By Dr Charu Mathur, Advocate-on-Record, Supreme Court of India
Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, In re, (2024) 6 SCC 1, a Seven Judge bench of Supreme Court has overruled a Five Judge bench decision [N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2023) 7 SCC 1 (“NN Global 2“)] which had held that unstamped or inadequately stamped arbitration agreements are void or void ab initio or unenforceable. In a welcome move, the Seven Judge bench has overruled this controversial position. It also overruled two previous two-judge bench decisions of the Supreme Court in SMS Tea Estates v Chandmari Tea Co (2011) 14 SCC 66 (“SMS Tea Estates“) and Garware Wall Ropes v Coastal Marine Constructions & Engg (2019) 9 SCC 209 (“Garware“).
The 7-judge bench decision provides considerable relief to businesses involved in India-related agreements by affirming that unstamped contracts will not obstruct the process of appointing arbitrators or hinder the referral of parties to arbitration. This decision eliminates the ability of parties to exploit stamping defects as a tactic to delay the formation of arbitral tribunals or to draw out litigation in the courts. This comes with an important rider- arbitral tribunals have the authority to impound such agreements and ensure that the required stamping procedures are followed. This is a possible a delay pit. Consequently, for contracts related to India, it remains essential for parties to seek proper legal guidance on stamp duty matters and ensure that their contracts meet all the relevant legal stamping requirements.
Background
Indian law imposes stamp duty on legal instruments such as deeds, bonds, and contracts, and is payable at the time of execution within India. Instruments executed outside of India also attract stamp duty once they are received in the country. The enforceability of arbitration agreements embedded in unstamped or inadequately stamped contracts has been a contentious issue in India. A two-judge bench of the Supreme Court in SMS Tea Estates v. Chandmari Tea Co. and Garware Wall Ropes v. Coastal Marine Constructions, held that arbitration agreements in unstamped contracts would be treated as non-existent in law. This meant that Indian courts could not recognize or enforce such arbitration agreements. These rulings were reaffirmed by a three-judge bench in the Vidya Drolia v. Durga Trading Corpn case, where the court upheld the view that an arbitration agreement in an unstamped contract could not be acted upon until the requisite stamp duty had been paid. This created significant hurdles in arbitration proceedings, as it delayed the referral of disputes to arbitration. A three-judge bench in NN Global Mercantile v Indo Unique Flame (2021) 4 SCC 379 (“NN Global 1“), questioned the correctness of the law laid down in the earlier judgments. The Court concluded that an arbitration agreement was considered a separate agreement from the underlying contract and would not be rendered unenforceable, even if the underlying contract was unenforceable for being unstamped or insufficiently stamped. Arbitration could commence and it would be for the arbitral tribunal to determine whether the underlying contract had complied with the requirements regarding stamping.
Given the difference between the conclusion reached by the three-judge bench in NN Global 1 and the view affirmed by a previous three-judge bench in Vidya Drolia, the matter was referred to a five-judge bench of the Indian Supreme Court.
In NN Global 2, a majority of a five-judge bench of the Supreme Court held that the previous cases of SMS Tea Estates and Garware were correctly decided and that an Indian court could not recognise or act upon an arbitration agreement contained in an unstamped or insufficiently stamped contract. As a result, courts could neither appoint arbitrators nor refer parties to arbitration when faced with an unstamped or inadequately stamped contract. It would be necessary to first impound the instrument and require parties to cure the defect regarding stamping before acting further. This meant significant delays to commencement of arbitration.
Reference to a seven-judge bench
Though NN Global 2 ought to have been, in the ordinary course, the final say on the issue, the question of enforceability of arbitration agreements contained in unstamped contracts remained alive. It was considered in other cases before the Supreme Court until the entire issue finally came to be referred to the seven-judge bench given the “larger ramifications and consequences” of NN Global 2.
The Court carried out a detailed analysis of the provisions of the Indian Stamp Act, 1899 (the “Stamp Act“) and the Arbitration Act to conclude that unstamped or inadequately stamped agreements are not void or unenforceable. When faced with applications to refer parties to arbitration or appoint arbitrators, courts only need to satisfy themselves as to the existence of an arbitration agreement and must leave issues of stamping to be dealt with by arbitral tribunals. The Court noted that the Arbitration Act provided for minimum judicial interference, with one of its main objectives being to minimize the supervisory role of courts in the arbitral process. It also noted that the Arbitration Act is a self-contained code and provides for the separability of the arbitration agreement from the main contract. The Court noted that the presumption of separability was applicable not only for the purpose of determining the jurisdiction of the arbitral tribunal, but that it also “encapsulates the general rule on the substantive independence of an arbitration agreement”.
The Court considered the provisions of the Stamp Act and noted that the statutory mandate did not render unstamped agreements void, but provided that unstamped agreements could not be admitted into evidence or acted upon, registered, or authenticated. The Court noted that there was a difference between “void” (relevant to enforceability of an agreement) and “inadmissible” (relevant to whether a court could consider or rely on the agreement). The Stamp Act, which was a fiscal statute, itself provided the procedure for curing a defect regarding stamping. Thus, it did not envisage that unstamped agreements would be void. The Court held that, Arbitral tribunals had jurisdiction to determine the limits of their own jurisdiction and the legislative mandate required courts not to interfere “at the referral stage by deferring to the jurisdiction of the arbitral tribunal in issues pertaining to the existence and validity of an arbitration agreement”. According to the Court, Indian courts have a duty to interpret the Arbitration Act “in a manner which gives life to the principles of modern arbitration in India“.
The Court noted that it was important to construe the Stamp Act and the Arbitration Act harmoniously, so as to give each statute full effect and ensure that the purpose of neither statute is defeated. The Court noted that the Arbitration Act, a comprehensive legal code governing arbitrations, was a “special” statute in the context of this case and ought to have primacy for the purpose of arbitration agreements. The Arbitration Act did not specify stamping as a pre-condition of a valid arbitration agreement and required courts to confine themselves to an examination of the existence of an arbitration agreement at the referral stage.
The Court held that it was then for the arbitral tribunal to act in accordance with the law and impound the agreement, if required, to ensure that the procedure under the Stamp Act to cure defects is followed. The issue of stamping is a jurisdictional issue. The provisions of the Stamp Act make it clear that a person having authority by “consent of parties” to receive evidence is empowered to impound and examine an instrument, and that such person having authority “by consent of parties” to receive evidence includes an arbitral tribunal.
The Court noted that this interpretation allows the doctrine of competence-competence to be given life and also ensures that the Stamp Act is not flouted.