[Drishti and Pallavi are Advocates practicing in the Delhi High Court.]
A three-judge bench of the Supreme Court (SC) referred to the question of the validity of an unstamped arbitration agreement in light of the statutory bar under Section 33 and Section 35 of the Indian Stamp Act 1899 (Stamp Act) for determination by a Constitution Bench. The position prior to adjudication of this question of law by the Constitution Bench was established in NN Global Mercantile Private Limited v. Indo Unique Flame Limited and Others (NN Global I) wherein the SC set aside the judgements passed in SMS Tea Estates Private Limited v. Chandmari Tea Company (SMS Tea Estates) and Garware Wall Ropes Limited v. Coastal Marine Construction Engineering Limited (Garware Wall Ropes) and held that since an arbitration clause forms a separate agreement, the non-stamping of the same would not render the arbitration clause void and the arbitration agreement in consideration would be enforceable and valid.
Issue Before the Constitution Bench
In the referral made by a three-judge bench of the SC, the question of law sought to be adjudicated by the Constitution Bench was whether in accordance with the statutory bar provided under Section 35 of the Stamp Act applicable to instruments chargeable to stamp duty the arbitration agreement contained in such an instrument as would be rendered non-existent, unenforceable or invalid pending the payment of such stamp duty and whether a Court acting upon a petition made under Section 11 of the Arbitration and Conciliation Act 1996 (Arbitration Act) is liable to examine the validity of such an agreement prior to adjudicating upon the Section 11 petition.
Majority Judgement by the Constitution Bench
The judgement of the Constitution Bench in NN Global Mercantile Private Limited v. Indo Unique Flame Limited and Others (NN Global II) was passed with a 3:2 majority. The majority observed that the findings of the SC in SMS Tea Estates and Garware Wall Ropes were correctly rendered. It was held that an instrument which is exigible to stamp duty and contains an arbitration clause which is unstamped shall not be considered to be a contract which is enforceable in law under the Contract Act 1872. The SC further held that a court acting under Section 11 of the Act is duty-bound to act under Section 33 of the Stamp Act, hence the arbitration agreement is required to be stamped prior to appointment of an arbitrator.
In its majority judgement, the SC overlooked certain considerable issues. Firstly, whether the judgement in NN Global II would be applicable retrospectively or retroactively; secondly, whether the requirement of stamping would be made applicable to the ongoing arbitrations and lastly, whether the transgression into the limited scope of interference by a Court as envisioned under Section 11 of the Arbitration Act is in consonance with the scope and object therein.
Retrospective or Retroactive Application of NN Global II
The terms retroactive and retrospective have often been used interchangeably but are distinct terms differentiated by subtle nuances. Retroactivity refers to the application of a statute/ judgement that applies to events that pan out post the coming into force of the said statute / judgement but in relation to an agreement that was in existence prior to the date of coming into force of such judgement. Retrospective refers to statutes/judgements which apply to events that have been completed in the past and with respect to agreements that were entered into in the past.
The SC, in its judgement in Securities and Exchange Board of India v. Rajkumar Nagpal, has distinguished between the implications of retrospectivity and retroactivity and reiterated the principles elucidated in Vineeta Sharma v. Rakesh Sharma (Vineeta Sharma) and held that a retroactive statute is considered to be one which operates in the future, although its operation is based upon an event that arose prior in time or a requisite which had been drawn from antecedent events. Retrospectivity in terms of Vineeta Sharma was determined to be a statute that operates from the past and applies to events that have culminated in the past.
In line with the jurisprudence evolved on the definition of retrospectivity and retroactivity, the ratio of the judgement in NN Global II should ideally be applicable retroactively i.e., pertinent to agreements signed prior to the said judgement albeit submitted to arbitration subsequent to the judgement. However, in a multitude of judgements, the SC has clarified that a judicial decision is to be applied retrospectively. A judicial decision can be differentiated from a statute or legislation which takes away a vested right while a judicial decision only adjudicates upon the existing law and provides clarification regarding the same. In Asst. Commissioner v. Saurashtra Kutch Sock Exchange, while upholding the retrospective application of a judicial decision, the SC held that judges are only entrusted with the power to clarify the existing law and they do not propound new law. In light of the aforementioned observations, the correct principle of law as interpreted is to be applied retrospectively.
In the authors’ view, the application of this judgement shall be retrospective as is the case with all declarations of law since this judgement is a mere clarification on the position of law and not the formulation of a new law by the SC.
Requirement of Stamping to the Ongoing Arbitrations vis-à-vis NN Global II
In addition to the above, the SC has failed to render any finding to clarify whether its judgement will be made applicable to arbitrations which are at the final stage of arguments and where reference has been made to the court for the appointment of an arbitrator.
The Arbitration Act confers upon the arbitrator under Section 16 the power to adjudicate upon its own jurisdiction. Although it is iterated in Section 16(2) that a plea under Section 16 can only be made prior to the filing of the statement of defence, the jurisprudence on the subject matter has shown that a plea under Section 16 can be made any time prior to the final arguments in the matter by amending the statement of defence as long as the substance of the pleading is not altered.
The SC, in its judgement in Revajeetu Builders and Developers v. Narayanaswamy and Sons and Others, has clarified that the courts at any stage may allow “the parties to amend their pleadings in such manner and on such terms as may be just and those amendments may be allowed which are imperative for determining the controversy between the parties”.
Accordingly, the SC in its judgement in NN Global II has stated that an unstamped arbitration agreement is void until it is stamped thereby making the issue of stamping an imperative one to be adjudicated upon prior to the adjudication of the dispute. Therefore, in the authors’ view, the determination of the legal validity of an arbitration agreement can be made applicable to the ongoing arbitration proceedings.
In accordance with the object and purpose of the Stamp Act, if the arbitration proceedings have crossed the pre-referral stage, it becomes the duty of the arbitrator to carry out the functions of the court and ascertain that the arbitration agreement is duly stamped and is in consonance with the principles of the Stamp Act. Accordingly, owing to the retrospective application of declaration of law by a court, the SC’s ratio in NN Global II would be applicable to all ongoing arbitral proceedings.
Transgression into the Limited Scope of Interference by a Court vide NN Global II
The SC has clarified that the primary object and purpose of the Stamp Act is revenue generation and accordingly, the said judgement has expanded the scope of adjudicatory power provided to a court in a petition under Section 11 of the Arbitration Act.
The SC, while adjudicating upon the issue of stamping of an arbitration agreement, stated that while determining the existence of an arbitration agreement in a Section 11 petition, the court is also duty bound to determine the enforceability of the arbitration agreement. If the arbitration agreement is insufficiently stamped, the court is vested with the power to impound it and ensure proper stamping. The scope of Section 11 of the Arbitration Act which has been reiterated by the SC vide a multitude of judgements such as Meenakshi Solar Power Private Limited v. Abhyudaya Green Economic Zones Private Limited and Sanjiv Prakash v. Seema Kukreja is extremely narrow such that a court acting in exercise of its jurisdiction under Section 11 of the Act has a limited scope of interference and should restrict itself to examination of the arbitration agreement and render all other issues for determination by the arbitrator.
The SC widening the scope of the adjudicating court in a petition filed under Section 11 of the Arbitration Act has given rise to a myriad of issues including the issue of expeditious trial of disputes under the Arbitration Act. The issue of determination of a petition under Section 9 of the Arbitration Act of emergency arbitration also remains undetermined. Needless to say, the extension of powers granted to a court will lead to delays in the adjudication of the dispute and render the “speedy dispute resolution” process as envisaged in the object and scope of the Arbitration Act ineffective.
Pending clarification by the SC on the stipulated issues that have arisen post the adjudication of the dispute in NN Global II, applying the judicial precedents on the subject matter to the present arbitration proceedings would result in a substantial delay in the arbitration proceedings. The defect of an unstamped arbitration is a curable defect and the arbitration agreement can be made enforceable upon payment of the stamp duty in accordance with the provisions of Sections 33 and 35 of the Stamp Act. Although the SC in NN Global II did not comment on the application of this judgement to petitions filed under Section 34 of the Arbitration Act, in Arg Outlier Media Private Limited v. HT Media Limited, the Delhi High Court clarified that non-stamping of the arbitration agreement is violative of the Stamp Act and is an insufficient ground for setting aside the arbitral award thereby rendering some clarity on the application of NN Global II as a grounds for setting aside the arbitral award.
Conclusion
Taking into consideration the various issues affecting the existing arbitration agreements and the transgression into the scope of Section 11 of the Arbitration Act, it may be prudent for the SC to issue clarifications with respect to the various matters in question which remain unanswered by the majority in NN Global II and ensure that the judgement of the SC is harmoniously interpreted in accordance with the scope and purpose of the Arbitration Act to ensure that the rights of the parties who submit to arbitration are not drastically affected and the essence of the Arbitration Act is upheld.