“It [law of arbitration] is to be expeditious where the law is slow, cheap where the law is costly, simple where the law is technical, a peacemaker instead of a stirrer-up of strife.”[1]
Are arbitration clauses in unstamped or inadequately stamped agreements enforceable? This is a question that has been under legal scrutiny and has seen conflicting views from various constitutional benches of the Supreme Court for over half a decade.
First, the apex court in Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd.[2] (“Garware Judgement”) had held that an arbitration agreement contained in an unstamped contract cannot be invoked and taken into evidence, unless impounded within 45 days. In fact, the principle of severability was applied differently to non-registration and non-stamping of agreements.
The position of law laid down by Garware Judgment was then followed by the judgment in Vidya Drolia v. Durga Trading Corpn.[3] (“Vidya Drolia”), where a three-judge bench of the Supreme Court held that existence of an arbitration agreement (to be examined under Section 11(6A) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”)) and the validity of the arbitration agreement (being dependent on satisfying mandatory legal requirements such as payment of stamp duty, etc.) are intertwined with each other, thus rendering the arbitration agreements unenforceable in both cases.
Thereafter, a completely opposite approach was taken by a three-judge bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[4] (“NN Global 3J”), which opined that an arbitration agreement is an independent and separate contract and thus would not be rendered void on account of the underlying contract being insufficiently stamped.
Since there were conflicting judgments on the same issue by three-judge benches, the matter was referred to a five-judge bench in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[5](“NN Global 5J”). By a 3:2 majority decision, it was held that Section 35 of the Indian Stamp Act, 1899 (“Stamp Act”), renders an arbitration agreement invalid if the main contract is either not stamped or insufficiently stamped, and thus such an arbitration agreement is void and “bereft of life”. Further, the verdict makes it mandatory for a court to decide this question at the stage of appointment of an arbitrator, i.e. at the stage of Section 11 of the Arbitration Act. However, NN Global 5J judgement was met with much criticism for creating a jurisdictional hurdle, widening the scope of judicial intervention at the pre-referral stage, thus creating a roadblock in the efficient invocation and conduct of arbitrations seated in India.
The matter has been finally put to rest when the seven-judge bench of the Supreme Court addressed the aforesaid issue in In Re: The Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996, and the Indian Stamp Act, 1899 (“In Re: The Interplay”), which is covered in detail herein below.
The judgment gains significance in light of the important observations made by the Apex Court on the interplay of the three Indian statutes, namely, the Arbitration Act, the Stamp Act and the Indian Contract Act, 1872 (“Contract Act”).
Intervention by SIAC
Given that the jurisdictional challenge related to unstamped arbitration agreements had larger ramifications for India’s position as a preferred seat of arbitration for international commercial arbitrations, coupled with the fact that Indian parties are among the most frequent foreign users of Singapore International Arbitration Centre (“SIAC”), an intervention was filed by the SIAC, which put forth the following submissions[6]:
- The NN Global 5J judgment affects institutional arbitration since it creates obstruction in the arbitral process, allowing parties to raise objection based on non-payment of stamp duty;
- Stamping of instruments is a matter of procedure and relevant for admissibility of evidence and does not deal with validity and enforceability of arbitration agreements;
- The presumption of separability of an arbitration agreement upholds and remains in force despite insufficient stamping of the underlying contract;
- The court is undermining the jurisdiction of the arbitral tribunal by conducting a full review before referring the issue to the tribunal. The Singapore courts have recognised the friction between the jurisdiction of the court and the tribunal, and have upheld the principle of Kompetenz-Kompetenz in allowing arbitral tribunals to decide on their own jurisdiction if the court is satisfied, on a prima facie basis, of the validity of the arbitration agreement;
- Following this approach, where Indian courts are called upon to consider requests to refer cases to arbitration (under Sections 8 and 45), or to appoint arbitrators (under Section 11), they should refer any issues concerning the impact of non-payment of stamp duty to the arbitral tribunal, and should exercise limited jurisdiction at that stage.
Supreme Court’s observations and ruling
Voidness v. inadmissibility
The Supreme Court draws a clear distinction between voidness and inadmissibility of an agreement, and states that when an agreement is void, it is unenforceable in a court of law; whereas, if an agreement is inadmissible, it only refers to such agreement being considered inadmissible in evidence, without questioning its validity/ existence in law. As a result, while an agreement may be void (say under Section 27 of the Contract Act), it will still be admissible in evidence if it complies with the rules pertaining to admissibility of documents (as given under the Indian Evidence Act 1872, Stamp Act, etc).
To that effect, Section 35 of the Stamp Act only refers to admissibility of an instrument. Therefore, the effect of non-payment or in-adequate payment of stamp duty under such a fiscal legislation, renders such an instrument only inadmissible, and not void or invalid or unenforceable.
Further, the Stamp Act (under Section 33) itself provides for the mechanism and detailed procedure to cure such a defect, thus making non-stamping or improper stamping a curable defect, without invalidating the agreement. Accordingly, under Section 42 of the Stamp Act, such agreement becomes admissible in evidence once stamp duty is paid.
It must be noted here that Section 11(6-A) of the Arbitration Act explicitly provides that courts must confine themselves to examining the existence of an arbitration agreement and not referring to its admissibility in evidence.
The relevant authority to examine whether the arbitration agreement satisfies all the legal requirements of the Contract Act is the arbitral tribunal, which is empowered and competent to do so under Section 16 of the Arbitration Act. Thus, the Supreme Court holds tight onto the principle of Kompetenz-Kompetenz. The corollary of this doctrine or the “negative” aspect is that courts must only examine whether an arbitration agreement exists basis the prima facie standard of review. Once an arbitral tribunal has been appointed, it will act in accordance with the law and proceed to impound the unstamped or inadequately stamped arbitration agreement under Section 33 of the Stamp Act, if it so deems fit.
Even at a more practical level, such interpretation is beneficial for all stakeholders since the procedure for impounding, i.e. payment of stamp duty (if not paid) and penalty (if any), and other procedures under the Stamp Act, are likely to be completed at a faster pace by arbitral tribunals than the courts, which are already over-burdened with abundant cases on their docket.
Fundamental principles of arbitration
The Supreme Court recognises and reinforces the fundamental principles which make arbitration an efficient and speedy dispute resolution mechanism. Much emphasis is put on “arbitral autonomy”, “minimum judicial interference”, “Kompetenz-Kompetenz” and the “presumption of separability”, i.e. an arbitration agreement is a self-contained agreement, which is distinct and separate from the underlying contract. The Court also traces the origin of separability presumption, the position of law in the UK, the US and Singapore, as well as refers to international conventions for traces of this principle.
The Supreme Court observed that the NN Global 5J decision prioritises the objective of the Stamp Act, i.e., to collect revenue, even at the cost of resolving dispute between the parties by way of arbitration. If such a decision is not corrected, then the purpose of the Arbitration Act, i.e., to facilitate efficacious and speedy adjudication of disputes, is put under humongous risk.
While the Supreme Court has observed that the separability presumption ensures the validity of an arbitration agreement, notwithstanding the invalidity, illegality, non-existence, termination, repudiation, or frustration of the underlying contract, such presumption applies only at the referral stage. The Stamp Act applies to an instrument as a whole and therefore, such instrument will eventually need to be stamped for giving effect to the arbitration agreement. In other words, even if the arbitration agreement is separable from the underlying contract, such contract as a whole will need to be stamped if the arbitral tribunal so deems it fit, in order to adjudicate/ proceed with the arbitration proceedings.
Harmonious construction of the statutes
The Supreme Court is cognizant that any interpretation of statutes, which is against the object of speedy resolution of disputes between the parties under the Arbitration Act must be eschewed. Accordingly, the Court has observed that the Arbitration Act is a special law and thus will have primacy over general laws such as the Contract Act and the Stamp Act. This is further encapsulated in Section 5 of the Arbitration Act, which contains a non-obstante clause. Consequently, applying the principle of harmonious construction, the Court concludes that Sections 33 and 35 of the Stamp Act cannot be allowed to operate in proceedings under Section 11 or Section 8 of the Arbitration Act, and that the referral court is not the appropriate forum to conduct a mini-trial by allowing the parties to adduce the evidence with regard to the existence or validity of an arbitration agreement.
Further, the Arbitration Act was enacted after the Stamp Act and yet does not specify stamping as a pre-condition to the existence of a valid arbitration agreement, which further demonstrates legislative intent to confine the scope of “examination” under Section 11(6-A) of the Arbitration Act.
The judgement is cautious as it does not allow the law to be flouted while interpreting the provisions of the Arbitration Act and the Stamp Act. Once an arbitral tribunal is appointed, it is still bound by the statutory provisions in relation to inadmissibility of unstamped agreement and impounding under Section 33 of the Stamp Act before adjudicating. This prevents against arming litigants with a weapon of technicality by which they can delay the adjudication of disputes referred to in the arbitration.
Conclusion
After the recent Supreme Court judgment in Cox & Kings Ltd. v. SAP India (P) Ltd.[7] (delivered on December 6, 2023), which validated the applicability of the ‘group of companies’ doctrine in Indian arbitration jurisprudence, the judgment in In Re: The Interplay is yet another progressive and pro-arbitration precedent, which reinforces the fundamental principles of arbitration.
However, there is likely to be certain amount of delay while impounding/ curing the defect once the arbitral tribunal is appointed, which is inevitable given that the parties cannot be allowed to step away from the requirement to pay stamp duty under the Indian laws.
Nevertheless, this judgment is instrumental in clarifying the scope and ambit of examination of an arbitration agreement by the Indian courts at the stage of appointment of arbitrators (Section 8 and Section 11 of the Arbitration Act). It also sets the direction for any future interpretation of the Arbitration Act, being a special law, vis-à-vis the general laws in India.
For further information, please contact:
Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas
vikashkumar.jha@cyrilshroff.com
[1] Redfern and Hunter on International Arbitration (7th edn, Oxford University Press, 2023) 3.
[2] 2019 SCC OnLine SC 515
[3] (2021) 2 SCC 1
[4] (2021) 4 SCC 379
[5] Civil Appeals No(s). 3802-3803 of 2020
[6] “Stamping Out The Uncertainty – The Supreme Court’s Way Forward For A Modern And Efficient Arbitration Regime For India”, Kluwer Arbitration Blog, published on February 18, 2024.
[7] Cox & Kings Ltd. vs. SAP India Pvt. Ltd. [2023 SCC OnLine 1634]
