative connotation of the doctrine of competence competence is focused towards the courts. It signals the policy of judicial restraint by courts which requires courts to limit their interference at a pre-reference stage.

NN Global 2 renders Section 5 of the Arbitration Act otiose

Section 5 of the Arbitration Act is effectively rendered otiose by the interpretation given to it in NN Global 2. The Supreme Court in NN Global 2 failed to provide a reason for holding that Section 5 of the Arbitration Act does not have the effect of excluding the operation of Sections 33 and 35 of Indian Stamp Act in proceedings under Section 11 of the Arbitration Act. The non-obstante clause in Section 5 of the Arbitration Act makes the Arbitration Act a special law.

Courts cannot decide the validity of an arbitration agreement at a pre-reference stage

The corollary of the principle of competence competence is that courts are only supposed to examine whether an arbitration agreement exists based on 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 cannot be decided on a prima facie basis.

Allowing arbitral tribunals to first rule on their jurisdiction safeguards powers of the arbitral tribunal as well as the courts and gives effect to the positive as well as the negative connotations of the principle of competence competence.

Therefore, obligating the courts to deal with the issue as to whether stamp duty has been paid or not at the stage of Section 11 (appointment of arbitrators), or Section 8 (arbitral reference by judicial authority) will be against the legislative intent of the Arbitration Act.

With the aforesaid observations, the 7J Constitution Bench overruled the judgments in SMS Tea Estates, and NN Global 2 to the extent they are contrary to the observation of the 7J Judgment. The 7J Constitution Bench also clarified that the observations of the Supreme Court at paras 22 and 29 of the Garware Wall are overruled.

Way forward

The Supreme Court’s 7J Judgment brings much-needed clarity to the Indian arbitration landscape by overruling conflicting judgments and provides a clear framework for addressing stamp duty issues. This clarity fosters certainty in arbitration proceedings and promotes an efficient and effective dispute resolution mechanism.

A direct implication of the 7J Judgment is that objections in relation to stamping would not come in the way of courts exercising the powers under Section 8 and Section 11 of the Arbitration Act. This ensures a more streamlined and judicial hands-off approach, keeping in spirit the legislative mandate of Section 5 of the Arbitration Act. Further, by steering courts away from prematurely deciding stamp duty issues, the Supreme Court has reinforced the importance of competence-competence principle as enshrined under Section 16 of the Arbitration Act.

Why the observations are important for institutional arbitration

The 7J Judgment appropriately rectifies the oversight of NN Global 2, which ignored that arbitral institutions also possess the authority to appoint arbitrators. Unlike a Court exercising powers under Section 11 of the Arbitration Act or dealing with a reference under Sections 8 and 45 of the Arbitration Act, an arbitral institution is not an authority which is empowered to take evidence either under the Arbitration Act or under institutional rules. Accordingly, NN Global 2 left the arbitral institutions in a quandary on the appropriate course of action in proceedings pending before the arbitral institutions at a pre-reference stage.

Fortunately, the 7J Judgment rectifies this deficiency as the Court has held that such issues need not be decided at the pre-reference stage at all and ought to be considered by the arbitral tribunal once constituted. This is not only a significant step towards addressing institutional challenges but also promotes and strengthens the framework of institutional arbitration.

In conclusion, the 7J Judgment not only resolves a longstanding legal conundrum but also paves the way for a more certain, legislatively aligned, and efficient arbitration landscape in India.

The 7J Judgment is a significant shot in arm for making India an arbitration friendly jurisdiction. It ensures that people can not only ‘Make in India’ or be part of ‘Digital India’ but also ‘Resolve in India’. The 7J Judgment coming on the eve of the Cox & Kings Ltd. v. SAP India (P) Ltd.,^[5] judgment clearly and emphatically shows a pro-arbitration mindset repeatedly by the Supreme Court. This should be a strong signal to other courts that the mantra is ‘keep calm and arbitrate’.

It is interesting to see that there were various interventions in the proceedings by many stakeholders including the arbitral institutions. It may be noted that the submissions made by SIAC (one of the intervenors) has not only been extracted in the 7J Judgment but also accepted.

Footnotes:

^[1] (2011) 14 SCC 66.

^[2] (2019) 9 SCC 209.

^[3] (2021) 2 SCC 1.

^[4] (2021) 4 SCC 379.

^[5] 2023 SCC OnLine SC 1634.