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Unstamped Arbitration Agreement: Valid or not

On 13.12.2023, a seven-judge constitution bench of the Supreme Court delivered verdict in the matter, In Re interplay between Indian Stamp Act and Indian Arbitration Act, which dealt with the validity of unstamped arbitration agreement. The bench comprised of DY Chandrachud (CJI), Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala and Manoj Misra JJ.

The bench held that Agreements which are not stamped or are inadequately stamped are inadmissible in evidence Under Section 35[1] of the Stamp Act. But these agreements are not rendered as void or void ab initio or unenforceable in law. It also affirmed that non-stamping or inadequate stamping of instruments is a curable defect under section 35 of the Stamp Act.

On 26 September 2023, the five-Judge Bench differed with the view taken in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. [2] (hereinafter N N Global 2) and referred the issue to a seven-Judge Bench to examine the correctness of the said decision. The judgement was authored by CJI DY Chandrachud, along with a concurring opinion by Sanjiv Khanna J.

Contentions of Petitioners and Respondents.
It was contended by the petitioners that NN Global 2 does not lay the correct law.

Supported by arguments such as:
  1. The NN Global 2 effectively nullifies section 11(6A)[3] of the Arbitration and Conciliation Act 1996.
  2. Arbitral Tribunal has competence to rule on its own jurisdiction including issues relating to stamp.
  3. The stamp process does not render an instrument void, it only makes it inadmissible as evidence. Non-stamping or deficiency in stamping is a curable defect. Thus, it being a temporary affliction, cannot affect the validity of an arbitration agreement.
  4. The doctrine of Separability recognizes that the Arbitration agreement is a self-contained agreement distinct from the underlying contract.
Per contra, it was contended by the respondents that NN Global 2 is correct and is in line with the consistent position adopted by the Supreme Court in SMS Tea Estates[4] and Garware Wall Ropes[5], which ought not to be disturbed.

Supported by the arguments such as:
  1. The examination by the court Under Section 11(6A) of the Arbitration Act is not confined to mere facial existence of an arbitration agreement. The referral court has to prima facie examine both the existence and validity of an arbitration agreement.
  2. The expression "examination" used in Section 11(6A) contemplates the examination of the validity of an arbitration agreement, including the examination of sufficiency of stamping.
  3. The principle of separability contained in Section 16 of the Arbitration Act[6] implies that an arbitration agreement can be treated as a distinct agreement only for the purpose of determining its validity or enforceability.
  4. Section 33[7] of the Stamp Act casts a mandatory legal requirement on courts Under Section 11[8] proceedings to impound an unstamped or insufficiently stamped instrument. Such an instrument cannot be admitted in evidence or otherwise acted upon until the stamp duty and requisite penalty is paid.

Voidness v. Inadmissibility
While dealing with the issues, the court distinguished between inadmissibility and voidness, in order to emphasise that the Section 35[9] of the Stamp Act renders an instrument inadmissible but not void. The Court observed that the Section 2(g)[10] of the Contract Act provides that an agreement not enforceable by law is said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence.

When an agreement is void, it refers to its enforceability in a court of law whereas when it is inadmissible, it refers to whether the court may consider or rely upon it while adjudicating the case. The Stamp act is a fiscal legislation primarily enacted to raise the government revenue and it does not render document as void but only renders it as inadmissible.

Minimum Judicial intervention vis-à-vis section 5 of the Arbitration and Conciliation Act, 1996
The principle of judicial non-interference reflects the autonomy of arbitral tribunals. Arbitral tribunals are autonomous as they are constituted to give effect to the mutual agreement of the parties to settle their disputes by submitting to its jurisdiction. The section 5[11], limits the scope of judicial intervention to 'where so provided in this part' i.e. the Part I which deals with the domestic arbitration. Thus, it has two facets – positive and negative.

The positive facet vests judicial authorities with jurisdiction over arbitral proceedings under Part I of the Arbitration Act. On the other hand, the negative facet prohibiting judicial authorities from intervening in the proceedings where arbitral tribunal has exclusive jurisdiction.

Separability of the Arbitration Agreement
The court held that the presumption of separability as in the section 16 of the Arbitration act, is not only to determine the jurisdiction of the Arbitral Tribunal but in general establishes the independence of the Arbitration agreement. The parties via an arbitration agreement confer jurisdiction on the arbitral tribunal to settle their disputes.

The separability presumption gives effect to this principle as even if contract is invalid, illegal, or terminated the disputes can be referred to arbitration. When parties sign the contract, they intend to treat the arbitration agreement in the contract as distinct from the other terms of the contract. It also gives validity to the principle of competence-competence as the arbitral tribunal can rule on its own jurisdiction by determining the validity of an arbitration agreement.

Harmonious construction of the Arbitration and Conciliation Act, the Stamp Act, and the Contract Act
The court concluded that it will have to build a harmonious construction of the Arbitration Act, the Stamp Act, and the Contract Act. If a statute is susceptible to two interpretations, the court will have to reject the construction which will defeat the plain intention of the legislation. This principal is the Harmonious Construction Principle.

The court also observed that the Arbitration Act is a special law and the Indian Contract Act and the Stamp Act are general laws and it is trite law that a general law must give way to a special law.

In order to determine whether a law is a special law or not, the court formulated these principles based on precedents:
  1. The principal subject-matter as well as the particular perspective or focus illuminate the path to ascertain whether a law is a general law or a special law;
  2. The court should examine whether its jurisdiction has been ousted in terms of the procedure prescribed by a special law.
Then the court summarised the subject matter of each of the laws and concluded that the Arbitration Act is a special law in the context of this case because it governs the law on arbitration, including arbitration agreements. In contrast, the Stamp Act defines 'instruments' as a whole and the Contract Act defines 'agreements' and 'contracts.' As observed by this Court in Bhaven Construction[12], "the Arbitration Act is a code in itself."

Obligating the court to decide issues of stamping will defeat the legislative intent underlying the Arbitration Act. The act ensures that the arbitration agreements are complied by the parties to reach a settlement. The arbitral tribunal has exclusive jurisdiction over the disputes and the courts are only allowed to interfere in two cases, first under section 9[13] for interim relief and under section 34[14], to set aside the arbitral award.

The court concluded that the decision in N N Global 2 gives effect exclusively to the purpose of Stamp Act. It prioritises the Stamp Act at the cost of the Arbitration Act. The impounding of an agreement which contains an arbitration Clause will delay the commencement of arbitration, thus undermining the purpose of the Arbitration Act i.e. to ensure speedy and efficient dispute resolution.

  1. Indian Stamp Act 1899, s 35.
  2. N N Global Mercantile (P) Ltd v Indo Unique Flame Ltd, (2023) 7 SCC 1.
  3. Arbitration and Conciliation Act 1996, s 11(6A).
  4. SMS Tea Estates (P) Ltd v Chandmari Tea Co (P) Ltd, (2011) 14 SCC 66.
  5. Garware Wall Ropes Ltd v Coastal Marine Constructions & Engg Ltd, (2019) 9 SCC 209.
  6. Arbitration and Conciliation Act 1996, s 16.
  7. Indian Stamp Act 1899, s 33.
  8. Indian Stamp Act 1899, s 11.
  9. Indian Stamp Act 1899, s 35.
  10. Indian Contract Act 1872, s 2(g).
  11. Arbitration and Conciliation Act 1996, s 5.
  12. Bhaven Construction v Sardar Sarovar Narmada Nigam Ltd, (2022) 1 SCC 75.
  13. Arbitration and Conciliation Act 1996, s 9.
  14. Arbitration and Conciliation Act 1996, s 34.

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