A Stamp of Approval: Supreme Court Resolves Issues Concerning Validity of Unstamped Arbitration Agreements

Introduction

The seven-judge bench of the Supreme Court (“SC”), on 13 December 2023, in the case of In Re: Interplay between Arbitration agreements under the Arbitration and Conciliation act 1996 and the Indian stamp act 1899 (“In Re”) settled a number of questions revolving around stamping and non-stamping of arbitration agreements. Through this judgement, the Court overruled the decision of the Constitutional Bench in NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (“NN Global 2”) which held that an unstamped instrument containing an arbitration agreement would be void. The constitutional bench, by a 3:2 majority had also ruled that the Court even at a pre-referral stage shall be bound by the mandate of Sections 33 and 35 of the Indian Stamp Act (“Stamp Act”), which allows it to impound and examine an unstamped instrument.

This judgement was not well received and it was argued that it goes against the legislative intent behind Section 5 of the Arbitration and Conciliation Act (“Arbitration Act”), which seeks to promote minimum judicial interference. The 7-judge bench now in In Re has unanimously ruled that the Court under Sections 8 and 11 shall only limit its examination to the existence of the arbitration agreement and the issue of Stamping shall be decided by the Tribunal under Section 16 of the Act.

This article offers an analysis of the judgment, delving into its intricacies and commending the Court’s discerning approach. Critical aspects of the decision, including the impact of Section 35 of the Stamp Act on the admissibility of a document, the Tribunal’s authority under the doctrine of Kompetenz-Kompetenz regarding stamping issues, and the prevailing significance of the Arbitration and Conciliation Act over the Indian Stamp Act are examined in this piece. While acknowledging the judicious scrutiny applied, the article also raises a discerning query about the appropriateness of invoking curative jurisdiction in this matter.

Section 33 and 35 of the Stamp Act: Questions Concerning Enforceability and Admissibility

It is essential to understand how Sections 33 and 35 of the Stamp Act become relevant in deciding the stamping of the instruments. Section 33 gives authority to the person receiving evidence to impound the instrument, which appears to them as not duly stamped, and Section 35 renders instruments not duly stamped inadmissible in evidence. The Court in NN Global 2 conflated the distinction between enforceability and admissibility of the instrument and had held that unstamped or insufficiently stamped instruments would be void under Section 2(g) of the Contract Act.

This position has finally been rebutted by the 7-judge bench, which ruled that the admissibility of an instrument in evidence needs to be distinguished from its validity or enforceability. Section 35 renders an instrument inadmissible and not void, and the Act prescribes a manner in which this defect can be cured. This observation overruled the judgement in NN Global 2 which held that unstamped agreements are not curable defects. The Court also made it clear that the Tribunal under Section 16 shall decide upon the issue of stamping and not the Court at the stage of deciding Section 11 applications.

Doctrine of Kompetenz-Kompetenz: Let the Tribunal Decide

Before understanding how the Court conclusively ruled that the issue of Stamping shall be decided by the tribunal under Section 16 of the Act, it is essential to note that previous arbitration regime was governed by the 1940 act. Section 33 of the 1940 Arbitration Act allowed Courts to hear challenges to the existence and validity of arbitration agreement. However, 1996 Act brought the change which under Section 16 recognized the doctrine of kompetenz-kompetenz based on Article 16 of the UNCITRAL Model Law.

This doctrine empowers the Tribunal to rule on its jurisdiction and any objections concerning the existence or validity of the arbitration agreement. The international and domestic framework prioritizes the Tribunal rather than the Courts to decide on the challenge to their authority. Similarly, the negative aspect of the kompetenz-kompetenz doctrine instructs the Courts to limit interference at the referral stage. It refrains them from deciding a challenge to jurisdiction before arbitrators have the opportunity to do so.

The 7-judge bench based on the judgement in Uttarakhand Purv Sainik Kalyan Nigam Ltd v. Northern Coal Field ruled that stamping is a jurisdictional issue and tribunal’s authority is wide enough to comprehend all preliminary issues that affect its jurisdiction, including the sufficiency of stamping.

Sections 33 and 35 of the Stamp Act empower a person having authority by the “consent of the parties” to impound and examine the instrument, an arbitral tribunal the Court ruled is also constituted by the “consent of the parties” which can receive evidence and examine the issue of Stamping. Moreover, the nature of stamp duty objections the Court noted requires a detailed consideration and thus shall not be left to the Courts to decide on the “prima facie” standard of review.

Arbitration and Conciliation Act vs. Stamp Act: What prevails?

Inconsistencies and contradictions can arise between statutes and it is incumbent upon the Courts to then bring harmony to the working of such statutes. The challenge before the Court in this case was to harmonize the provisions of the Arbitration and Conciliation Act, and the Stamp Act.

Through harmonious construction, the Court held that the Arbitration Act shall prevail over the Stamp act, since the “particular perspective” of the case pertains to “arbitration agreements” in particular, rendered unenforceable under the Stamp Act, and not all agreements. This test has been used to determine whether a law is a general law or special law and stems from the doctrine of generalia specialibus non derogant. The Court held that the purpose of enacting the Arbitration Act makes it a special law, and the SC in Bhaven Construction v Sardar Sarovar Narmada Nigam Ltd held it to be a “Code in Itself”.

Arbitration Act, a self-contained code, makes it clear that the other statutes cannot interfere in its working. Therefore, it becomes imperative that what is permissible within the law shall be performed in the manner indicated and not otherwise. The interpretation arrived in this judgement gives effect to the Arbitration Act by not detracting from the purpose of revenue collection enshrined under the Stamp Act. The Tribunal will continue to be bound by the provisions of the Stamp Act set out in Sections 33 and 35 of the Act, which includes impounding and admissibility of instruments.

Clarifications Issued

This judgment offers three notable clarifications, firstly on the status of Section 11 (6A) of the Arbitration Act. Justice Sanjeev Khanna in Vidya Drolia and Others v. Durga Trading Corporation held that this Section ceased to operate in view of Section 3 of the Arbitration and Conciliation (Amendment) Act, 2019. However, in his concurring opinion, Justice Khanna acknowledged in paragraph 41 of In Re that it was an error since the amendment is yet to be enforced. Chief Justice Chandrachud also made this observation while authoring the majority judgment and ruled Section 11 (6A) is still operative.

Secondly, the judgement makes it clear the Court in Vidya Drolia did not rule on the validity of an unstamped or an under-stamped agreement; the reference to these terms was made only to draw a comparison between the “existence” and “validity” of an arbitration agreement.

Lastly, In Re the Court also cleared the doubt that, when considering applications for interim relief under Section 9 of the Arbitration Act, the Courts are not required to address stamping concerns. This question recently arose before the Bombay High Court(BHC) in  L&T Finance Limited v Diamond Project Limited and others. In the judgement, Justice Bharati Dangre underscored that the absence or insufficiency of stamp duty on an agreement should not serve as the exclusive basis for denying interim relief. The BHC held that a party might not necessarily seek to evade stamp duty payment but rather aim to secure interim relief at the early stages of the dispute resolution process.

Misplaced Reliance to Curative Jurisdiction?

The bench in In Re was constituted after the SC’s 26th September 2023 order in M/S Bhaskar Raju v. M/S. Dharmaratnakara Rai Bahadur which referred NN global II to a seven judge bench. In its 2020 judgement titled M/S. Dharmaratnakara Rai Bahadur v. M/S. Bhaskar Raju, SC overturned a High Court decision that had referred parties to arbitration under Section 11(6) of the Arbitration Act based on an insufficiently stamped lease deed. It is noteworthy this judgement predated the decision in NN Global 1. Interestingly, during the pendency of the reference in NN Global 1, review petitions were filed in SC’s Bhaskar Raju judgement of 2020.

However, on July 20, 2021, the review petition in Bhaskar Raju was dismissed, citing both delay and merits as grounds for rejection. Later a curative petition was filed, seeking a reconsideration of Bhaskar Raju judgement. Through the order dated 26th September 2023, SC in the curative petition clubbed with Section 11 application referred the matter before a seven-judge bench.

Order XLVIII of the Supreme Court rules deals with the curative petitions. Rule 1 of this order provides that curative petitions shall be governed by the Rupa Hurra v Ashok Hurra judgement. This implies that rigours of the judgement need to be applied strictly for invoking this jurisdiction. The SC in its 26thSeptember order and later in the 13 December 2023 judgement did not delve into merits required to invoke the curative jurisdiction. The judgement in “In Re” remains silent on the aspect of the maintainability of curative petition and does not conform to the limited scope of invoking curative jurisdiction enshrined in the Rupa Hurra judgement.

Conclusion

The SC judgement of In Re has given effect to the principle of minimum judicial interference by ruling at what stage the agreement would be impounded and not whether it would be impounded at all. The judgement corrects the problematic stances taken in SMS Tea Estates Pvt. Ltd. Versus Chandmari Tea Co. Pvt. Ltd. and Garware Wall Ropes Limited v. Coastal Marin Constructions and Engineering Limited which were relied on by the Court in NN Global 2 to impound the agreements at the pre-arbitral stage.

The recent judgment, while prioritizes efficiency and expediency in the arbitration process, raises a pertinent question regarding the court’s invocation of curative jurisdiction. The decision to refrain from assigning the court authority to impound the agreement during Section 8 or Section 11 proceedings is undoubtedly a practical and reasonable approach, preventing unnecessary delays in the commencement of arbitration.

However, the use of curative jurisdiction by the court in this case introduces an aspect that demands careful reconsideration. While acknowledging the positive attributes of the judgment, it is crucial to ponder whether the invocation of curative jurisdiction might inadvertently open the door to potential judicial indiscipline. This prompts a thoughtful examination of the implications and consequences of such a recourse, urging a reassessment at the earliest.

(This post has been authored by Shivang Monga, 3rd year student at Maharashtra National Law University, Mumbai.)

CITE AS: Shivang Monga, ‘A Stamp of Approval: Supreme Court Resolves Issues Concerning Validity of Unstamped Arbitration Agreements’ (The Contemporary Law Forum, 05 February 2024) <tclf.in/2024/02/05/a-stamp-of-approval-supreme-court-resolves-issuesconcerning-validity-of-unstamped-arbitration-agreements/>date of access.

1 thought on “A Stamp of Approval: Supreme Court Resolves Issues Concerning Validity of Unstamped Arbitration Agreements”

  1. This article is really useful to all and drafted covering all the surrounding issues, with uptodate knowledge. Thanks for sharing such type of article, keep it up, wish to see forward more articles, showing your potentionality. GOD bless you. So happy all the team – Ravinder Monga, Avinash Sethi, Rishab Goyal, Kamal Kumar, Surender Kamboj

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