In a span of two years, the Supreme Court of India has see-sawed between two extremes apropos the validity of an arbitration clause in unstamped contracts.
In 2021, a three-judge bench in M/s NN Global Mercantile Pvt Ltd v. M/s Indo Unique Flame Ltd & Ors (NN Global 1) held that the validity and existence of an arbitration agreement is well-protected from any defects in the underlying contract. The judgment was well-received by the arbitration fraternity in India.
However, NN Global 1 was overruled in early 2023, when a five-judge bench of the Supreme Court, by a 3:2 majority, held that an insufficiently stamped contract is inherently unenforceable and consequently, the arbitration clause therein cannot be acted upon (NN Global 2). Such views were expressly reserved to initiation of arbitration by virtue of such clauses, while allowing parties the liberty to still approach the court for urgent interim relief under Section 9 of the Arbitration & Conciliation Act.
Pertinently, in the minority judgment, it was noted that the failure to stamp a contract was a temporary affliction and that such issues ought to be deferred to an arbitrator.
Considering the larger ramifications and consequences of NN Global 2, on September 26, 2023, a seven-judge bench of the apex court agreed to reconsider the decision so rendered. The bench also renamed the case “In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899.”
On December 13, 2023, the Court observed that an arbitration clause contained in an unstamped agreement was indeed enforceable, setting aside prior decisions which held otherwise.
Here, we aim to examine the basis of the findings of the Court and its welcome impact on commercial and legal strategy for parties opting for arbitration.
The findings of the seven-judge bench are based on the following propositions:
Firstly, one of the primary objectives behind the enactment of the Arbitration Act was to minimize the supervisory role of courts in the arbitral process by confining it only to the circumstances stipulated by the legislature. The Arbitration Act in plain and unambiguous terms confines the authority of a court at the referral stage [under Section 8 and 11 of the Act] to the prima facie examination of the existence of an arbitration agreement. Furthermore, Section 5 of the Arbitration Act contains a general rule of judicial interference and limits courts from dealing with a parties’ substantive rights, unless expressly allowed by the Act. Therefore, mandating the courts at such a stage to examine the issue of stamping not only remits the scope of examination permitted under the Act, but also renders the legislative purpose of minimal judicial interference enshrined in Section 5 otiose.
Secondly, with the principles of judicial interference comes the autonomy of arbitral tribunals. Section 16 of the Arbitration Act recognizes the doctrine of competence-competence in the Indian arbitration landscape and empowers the arbitral tribunal to rule on, inter alia, issues pertaining to its own jurisdiction and the substantive issues including those concerning the validity and existence of the arbitration agreement, stamping, arbitrability of a dispute and the scope of the arbitration agreement. The legitimate concerns of the realization of stamp duty cannot be said to be defeated merely because it is under the jurisdiction of the arbitral tribunal.
Thirdly, in NN Global 2, the Court erroneously watered-down the well-established principle of the doctrine of separability by incorrectly holding that the deficiency in stamping would ipso facto render the arbitration agreement invalid. The primary objective of the doctrine of separability is to insulate the arbitration agreement from the invalidity, frustration, termination, repudiation or any other defect of the underlying contract. The Court also restated that parties entering into the arbitration agreement do so with the expectation that their disputes will be resolved by the arbitral tribunal. It is the separability presumption which ensures the sustenance of the tribunal’s jurisdiction over the substantive rights and obligations of the parties.
Fourthly, the Arbitration Act is a self-contained code and the non-obstante clause is of a particular significance since it stipulates that the said Act takes precedence over any other laws in force. However, since the Arbitration Act does not contemplate any intervention during the referral stage due to a deficiency in stamping of the underlying contract, such a circumstance is clearly unsustainable in law.
Lastly, the judgment of NN Global 2 is based on the erroneous presumption that an unstamped or an insufficiently stamped contract would be void since the same is unenforceable in the eyes of law. Ergo, the arbitration agreement contained in the contract would be null and invalid. The Court held that such an interpretation disregards the literal interpretation of the Indian Stamp Act, 1899 and leads to an absurd outcome. As per Section 35 of the Stamp Act, non-stamping of an instrument merely renders an instrument inadmissible in evidence until the defect is cured and does not make it void or unenforceable in law. In fact, the Stamp Act outlines the procedure for curing defects, specifying a detailed process. It is also noteworthy that there is no procedure by which a void agreement can be “cured”.
The decision is a welcome development that irons out the creases formed by NN Global 2 and restores faith in the well-founded approach of the courts to limit their intervention at the pre-reference stage. Some of the significant takeaways are as follows:
i. The decision will allow for expeditious appointments of arbitrators at the reference stage by not allowing courts to enter into a mini trial on the issue of stamping of the underlying agreement. NN Global 2 laid down an additional requirement de hors Section 11(6-A) of the Arbitration Act, while mandating courts to ‘confine’ their examination to the ‘existence’ of the agreement. By removing this hurdle, the decision will significantly decrease the time taken for disposal of Section 8 and Section 11 applications.
ii. After NN Global 2, the standard applicable at the referral stage was separate from the one applicable to proceedings for interim relief under Section 9. As the majority in NN Global 2 did not deal with Section 9, the decision of the Bombay High Court in Gautam Landscapes Pvt Ltd v. Shailesh Shah held the field. In this judgment, it was laid down that interim relief could be granted even where no stamp duty was paid. The recent decision leads to the conclusion that a uniform approach will be adopted by courts on the issue of stamping in all arbitration cases.
iii. A consistent application of law also prevents the misuse of the law by the parties to prolong the appointment of an arbitrator. As an example, after NN Global 2, a party could enjoy interim relief for three months while not taking steps for appointment of an arbitrator qua an unstamped agreement. Even otherwise, quicker disposal of reference proceedings will reduce the time and money spent by the parties to the dispute.
iv. There was no clarity as to the retrospective application of the declaration of law made in NN Global 2. This allowed parties to file applications 34 in pending arbitration challenging the tribunal’s jurisdiction as well as awards rendered before NN Global 2 on the ground of inadequacy of stamping, thereby causing delay in conclusion of proceedings.
v. The decision allows the parties the freedom to choose their contract, as is also prescribed by the Arbitration Act, which permits parties to have an arbitration agreement by way of exchange of letters, telex, telegrams, or other means of telecommunication including electronic means. After the recent decision, the issue of stamping of such agreements cannot be raised at the reference stage and thus parties opting for an ‘unconventional agreement’ will not be treated differently by the courts.
The Arbitration Act has undergone several amendments since 1996 and more often than not, the clear legislative mandate has been to limit judicial interference in arbitral proceedings, institutionalize the arbitral ecosystem in India and lay down time limits for completion of proceedings. This has been done not just due to legislative enterprise but due to compelling reasons such as the huge pendency of commercial cases in India and vacancies in judicial appointments.
Through the years, the Supreme Court has been cognizant of these legislative prescriptions and has ceded control and governance over the arbitral process. This trend was upset in NN Global 2, when the Court went above and beyond the Arbitration Act to convert a curable defect of under-stamping to a fatal blow to the arbitral proceeding. The recent seven-judge decision overruling NN Global 2 has corrected a judicial mishap while, yet again, giving arbitration the nod of approval.
Vishal Sinha is an Advocate practicing before the Supreme Court of India.
Prerona Banerjee is an Associate at Khaitan & Co.