Roadmap to Legality and Enforceability of Unstamped Arbitration Agreements

Recently, a seven-judge bench of the Hon’ble Supreme Court, while deciding on proceedings arising from a curative petition, resolved the issue concerning an arbitration clause contained in an unstamped contract. The Court held that such a clause does not become invalid, and that the defect of the document not being stamped is a curable defect.

Keeping in view the principles of party autonomy, it was further held that the arbitral tribunal being competent to decide on its jurisdiction, the courts should refrain from interfering on such issues. This judgment was rendered while entertaining a challenge against the decision rendered in M/s NN Global Mercantile Private Limited v. M/s Indo Unique Flame Limited & Ors. (2023) SCC Online SC 495, wherein vide a 3:2 split decision, it was decided that an unstamped arbitration agreement could not be enforced until the stamp duty was paid. Further, it also opined that an arbitration clause in an unstamped or insufficiently stamped contract cannot be considered valid until the parties have duly complied with the stamp duty obligations.

The parties in the present case had entered into a sub-contract for coal transportation wherein a dispute arose and subsequently the respondent, that is, Indo Unique Flame Ltd, invoked a bank guarantee submitted by the petitioner. The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Arbitration Act”) for referring the dispute to arbitration which was rejected by a commercial court. Subsequently, a writ petition was filed by the respondent before the Bombay High Court, wherein it was observed that the Section 8 application was maintainable, and that the issue of unregistered/ unstamped contract could be raised in an application under Section 8 of the Arbitration Act. Accordingly, an appeal was filed before the Hon’ble Supreme Court. A three-judge bench of the Hon’ble Supreme Court in M/s NN Global Mercantile Private Limited v. M/s Indo Unique Flame Limited & Ors. (2021) 4 SCC 379, upheld the validity of the arbitration clause appearing in an unstamped contract, applying the doctrine of separability, that is, the distinctive and independent nature of an arbitration agreement from its underlying contract. This meant that even if the underlying contract is invalid, the independent arbitration agreement can still be enforced because the non-payment of stamp duty will not invalidate the arbitration agreement but only the said contract.

Thereafter, a five-judge Constitution Bench decided, by majority, that an arbitration agreement cannot be acted upon if it is unstamped or insufficiently stamped, in view of Section 35 of the Indian Stamp Act, 1899, unless the requisite stamp fees is paid. It was further observed that in an application under Section 8 of the Arbitration Act, the court is bound to examine the instrument and if the same is found to be insufficiently stamped or unstamped, the instrument would be impounded at that stage itself. The minority held that non-stamping is a curable defect which would not render the arbitration agreement unenforceable.

Pursuant to the above decision, the petitioner in NN Global (supra), preferred a curative petition impugning the judgment and raising issues with respect to validity of the judgment. The Supreme Court referred the issue to a seven-judge bench to consider the correctness of the judgment. Consequently in Interplay between Arbitration Agreements under the Arbitration & Conciliation Act, 1996 & the Indian Stamp Act, 1899, In re, 2023 SCC OnLine SC 1666, the seven-judge bench overruled the decision in NN Global (supra), and held that the arbitration agreements which are unstamped or inadequately stamped are inadmissible as an evidence but not void ab initio or unenforceable.

The apex court discussed the objective of the Indian Stamp Act, 1899, Indian Contract Act, 1872 and their harmonious construction with the Arbitration and Conciliation Act, 1996. The apex court emphasized that within the framework of the Stamp Act, a party cannot evade their liability under unstamped or inadequately stamped arbitration agreements. This is because the genesis of the Stamp Act was for a fiscal measure and its aim is to generate revenue for the State from specific instruments. While dealing with the principle of harmonious construction, the Court held that the Contract Act and Stamp Act are general laws, whereas the Arbitration Act is a special law, and that the latter will always prevail over the former. The fact that the legislature was aware of the Stamp Act, and Contract Act while enacting the Arbitration Act and choose not to insert a provision for stamp duty signifies the acceptance of the legislature towards the fact that unstamped or insufficiently stamped arbitration agreements are valid and enforceable.

Furthermore, the Hon’ble Court emphasized on the pillars of arbitration, that is, party autonomy in the arbitration process, principle of minimum judicial intervention in arbitral proceedings, holistic nature of the Arbitration Act, and principles of modern arbitration.

Moreover, the Hon’ble Court created a dichotomy in the doctrine of Kompetenz-Kompetenz as positive and negative under Section 16 of the Arbitration Act, to uphold the principle of party autonomy. The positive branch of the doctrine here states that the arbitral tribunal has the competence to rule on jurisdiction of its own; whereas the negative branch of the doctrine instructs courts to refuse to interfere in a matter in which the parties have submitted their jurisdiction to arbitration to resolve their disputes, and defer to the jurisdiction of the tribunal in issues related to the existence and validity of an arbitration agreement.

The Delhi High Court in ARG Outlier Media Pvt. Ltd. v. HT Media Ltd. 2023 O.M.P (COMM) 161/2023, while dismissing a petition stated that once an arbitrator has accepted an agreement and passed an award on the basis of that agreement, then the agreement cannot be set aside on the ground that it was insufficiently stamped. It further held that since the petitioner had not raised an issue regarding the agreement being insufficiently stamped at any stage while leading evidence and since the petitioner had not raised an objection as to the validity of the agreement before the arbitrator, the same cannot be brought into question under Section 34 of the Arbitration Act once the arbitrator has already passed an award based on such an agreement.

Recently, the Bombay High Court, in L&T Finance Limited v. Diamond Projects Limited, Commercial Arbitration Petition No. 1430 of 2019, while referring to the judgment of the Constitution Bench in N.N. Global (supra), held that the aforesaid judgment does not affect the power of Court to grant interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 despite the non-payment or insufficiency of payment of stamp duty on the arbitration agreement or the main agreement containing the arbitration clause. It further held that unlike Section 11 or 8 of the Arbitration and Conciliation Act, the Court exercising powers under Section 9 of the Act is not required to make a determination on the existence and validity of the arbitration agreement. Rather, the Court would have to grant interim relief on the parameters of a three-fold test of (a) prima facie case (b) balance of convenience and (c) irreparable injury.

Pursuant to the passing of the judgment in a curative petition, the Delhi High Court, in Green Edge Infrastructure (P) Ltd. v. Magic Eye Developers (P) Ltd., 2024 SCC OnLine Del 1732, while relying upon the judgement of the Supreme Court in Interplay between Arbitration Agreements under the Arbitration & Conciliation Act, 1996 & the Indian Stamp Act, 1899, In re, (supra), directed the parties to the arbitral tribunal for in-depth examination of the jurisdiction aspect, with respect to the existence of the arbitration agreement. Further, the Court also referred to the doctrine of competence-competence and said that the issue of validity of an arbitration agreement shall be decided by the arbitral tribunal, in order to prevent any mini-trial at an inappropriate forum. Also, while examining Section 11(6A) of the Arbitration Act, the Court said that the word ‘examination’ does not connote or imply a laborious inquiry into the existence of the arbitration agreement.

As per the 2015 amendment to the Arbitration and Conciliation Act 1996, the High Courts or the Supreme Court under Section 8 of the Act are only empowered to prima facie review and confirm the existence of an arbitration agreement to facilitate speedy disposal of cases. However, the decision of the court in NN Global (supra) opened doors to judicial intervention by allowing courts to determine the validity of the contract, thus hampering the very spirit of arbitration, that is, minimal judicial intervention. This lacunae was addressed.by the decision rendered in the curative petition filed in Interplay between Arbitration Agreements under the Arbitration & Conciliation Act, 1996 & the Indian Stamp Act, 1899, In re, (supra), preserving the pillars of party autonomy in arbitration, and thereby saving the time of parties. The judgement also held that the deficiency in stamping is a curable defect, and further that primary courts shall only examine whether an arbitration agreement prima facie exists, and that the issue as to whether the agreement has deficiency in stamping shall be dealt with by the arbitral tribunal.

The aforementioned judgement emphasized on the doctrine of separability in different countries such as the USA, UK and Singapore. This doctrine under Section 16(a) of the Arbitration Act provides an independent character to the arbitration clause in a contract as a separate and autonomous agreement, independent of the underlying substantive contract. Accordingly, the party that alleges the invalidity of the main contract, must also establish that such invalidity has a direct effect on the arbitration clause to avoid arbitration.

The judgement covers the doctrine of Kompetenz-Kompetenz under Section 16 of the Arbitration Act in two aspects: positive and negative, implying that the arbitral tribunal has competence or authority to rule on its own jurisdiction, including providing answers as to the questions of validity or existence of the arbitration agreement.

The judgement brought the main objective of the arbitration process back on track which is to ensure a smooth, reliable, speedy and effective dispute redressal mechanism for the parties and save the parties from the agony of the mini-trial, that became an impediment, just to decide the validity of the arbitration agreement at the initial stage itself.

About the author: Jaskaran Singh Narula is a Senior Associate at Hammurabi & Solomon Partners.