India: The Triumph Of Arbitration Clauses In Insufficiently / Unstamped Agreements!

Introduction

One of the hallmarks on which the Arbitration and Conciliation Act, 1996 (Arbitration Act) was enacted was to minimize the supervisory role of courts in the arbitral process.¹ However, in ad hoc arbitrations numerous procedural issues arise prior to the constitution of the arbitral tribunal which are decided by courts. The evolution of the issue – whether arbitration can be invoked on insufficiently / unstamped agreement is a classic example in this regard. While the said issue has gone down a roller coaster and has garnered conflicting views, the Supreme Court in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 has finally put the issue to rest. A 7-Judge Bench of the Supreme Court has held that arbitration can be validly invoked on an insufficiently / unstamped agreement and the issue of payment of stamp duty shall thereafter be decided by the arbitral tribunal itself.

In this article, the authors discuss the significance of the Supreme Court's ruling in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 (In Re: Interplay) and share our thoughts on the same.

Scope

The decision in In Re: Interplay and the line of decisions prior to that consider the limited question of whether the courts during pre-referral stage (to read about pre-referral stage, click here) must consider the issue of insufficiency / unstamped agreement and invoke the arbitration clause contained therein.

Recap

The genesis of the present issue stems from a 2011 decision of a two-Judge Bench in SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd. (SMS Tea Estates). In SMS Tea Estates, the Supreme Court considered the issue of whether an arbitration agreement contained in an unregistered instrument which is not duly stamped is valid and enforceable. The Supreme Court held that an insufficiently / unstamped agreement cannot be acted upon and consequently, the arbitration clause contained therein is invalid. As a consequence, the courts were mandated to intervene at the pre-referral stage and direct the parties to impound the agreement and pay the requisite stamp duty before arbitration could be invoked.

In 2015, the Arbitration Act (2015 Amendment) came to be amended on the recommendations of the Law Commission of India. The 2015 Amendment significantly altered the provision for appointment of arbitrators by courts at pre-referral stage. The 2015 Amendment clarified that the scope of judicial intervention is limited to examining an arbitration agreement's existence. Therefore, the legislative basis for SMS Tea Estates came to be altered in as much as the 2015 Amendment curtailed judicial intervention at the pre-referral stage.

However, a 2-Judge Bench of the Supreme Court in 2019 in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (Garware Wall Ropes) opined that the 2015 Amendment does not intend to overrule SMS Tea Estates. Moreover, it was held that an arbitration agreement contained in an unstamped instrument would not exist in law leading to the conclusion that arbitration cannot be invoked on such an agreement. The Supreme Court held that the courts at pre-referral stage must look into the "existence and validity" of an arbitration agreement and an insufficiently / unstamped agreement must be directed to be impounded by the courts at the pre-referral stage itself.

Thereafter, a 5-Judge Bench of the Supreme Court in Vidya Drolia & Ors. v. Durga Trading Corporation(Vidya Drolia) while considering the scope of judicial intervention at the time of deciding the "existence" of an arbitration agreement included the aspect of "validity" of the same. Accordingly, the courts will consider the same at the referral stage. In fact, Vidya Drolia relied upon Garware Wall Ropes and upheld the view that the issue of insufficiency of stamp duty must be considered at the pre-referral stage. Accordingly, "existence" of an arbitration agreement includes questions of "validity" as well.

Thereafter, a 3-Judge Bench of the Supreme Court in Intercontinental Hotels Group (India) (P) Ltd. v. Waterline Hotels (P) Ltd. and NN Global Mercantile Pvt. Ltd. v. Indo Unique Flames Pvt. Ltd. (NN Global 1) took a contrasting view and held that the courts cannot review or go into the aspect of sufficiency of stamp duty at the stage of appointment of an arbitrator. However, in NN Global 1, the issue was referred to a 5-Judge Bench of the Supreme Court.

In April 2023, the 5-Judge Bench of the Supreme Court in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flames Pvt. Ltd.(NN Global 2) held that the courts at pre-referral stage i.e., at the time of appointment of an arbitrator, are required to adjudicate on the issue of sufficiency of stamp duty of the main agreement. The Supreme Court held that arbitration clause contained in an insufficiently / unstamped agreement is unenforceable and therefore, arbitration cannot be initiated on the basis of the same.

As pointed by us before (read here), NN Global 2 was alarming in as much as – (i) counter-parties could raise objections regarding stamping of principal agreement at a belated stage as dilatory tactics to prevent arbitration, (ii) judicial intervention could substantially increase at the pre-referral stage.

In the backdrop of NN Global 2 and a roller coaster of conflicting decisions thereafter, the issue of insufficiency / unstamped agreements came up before Supreme Court in Seka Dobric v. SA Eonsoftech Pvt. Ltd. and M/s. Bhaskar Raju & Brothers & Anr. v. M/s. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram Other Charities. The Supreme Court took up both the matters together on 26 September 2023. However, having regard to the larger ramifications and consequences of the view in NN Global 2, the Supreme Court placed the proceedings before a 7-Judge Bench to reconsider the correctness of the view therein. In light of this, the 7-Judge Bench of the Supreme Court in In Re: Interplay pronounced its judgment on 13 December 2023.

Supreme Court's ruling in In Re: Interplay

The 7-Judge Bench in its decision disagreed with the view taken by NN Global 2 and SMS Tea Estates and partially overruled Garware Wall Ropes. The Supreme Court opined that agreements which are insufficiently / unstamped are not rendered unenforceable or void. Consequently, the courts at pre-referral stage must appoint an arbitrator or refer the dispute to arbitration without delving into the merits of insufficiency of stamp duty. The Supreme Court disagreed with NN Global 2 on the following aspects under the Indian Stamp Act 1899 (Stamp Act), the Arbitration Act and Indian Contract Act 1872 (Contract Act):

1. The difference between admissibility and voidness

The Supreme Court observed that the Stamp Act deals with the admissibility of a document in evidence. In cases where a document is insufficiently stamped / unstamped, the document merely becomes inadmissible in evidence. On the other hand, the enforceability of a document is determined as per the Contract Act. It was observed that an agreement that is void is not enforceable in a court of law. However, that does not impact its admissibility in evidence should a party try to enforce the agreement.

The court further held that an insufficiently stamped / unstamped agreement, although is inadmissible in evidence, cannot be said to be void. Moreover, as per the Stamp Act, once the necessary stamp duty is paid, the agreement becomes admissible in evidence.

2. Scheme of Stamp Act and Arbitration Act

In a separate segment, the Supreme Court dealt with the object of the Stamp Act and Arbitration Act. It was observed that the Stamp Act is a fiscal legislature and payment of stamp duty under the same is a matter of technicality. The said could not have been enacted to arm a litigant to oppose the case of its opponent. With regards to the Arbitration Act, the Supreme Court traced the genesis of the Act and observed that arbitration gained traction mainly due to minimum judicial interference and autonomy offered to parties opting for arbitration.

3. Minimum judicial interference under the Arbitration Act

While the Supreme Court observed that one of the objects of the Arbitration Act is minimum judicial interference, Section 5 of the Arbitration Act specifically empowers courts to decide on certain matters. However, the scheme of the provision is such that it prohibits judicial authorities from intervening when an arbitral tribunal has been bestowed with exclusive jurisdiction. Accordingly, even as per Section 5 of the Arbitration Act, judicial intervention is discouraged except in limited, narrow circumstances as provided under the Arbitration Act.

4. Doctrine of kompetenz-kompetenz

In furtherance of minimum judicial intervention, an issue that arises under arbitration law is with respect to the scope of powers of an arbitral tribunal to deal with procedural issues. The Supreme Court observed that the doctrine of kompetenz-kompetenz allows an arbitral tribunal to decide all issues related to the arbitral agreement including questions on its existence and validity. The Supreme Court made reference to international best practices and observed that the principle of separability of an arbitration agreement operates within the realm of kompetenz-kompetenz. That is, the separable nature ensures that the arbitral tribunal has the jurisdiction to decide on issues arising under the contract even when it is rendered unenforceable.

Accordingly, as per the Arbitration Act as well as international best practices, arbitral tribunals are empowered to decide on every issue including its own jurisdiction instead of demanding judicial intervention. Further, the Supreme Court observed that the principle of kompetenz-kompetez has a negative connotation in as much as it prohibits courts from ruling on the jurisdiction of arbitral tribunal unless the tribunal itself had the chance to consider the same first.

5. Whether the issue of stamping is a jurisdictional issue

It was observed by the Supreme Court that any issue that affects the power of an authority to hear a matter would be a jurisdictional issue. A reference was drawn from the issue of limitation. The Court observed that limitation is a jurisdictional issue wherein the arbitral tribunal has the power to decide whether the claim is within the limitation period. Further, if the dispute is within limitation, it is only then that the arbitral tribunal may delve into the merits of the matter. Accordingly, it was held that the issue of sufficiency / stamping of a document is a jurisdictional issue and the powers of an arbitral tribunal are wide enough to deal with the same.

Thus, the Supreme Court held that an insufficiently / unstamped agreement is not void and is in fact curable. Moreover, the issue of whether an agreement is stamped sufficiently or at all must be decided by the arbitral tribunal itself and not by courts at pre-referral stage.

Our thoughts

While there was chaos pursuant to NN Global 2, the decision in In Re: Interplay brought in much awaited clarity regarding arbitration agreements contained in insufficiently / unstamped agreements. In the aftermath of NN Global 2, High Courts across the country adopted varied views. While a few High Courts disallowed appointment of arbitrators, invocation of arbitration and interim reliefs at pre-referral stage owing to insufficiency of stamp duty, other High Courts such as the Calcutta High Court allowed such reliefs while distinguishing the views adopted in NN Global 2. Understandably, the distinguished views caused panic and paranoia amongst the litigants and led to an uptick in litigation in as much as parties preferred review petition in cases where arbitral tribunal was already appointed on the premise that the main agreement is unstamped / insufficiently stamped.

However, the decision in In Re: Interplay has not only settled the long-standing debate but appears to be in line with the object to increase alternate dispute resolutions in India. The Indian government has been vocal about making India a hub for arbitrations and alternate dispute resolution. The decision in In Re: Interplay will play an important role in contributing to the said objective.

The decision of the Supreme Court was limited to arbitrations initiated in India i.e., domestic arbitrations. It remains to be seen whether In Re: Interplay will have ramifications on arbitral awards that may be based on insufficiently stamped / unstamped agreements brought to India for execution pursuant to a foreign arbitral award.

Footnote

1. Statement of Objects and Reasons of Arbitration and Conciliation Act 1996.

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.