Rule-based Reasoning vs Analogical Reasoning [Part I of III]

A Five Judges Bench of the Hon’ble Supreme Court on April 25, 2023, with a 3:2 verdict, in NN Global case, held that an unstamped contract and its arbitration clause are not legally enforceable. It further adjudicated that such Arbitration clauses/Agreements are non-existent in Law unless validated subsequently in compliance with the applicable Law, particularly Section 42 of the Stamp Act. 

Almost after a month, on May 23, 2023, NCLAT, Delhi, in Smartworks case held that when an agreement is executed and is also acted upon, the fact that such agreement is not on requisite stamp paper shall have no adverse consequences and the Court cannot ignore such contracts at the time of adjudication. What makes these Judgements an interesting read and comparison is the fact that NCLAT went on to observe that even if an agreement is compulsorily registerable but neither registered nor executed on requisite stamp paper, it is still not a relevant consideration to seek enforcement of the agreement if acted upon by both parties. 

Such divergent opinions and reasoning warrant an analysis of these two judgments and the emerging legal position. Therefore, this Article Series aims to evaluate the correct way to deal with the procedural and technical objections concerning special statutes in three parts. 

The first part seeks to set the background and legal precedence. In the second part, we will address whether the right approach is to apply a strict interpretation of the law or to allow a more practical approach to further the aim and objectives of the special statute. 

In the third and last part, we will evaluating another Supreme Court decision pronounced last year where the Apex Court has held that liberal interpretation is the norm, and strict interpretation is an exception.

The legal deliberations regarding unstamped Instruments and their enforceability have been brewing for many years. These deliberations will help us understand the foundation of this dichotomy (if one exists!). 

These deliberations started in 2011 when the Hon’ble Supreme Court of India in SMS Tea held that a Court could not act upon an instrument and on an Arbitration clause contained in such instrument on which stamp duty is not paid. Therefore, payment of Stamp Duty and penalty is a pre-condition.  

After the SMS Tea Judgment, the legislature notified Section 11(6A) in the Arbitration (Amendment) Act, 2015 which restricted judicial intervention to only examining whether or not an Arbitration Agreement exists.

11 Appointment of arbitrators. —

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(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

Post the 2015 amendment, the Hon’ble Supreme Court in Duro Felguera, took a simplified view and confined itself to adjudicating on the existence of a valid arbitration agreement in view of the newly inserted Section 11(6A).  

But in 2018, in United India Insurance Co. Ltd, the Hon’ble Supreme Court, while deciding the scope of Section 11(6A) held that it is wrong to conclude that the ratio in the Duro Felguera case and Section 11(6A) prohibit holding an enquiry except to the fact that whether or not there exists an arbitration Agreement. 

Then again in 2019, the Hon’ble Supreme Court in the Garware case ruled that an arbitration clause in an agreement would be considered non-existent if this agreement is legally unenforceable. This means that Section 11(6­A) will not be a bar for the Court to hold that the arbitration clause does not cover the particular dispute as it is part of an unstamped agreement (thus not enforceable), and that Section 11(6­A) will not apply as there exists no arbitration clause which can be enforced. The result is no reference to arbitration can be made where the agreement is unstamped.

The above view was reaffirmed by the Hon’ble Supreme Court in Vidya Drolai, which held that an arbitration agreement presupposes a valid and legally enforceable contract. Therefore, the existence and validity are intertwined, and an arbitration agreement does not exist if it is not legal/ does not satisfy the mandatory legal requirements of an enforceable contract. The invalid agreement is no agreement.  

It is pertinent to mention here that in 2021, the Hon’ble Supreme Court in NN Global (a three Judge Bench decision) itself set aside the Judgments of SMS Tea and Garware and held that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and un-enforceable, is not the correct position in law. Yet, given the sensitivity around this issue, and the findings in the judgment of Vidya Drolia by a co-ordinate bench, which affirmed the judgment in Garware, the aforesaid issue was deemed fit to be required to be authoritatively settled by a Constitution bench of the Hon’ble Supreme Court and thus the matter was referred to a five Judge Bench of the Hon’ble Supreme Court.

While the constitution of Five Judges bench was pending, on January 25, 2022 a three Judge Bench of the Hon’ble Supreme Court in the Intercontinental Hotels, following the ratio of N. N. Global (a three Judge Bench decision), matter held that issue of insufficiently or incorrectly stamped can be decided at a later stage or till the time the five Judges bench decides the matter referred for Arbitration.

But within the year 2022, in IOCL (decided on 20 July, 2022) the Hon’ble Supreme Court disagreed with the Delhi High Court’s conclusion that after the insertion of sub-section (6A) in Section 11 of the Arbitration Act, the scope of inquiry by the Court in Section 11 petition is confined only to ascertain as to whether or not a binding arbitration agreement exists qua the parties before it, which is relatable to the disputes at hand. See the ratio of the Supreme Court Judgment in the box.

Indian Oil Corpn. Ltd. v. NCC Ltd.

“93. We are of the opinion that though the Arbitral Tribunal may have jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, whether the dispute is non-arbitrable and/or it falls within the excepted clause. Even at the stage of deciding Section 11 application, the Court may prima facie consider even the aspect with regard to “accord and satisfaction” of the claims.”

But within the year 2022, in IOCL (decided on 20 July, 2022) the Hon’ble Supreme Court disagreed with the Delhi High Court’s conclusion that after the insertion of sub-section (6A) in Section 11 of the Arbitration Act, the scope of inquiry by the Court in Section 11 petition is confined only to ascertain as to whether or not a binding arbitration agreement exists qua the parties before it, which is relatable to the disputes at hand. See the ratio of the Supreme Court Judgment in the box.

With this background, in the following two parts of this series, we will evaluate three Judgments and their respective impacts.

Kapil Dev Sapra is the Founder & Managing Partner of Kapil Sapra & Associates. Vikas Dutta heads litigation practice in the Firm.