Published On: 31st January, 2024
INTRODUCTION
Supreme Court: In a case involving the legality of an unstamped arbitration agreement, a unanimous panel of seven judges, including Dr. DY Chandrachud, C.J.I., Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala, and Manoj Misra, JJ., concluded that while the unstamped agreement is unenforceable with regard to the Stamp Act, it cannot be declared void ab initio. Arbitration clauses are therefore enforceable in agreements that are unstamped or inadequately stamped. A concurring judgment has been written by Justice Khanna.
Chief Justice made it clear that if the contract was not stamped, arbitration agreements would not be void, non-existent, or unenforceable. According to the Chief Justice, arbitration proceedings under the Arbitration Act will not be impacted by nonpayment or inadequate stamping of contracts under the Stamp Act. These agreements were merely inadmissible in evidence under the Stamp Act [1].
BACKGROUND
Indo Unique entered a subcontract with NN Global under a work order containing an arbitration clause. A dispute over a bank guarantee arose between them, leading NN Global to sue Indo Unique. When Indo Flame sought arbitration under the Arbitration Act[2], its plea was rejected due to the unstamped work order, deemed unenforceable under the Stamp Act[3].
Indo Flame challenged this rejection through a writ petition, successfully in the Bombay High Court. NN Global then appealed to the Supreme Court, debating the validity of an arbitration clause within an unstamped agreement. In NN Global vs. Indo Unique[4], the Supreme Court declared that the arbitration clause remains valid despite the unstamped work order.
However, this decision faced a twist when a 5-judge bench, with a 3:2 majority, ruled that unstamped arbitration agreements are not legally valid. Two judges dissented, believing they were valid before the referral to arbitration. The case further evolved through a curative petition where a 5-judge bench referred the matter to a 7-judge bench considering the significant implications of the NN Global vs. Indo Unique case[5]. This move aimed to reassess the validity of unstamped arbitration agreements.
In essence, despite initial support for the validity of arbitration clauses in unstamped agreements, subsequent deliberations and challenges prompted the Supreme Court to refer the matter to a larger bench for reconsideration.
ISSUE
The Stamp Act applies duties to “instruments,” and those unstamped or inadequately stamped are not admissible as evidence or enforceable according to its provisions. Arbitration agreements often exist within these instruments or main contracts. When objections are raised during arbitrator appointments due to unstamped arbitration agreements within unstamped contracts, it raises the question: Are these agreements void, unenforceable, or invalid if the underlying contract lacks proper stamping?
The Supreme Court faced conflicting judgments on this matter, prompting a three-judge bench to refer this crucial legal question to a five-judge constitutional bench for a conclusive decision. This inquiry sought to determine whether the statutory bar in Section 35 of the Stamp Act, which applies to instruments subject to stamp duty, would also affect the validity or enforceability of an arbitration agreement within an unstamped instrument not liable for stamp duty until the substantive contract is stamped.
ARGUMENTS BEFORE THE COURT
A seven-judge bench, including CJI Chandrachud and Justices Kaul, Khanna, Gavai, Kant, J.B. Pardiwala, and Manoj Misra, presided over a hearing regarding the NN Global judgment on October 11-12, 2023. Renaming the case “In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899,” the bench heard arguments from Senior Advocates Arvind Datar, Nikhil Sakhardande, Jayanth Mehta, Gourab Banerjee, and Darius Khambata, who contended that the NN Global majority decision was flawed. They emphasized that the court’s jurisdiction under Section 11(6A) of the Arbitration Act was limited to determining the existence of an arbitration agreement, not its validity. They argued that lack of stamping was a “curable defect” and shouldn’t render an arbitration agreement void under contract law.
On the opposing side, Senior Advocates Shyam Divan and Nikhil Nayyar argued that the court lacked jurisdiction to address legal questions in this case. They contended that considering a curative petition to reconsider one judgment through another breached the rules of the court’s curative jurisdiction.
Despite objections, the bench felt compelled to address the significant legal issue. They assured they would confine their deliberations solely to this matter and avoid reopening facts. Divan and Nayyar argued that the five-judge bench rightly declared unstamped arbitrations as void under contract law and asserted that an arbitration clause couldn’t be severed from the main contract.
After two days of arguments, the bench reserved judgment. This decision aims to definitively establish the validity of an unstamped arbitration agreement. Both sides presented extensive arguments, with one side emphasizing the curability of stamping issues and the other side highlighting the impact of stamping on the validity of arbitration agreements. This case’s outcome will clarify the status of unstamped arbitrations under Indian law.
DISCUSSION BY THE SUPREME COURT
- Interpretation of Section 35 of the Stamp Act- The Constitution Bench, with a 3:2 majority, offered a different perspective from the previous NN Global Mercantile Private Limited v. Indo Unique Flame Limited[6] ruling. It examined the Indian Contract Act, of 1872, emphasizing that only agreements enforceable by law are deemed contracts. The court then dived into Section 35 of the Stamp Act, noting its stringent language that invalidates unstamped documents. This section lacks provisions for exemptions based on collateral purposes, unlike the scenario with unregistered documents.
- Enforceability of Arbitration Agreements- The Bench firmly rejected the enforceability of unstamped arbitration agreements, asserting that their non-enforceability under the Stamp Act effectively implies non-existence in law. This stance contradicts sections within the Contract Act that render unenforceable contracts void. Moreover, the court emphasized that an unstamped instrument containing an arbitration clause cannot be utilized, highlighting the arbitration clauses as separate entities distinct from the primary contract.
- Section 11(6) Appointment of Arbitrators- Addressing the nuances of Section 11(6A) of the Arbitration Act, the court clarified that an enforceable contract is a prerequisite, not merely the literal existence of an arbitration agreement. It highlighted that the intention behind this provision was to curtail court interference and did not warrant disregarding existing laws, such as the Stamp Act.
- Role of Tribunal or Court in Stamp Duty Matters- The Bench disagreed with the notion that arbitrators should handle stamping issues, asserting that courts cannot evade their legal obligations in this regard. However, it specified that if an instrument appears to be stamped but raises doubts about its sufficiency, the matter may be referred to the arbitrator under Section 11 for consideration.
- Existence vs. Validity of Arbitration Agreement- Drawing upon the case of Vidya Drolia vs. Durga Trading Corporation[7], the court stressed that for an arbitration agreement to “exist” under Section 11(6A), it must meet the requirements of the Contract Act to be legally valid and enforceable. Therefore, the arbitration agreement must qualify as a valid contract under the law to be considered to “exist.”
- Impact of Non-Stamping Under the Stamp Act- Referring to precedents such as Hindustan Steel Limited vs. Dilip Construction Company[8] and Mahanth Singh vs. U Ba Yi[9], the Bench established that unstamped contracts subject to stamp duty are rendered void. It reiterated that courts are mandated to impound unstamped instruments under Section 33 of the Stamp Act.
- Doctrine of Severability- While recognizing the distinct nature of arbitration agreements, the court emphasized that the doctrine of severability does not apply in matters concerning the Stamp Act. It explained that as arbitration agreements are also subject to stamp duty, the doctrine of severability would not salvage unstamped main contracts containing arbitration clauses.
FOREIGN JURISDICTIONS
An analysis of some of the case laws from foreign will demonstrate that courts in various jurisdictions have a tendency to uphold the legitimacy of Arbitration agreements, even if the encompassing contract is deemed invalid for any cause.
- United Kingdom (UK)
In the UK, the Arbitration Act of 1996, specifically Section 7, stands as a crucial provision. This section establishes that an arbitration agreement, even if it’s part of a larger contract that is considered invalid or non-existent, remains separate and valid. Essentially, the law ensures that the arbitration clause retains its effectiveness independently of the overall contract’s status. This provision offers a broad scope, ensuring the viability of the arbitration agreement even if doubts or disputes arise regarding the main contract’s validity or existence[10].
- United States (USA)
In the US, the legal precedent set by cases like Buckeye Check Cashing, Inc v. Cardegna et. al[11] reinforces the principle of separability of arbitration clauses. Here, federal arbitration law permits the isolation of an arbitration clause from the rest of the contract when challenges to the contract’s validity surface. What’s notable is that challenges to the contract, excluding the arbitration clause itself, are typically directed to an arbitrator for initial decision-making before court intervention. This distinction acknowledges that objections to various contract provisions don’t necessarily impede the enforcement of a specific arbitration agreement.
Additionally, the US Supreme Court[12] has differentiated between challenges to the overall contract and those specifically targeting the arbitration agreement. The court’s stance is to enforce the arbitration clause even if other portions of the contract face challenges, ensuring the continuity and enforceability of the arbitration provision.
- Singapore
In Singapore, the case of BNA v. BNB and BNC[13] elucidates the approach of the High Court concerning the doctrine of separability. It emphasizes the importance of reasonably applying this doctrine to honor the parties’ intention to settle disputes through arbitration. The court’s primary concern is to safeguard a comprehensive arbitration agreement that distinctly demonstrates the parties’ intent to resolve disputes through arbitration, irrespective of any potential invalidity or challenges in the underlying contract. The emphasis in Singaporean law is on protecting the sanctity of the arbitration agreement, ensuring its validity and enforceability, even if the primary contract is deemed invalid or faces challenges.
In summary, these jurisdictions share a common approach of upholding the validity of arbitration agreements despite challenges or uncertainties surrounding the overarching contract, emphasizing the separability of arbitration clauses and honoring the parties’ intent to resolve disputes through arbitration.
EMERGING CHALLENGES
The recent verdict has sparked concerns about its impact on arbitration practices in India. While acknowledging the importance of paying stamp duty for the validity of arbitration agreements, the NN Global ruling now necessitates courts to decide on this matter during the arbitrator’s appointment. This might lead to increased judicial workload and potential delays in initiating arbitration proceedings, particularly in a country plagued by judicial backlogs.
The ruling’s omission on the issue of granting interim relief raises questions for parties involved in disputes stemming from inadequately stamped agreements. This omission could potentially prolong arbitration proceedings from the outset. To avoid such delays, stakeholders in India might need to review their contracts and ensure proper stamp duty payments. Given the government’s push to make India an arbitration hub, it’s likely that legislative amendments to the Stamp Act or related laws will aim to clarify and streamline their application, aiming to mitigate delays caused by the Supreme Court’s decision[14].
This judgment’s implications might hinder the pro-arbitration trend initiated in 2012 by the BALCO judgment. Impounding unstamped agreements could delay arbitral proceedings, hindering the government’s efforts to promote institutional arbitration in India as recommended by Justice Srikrishna’s committee. Moreover, the ruling’s assertion that an unstamped agreement doesn’t legally exist could impact foreign-seated arbitrations governed by Indian laws, potentially undermining their recognition. It remains uncertain if courts would grant interim relief in agreements considered non-existent under Indian law, despite the Supreme Court’s statement not directly addressing this aspect in Section 9 of the Arbitration Act. The ruling overlooks technological advancements like electronic signatures and smart contract arbitration, as noted in Justice Hrishikesh Roy’s dissenting opinion. This oversight could pose a challenge to the evolving use of technology in dispute-resolution processes.
Reference(s):
[1] https://main.sci.gov.in/supremecourt/2022/40099/40099_2022_1_1501_49105_Judgement_13-Dec-2023.pdf
[2] Section 8 of the Arbitration and Conciliation Act,1996
[3] Section 35 of the Indian Stamp Act
[4] (2021) 4 SCC 379 (NN Global 1)
[5] 2023 SCC Online SC 495, (NN Global 2)
[6] (2021) 4 SCC 379 (NN Global 1)
[10] In the case of Harbour Assurance v. Kansa General International Insurance,[1993] 1 Lloyd’s Rep. 455 (CA).
[12] Rent-A-Center, West, Inc. v. Jackon, 561 US 63 (2010)
[14] In Para 218 and 304.4 of the judgment in NN Global
