Supreme Court: Arbitration clauses in unstamped agreements enforceable, seven-judge bench overrules ‘NN Global’ decision January 23, 2024
Published in: Between The Lines
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The Supreme Court, vide its judgment dated December 13, 2023, in the matter of Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 [Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020 and with Arbitration Petition No. 25 of 2023], has held that agreements which are not stamped, or are inadequately stamped, are inadmissible in evidence under Section 35 (Instruments not duly stamped inadmissible in evidence, etc.) of the Indian Stamp Act, 1899 (“Stamp Act”). However, such agreements are not rendered void or void ab initio or unenforceable as non-stamping or inadequate stamping is a curable defect.
Background of the case
The genesis of the present judgment flows from some of the previous judgments with contradictory ratio. In the case of SMS Tea Estates (P) Limited v. Chandmari Tea Company (P) Limited [(2011) 14 SCC 66] (“SMS Tea Estates Case”), a two-judge bench of the Supreme Court had held that an arbitration agreement in an unstamped contract cannot be acted upon.
Thereafter, on December 31, 2015, after the recommendation of the Law Commission of India Report, 2015, in order to reduce judicial interference during the appointment of the arbitrator, Section 11(6A) was inserted in the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) by way of amendment stating that the court, while considering application for appointment of arbitrators, shall, confine to examination of existence of arbitration agreement.
Thereafter, on April 10, 2019, in the matter of Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited [(2019) 9 SCC 209] (“Garware Case”), the Supreme Court reaffirmed the legal position that an arbitration agreement in an unstamped contract would not exist in law and therefore cannot be acted upon until the contract is sufficiently stamped.
Thereafter, in the matter of NN Global Mercantile (P) Limited v. Unique Flame Limited [(2021) 4 SCC 379] (“NN Global 1 Case”) decided on January 11, 2021 by a three-judge bench, the Supreme Court held that the non-payment of stamp duty would not invalidate the underlying contract because it is a curable defect.
Thereafter, on April 25, 2023, five-judge constitution bench of the Supreme Court decided the issue referred to by the three-judge bench in NN Global 1 Case (“NN Global 2 Case”). By a majority of 3:2, it was held that NN Global 1 Case does not represent the correct position of the law. Furthermore, it was held that an unstamped instrument, not being a contract and not enforceable in law, cannot legally exist. The arbitration agreement in such an instrument can be acted upon only after it is duly stamped.
Previously, on February 14, 2020, the Supreme Court relied upon SMS Tea Estates Case in the matter of Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers [2020 4 SCC 612] (“Bhaskar Raju Case”). Notably, Bhaskar Raju Case was pronounced prior to NN Global 1 Case. However, during the pendency of reference made by three-judge bench in NN Global 1 Case, review petitions were filed in Bhaskar Raju Case, which were dismissed on the grounds of delay as well as on merits.
Thereafter, on December 7, 2022, a curative petition seeking reconsideration of Bhaskar Raju Case was filed. Thereafter, NN Global 2 Case was pronounced on April 25, 2023. Thereafter, due to broader implications of NN Global 2 Case, the Supreme Court referred the proceedings to a seven-judge Bench.
Whether an Arbitration Agreement would be considered non-existent, invalid or unenforceable in the event the underlying contract is unstamped or insufficiently stamped.
Contentions of the Petitioners:
The petitioners submitted that Section 11(6A) of the Arbitration Act expressly restricts the power of the referral court to the examination of the existence of an arbitration agreement and such power does not extend to examine adequacy of the stamping under Section 33 (Examination and impounding of instruments) of the Stamp Act.
It was further contended that the majority view in NN Global 2 Case has nullified the effect of Section 11(6A) of the Arbitration Act which had restricted the jurisdiction of the court to the examination of the existence of an arbitration agreement. It was further contended that the Arbitration Act restricts the authority of referral court to examine the arbitration agreement only and not the instrument in question.
It was further submitted that the arbitral tribunal has the competence to rule on its own jurisdiction on issues pertaining to stamping. It was further contended that the non-obstante clause provided under Section 5 (Extent of judicial intervention) of the Arbitration Act confines the scope of judicial intervention of courts in the arbitral process and must be read harmoniously with the provisions of the Stamp Act.
It was further submitted that the requirement of stamping does not render an instrument void, but only makes the instrument inadmissible in evidence until the defect is cured in accordance with the provisions of the Stamp Act.
Contention of the Respondents:
Respondents contended that the requirements set out for a curative petition to be maintainable as laid down by the Supreme Court in the landmark judgment of Rupa Ashok Hurra v. Ashok Hurra [(2002) 4 SCC 388] was not adhered to.
It was further contended that the examination by the court under Section 11(6A) of the Arbitration Act is not confined to mere facial existence of an arbitration agreement and that the referral court has to prima facie examine the existence as well as validity of the arbitration agreement.
It was further argued that Section 33 of the Stamp Act casts a mandatory obligation on courts under Section 11 of the Arbitration Act to impound an unstamped or insufficiently stamped instrument and that the same cannot be admitted in evidence or acted upon until payment of the stamp duty and requisite penalty is paid.
Observations of the Supreme Court
With regards to the maintainability of the curative petition, Supreme Court did not deal with the same and considered it appropriate that this issue be left open for parties to raise to the appropriate bench.
It was further observed that Section 35 of the Stamp Act is significant for adjudication of the issue at hand. In a nutshell, Section 35 of the Stamp Act provides that no instrument chargeable with stamp duty shall be admitted in evidence or shall be acted upon, unless such instrument is duly stamped.
However, the aforesaid section also provides that upon payment of the balance insufficient amount of stamp duty, the instrument will be admitted in evidence. Hence, Section 35 of the Stamp Act renders a document inadmissible for evidence but not void and therefore, the ratio laid down by the five-judge bench in NN Global 2 Case is not correct as it does not appreciate the distinction between enforceability and admissibility of a document.
Further, Supreme Court examined the distinction between inadmissibility and voidness of an agreement. It was observed that the issue of admissibility means as to whether a court may rely upon a document while adjudicating a case, whereas when an agreement is void, it hits on the issue of enforceability of such agreement in a court of law.
Further, Supreme Court also analysed the concept of separability or severability of an arbitration agreement from the underlying contract and observed that an arbitration agreement is juridically independent from the underlying contract in which it is contained.
Thereafter, Supreme Court dealt with the common law concept of ‘Competence-Competence’ which is adopted in Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act.
Upon consideration, Supreme Court arrived at the conclusion that the analysis of five-judge bench in NN Global 2 Case was not correct as the aforesaid analysis is contrary to the separability presumption which treats an arbitration agreement as separate from the underlying contract.
Further, Supreme Court examined the scope of judicial interference under the Arbitration Act. It was observed that upon analysis of relevant judicial pronouncements prior to insertion of Section 11(6A) of the Arbitration Act, there was high level of judicial intervention in appointment of an arbitrator.
Consequently, the Law Commission of India deemed it fit to curtail the extent of judicial interference and hence, recommended the insertion of Section 11(6A) by way of amendment in the Arbitration Act.
Further, Supreme Court laid stress on harmonious construction of the Arbitration Act, the Stamp Act and the Indian Contract Act, 1872. Furthermore, Supreme Court observed that the object of the Arbitration Act is to ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. Whereas, the object of the Stamp Act is to secure revenue for the State. Hence, there is a need that provision of both the aforesaid legislations must be interpreted in a harmonious manner.
Decision of the Supreme Court
Supreme Court held that arbitration clauses in unstamped agreements are enforceable. Even though unstamped or inadequately stamped agreements are inadmissible in evidence under Section 35 of the Stamp Act, such agreements are not rendered void or void ab initio or unenforceable since non-stamping or inadequate stamping is a curable defect.
Further, Supreme Court held that objection on the issue of stamping does not fall within the scope of determination under Sections 8 or 11 of the Arbitration Act. However, the concerned court must examine whether arbitration agreement prima facie exists.
Further, it was held that any objection in relation to stamping of the agreement falls within the ambit of arbitral tribunal. Further, it was made clear that the decision in NN Global 2 Case, SMS Tea Estates Case and Garware Case (to the extent of paragraphs 22 and 29 of the judgment) stand overruled by virtue of the present judgment.
The present judgment laid down by the Supreme Court is a landmark judicial pronouncement in the regime of Arbitration Act vis-à-vis Stamp Act. Further, this judgment gives clarity on the legal position as well as distinction between admissibility of an agreement/instrument in evidence and its legal enforceability in a court of law on account of non-stamping or insufficient stamping.
This judicial pronouncement is remarkable because it has settled the confusion prevailing over this issue of law, provided clarity on the scope of judicial intervention by an appropriate court at the time of appointment of arbitrator as well as harmonizes the conjoint interpretation of relevant provisions of the law pertaining to arbitration and stamping.
This judgment will give impetus to development of arbitration regime in India and will go a long way in ensuring that India becomes a preferred destination for arbitration.
For any query, please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER