IN RE: INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT 1899 : CASE SUMMARY

The Supreme Court in  In Re : Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 (2023) 15 SCR  held that an arbitration agreement is not rendered void or unenforceable because it is unstamped or insufficiently unstamped.

The Supreme Court  in SMS Tea Estates (P) Ltd. Vs. Chandmari Tea Co. Ltd.  (2011) 14 SCC 66  and Garware Wall Ropes Ltd. Vs. Coastal Marine Constructions & Engg Ltd. (2019) 9 SCC 209 held that an arbitration agreement in an unstamped commercial contract would not exist as a matter of law and could not be acted upon.

The Supreme Court in  N N Global Mercantile (P) Ltd. Vs. Indo Unique Flame Ltd (2021) 4 SCC 379 ( N N Global -1)  took and different view  had held that non -payment of stamp duty will not render Arbitration Agreement, being separate and distinct agreement, invalid. Even underlying agreement will not be invalid because it is a curable defect and referred the matter to Constitution Bench.

The Constitution Bench in N N Global Mercantile (P) Ltd. Vs. Indo Unique Flame Ltd (2023) 7SCC 1 ( N N Global II) rejected the view taken in N N Global -I and approved the view taken in SMS Tea Estates and Garware Wall Ropes.

FINDINGS OF THE SUPREME COURT

The Stamp Act

The Supreme Court observed that Section 35 of the Act is unambiguous. It stipulates that no instrument shall be admitted in evidence. The term “admitted in evidence” refers to the admissibility of the instrument. Sub-section (2) of Section 42, too, states that an instrument in respect of which stamp-duty is paid and which is endorsed as such will be “admissible in evidence”. The effect of not paying duty or paying an adequate amount renders an instrument inadmissible and not void. Non-stamping or improper stamping does not result in the instrument becoming invalid. The Stamp Act does not render such an instrument void. The non-payment of stamp duty is accurately characterized as a curable defect.   The Stamp Act itself provides for the manner in which the defect may be cured and sets out a detailed procedure for it. It bears mentioning that there is no procedure by which a void agreement can be “cured”. The Supreme Court also observed that the Stamp Act is a legislation which is enacted in interest of the revenue. The statue must be interpreted with due regard to its purpose.

The Arbitration and Conciliation Act

The Supreme Court noted that the objective of arbitration is to provide speedy, efficient, and binding resolution of disputes that have arisen between the parties in regard to their substantive obligations. The principle of arbitral autonomy is an integral element of the ever evolving domain of arbitration law which is reflected in Section 5 of the Arbitration and Conciliation Act, 1996.  Arbitral autonomy means that the parties to an arbitration agreement can exercise their contractual freedom to bestow the arbitral autonomy with the authority to decide disputes that may arise between them.

The Supreme Court observed that the concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement. The separate nature of the arbitration agreement from the underlying contract is one of the cornerstones of arbitration law and is reflected in Section 16 of the Arbitration Agreement.

The Supreme Court noted that it has held in Vidya Drolia Vs Durga Trading Corporation (2021) 2SCC1 and Chloro Controls India (p) Ltd  Vs. Severn Trent Water Purification Inc. (2013) 1 SCC 641 that the doctrine of competence-competence has both the positive and the negative aspects. It was observed that while the positive aspect enables the arbitrator to rule on its own jurisdiction, the negative aspect deprives the courts of their jurisdiction.

Extent of judicial interference in appointment of Arbitrators

The Supreme Court in SBP & Co. Vs Patel Engineering (2005) 8 SCC 618 held  that power exercised by Chief Justice is judicial power and Chief Justice or his designate has to power to determine all preliminary issues.

In National Insurance Co. Ltd. Vs. Boghara Polyfab  (2009) 1 SCC 267 observed that when intervention of the Chief Justice is sought under Section 11, the following issues will arise :

The issues which the Chief Justice or his designate is bound to decide. These issues were : first, whether the party making the application has approached the appropriate High Court and second whether there is a valid arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to the Agreement. (ii) The issues which the Chief Justice or his designate may choose to decide or leave them to the decision of the arbitral tribunal.  These issues were first whether the claim is a dead (long barred) claim or a live claim and second whether the parties have concluded the contract /transaction by recording the satisfaction of their mutual rights and obligations or by receiving the final payment without objection  and (iii) the issues which the Chief Justice or their designate should leave exclusively to the arbitral tribunal. These issues were , first whether a claim made falls within the arbitration clause  and second merits or any claim involved in the arbitration.

The decision of the Supreme Court in Patel Engineering and Boghara Polyfab allowed for greater judicial interference at the pre-arbitral stage. In effect, the referral courts were encouraged to conduct mini trials instead of summarily dealing with the preliminary issues.

Law Commission recommended for reduction of judicial intervention at pre-arbitral stage.  Further, the Statement of Objects and Reasons of the 2015 Amendment Act stated that sub-section (6A) is inserted in Section 11 to provide that the Supreme Court or the High Court while considering application under sub-section (4) to (6) “shall confine to the examination of an arbitration agreement.” With the coming into force of the 2015 Amendment Act, the nature of preliminary examination at the referral stage under Section 11 was confined to examination of  the existence of an arbitration agreement

Justice Kurien Joseph in Duro Felguera, S.A. Vs. Gangavaram Port Ltd (2017) 9 SCC 729  noted that the intention of the legislature in incorporating Section 11(6A) was to limit the scope of the referral court’s jurisdiction to only one aspect – the existence of an arbitration agreement. To determine the existence of an arbitration agreement, the court only needs to examine whether the underlying contract contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. This Court further held that Section 11(6A) incorporates the principle of minimal judicial intervention.

The Supreme Court in Mayavati Trading (P ) Ltd. Vs. Pradyut Deb Burman (2019) 8 SCC 714   reiterated Duro Felguera  and held that decisions in Patel Engineering  and Boghra Polyfab   has been overruled.

The Supreme Court in Vidya Drolia  affirmed that Patel Engineering and Boghara Polyfab have been overruled but held that question of non-arbitrability of dispute can be determined at referral stage.

The Supreme Court noted that the while Section 8 requires prima facie existence of arbitration agreement Section 11 only requires examination of existence of agreement. Two provisions cannot be read as laying down a similar standard.

Validity of unstamped Agreement

The Supreme Court held that the agreement which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.  An arbitration agreement or its certified copy is not rendered void or unenforceable because it is unstamped or insufficiently unstamped.

The referral court at Section 11 stage should not examine or impound an unstamped or insufficiently stamped instrument, but rather leave it for the determination by the Arbitral Tribunal. When a Party produces an arbitration agreement or its certified copy, the referral court only has to examine whether an arbitration agreement exists in terms of Section 7 of the Arbitration Act. The referral court under Section 11 is not required to examine whether a certified copy of the agreement/instrument/contract discloses the fact of payment of stamp duty on the original. The decision in NM Global 2, SMS Tea Estates and Garware Wall Ropes were overruled.

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