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, the Hon'ble High Courts across the country as well as the Hon'ble Supreme Court of India have been faced with a peculiar point of law, i.e., whether an unstamped Arbitration Agreement is valid and capable of being enforced? The peculiarity 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"). 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. The question of law was referred to a 7 (seven) judge bench in view of its "larger ramifications and consequences".

REVISIT OF NN GLOBAL 2 BY THE SEVEN JUDGE BENCH

The Hon'ble Supreme Court, in its quest to answer the issue under consideration, harmoniously constructed the 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 pertains to 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.

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 Hon'ble Court provided following considerations to identify the Special Act from the General Acts: -

• The subject-matter of the Acts along with the "particular perspective" described as the focus of the case; and
• Whether the jurisdiction of the court has been ousted in terms of the procedure prescribed in the special act.

It was observed that in the context of the case, the A&C Act is the special Act as:-

• 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 and as such, provisions of other statutes cannot interfere with the working of the A&C Act, unless specified otherwise;

• the issue in focus or from the particular perspective is whether unstamped arbitration agreements are rendered unenforceable and not all agreements;

• Section 5 of the Arbitration Act contains a non-obstante clause and thus, Sections 33 and 35 of the Stamp Act cannot take precedence over the A&C Act in Section 8 and 11 proceedings;

• Section 11(6-A) has confined the scope of examination by the courts to the existence of the arbitration agreement, juxtaposed to Section 33(2) of the Stamp Act (which existed prior in time) which requires examination on the touchstone of adequacy of stamping. Thus, the Parliament did not contemplate the courts under Section 11 of the A&C Act to undertake the examination required under Section 33 of the Stamp Act.

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

The Hon'ble Court observed that in order to adjudicate whether the captioned provisions of the Stamp Act are directory or mandatory, the following considerations are relevant:-

• Contextuality; interplay and intention of the statutes in the context of such statutes;
• scope, nature, and design of all the statutes which appear to operate simultaneously;
• consequence of such interpretation, including the impact of such interpretation on the other provisions;
• the consequence of non-compliance of the provision; and
• Impact on the object of the legislation by such interpretation; furthered or destroyed.

(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 or not but what is the relevant stage for the same. The Court based its findings on the following major principles:-

a) 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.

b) The doctrine of komptez-komptez

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.

It was observed that a natural corollary of the doctrine is that the courts may only examine existence of the arbitration agreement on a prima facie standard of review, and the issue of adequacy of stamp required detailed consideration and cannot be dealt with at the stage of Section 8 and 11. By enabling the arbitral tribunal to proceed with the procedure prescribed under the Stamp Act, it was opined that the competence-competence doctrine is given life and arbitration proceedings can continue to remain a faster alternative to suits before the trial courts or other, similar actions, and the impounding of an arbitration agreement at the stage of Section 11 or Section 8 of the Arbitration Act will delay the commencement of arbitration.

c) 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, disagreeing, stated that a plain reading of the provision "confines" the examination to the existence of an arbitration agreement and accordingly, limits the jurisdiction of the courts to appointment of an arbitrator. The examination as to compliance of the rigors of the Contract Act were left with the arbitral tribunal under Section 16 of the A&C Act.

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 void, and the same is therefore, a curable defect. The question of law before it is whether an unstamped arbitration agreement, particularly, is rendered unenforceable pending the payment of stamp duty so as to 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 in view of Section 5 (non-obstante clause) read with Section 16 (komptez-komptez) and thus, would prevail. Any objections in relation to stamping of the agreement would fall within the ambit of the Arbitral Tribunal, and not under Section 8 and 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 Stamp Act and upon the validity and enforceability of the agreement in accordance with the Contract Act. 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. At the same time, the Hon'ble Supreme Court by observing that the Courts under Sections 8 and 11 of the Act can solely examine the existence of the arbitration agreement from a prima facie standard (open to an in-depth analysis by the Tribunals), in effect, may put more pressure and time constraints on the Arbitral Tribunals which is expected to complete the proceedings within twelve months from the date of competition of pleadings.