[Riddhi and Rahul are students at Institute of Law, Nirma University.]
A fundamental question that has always remained is concerning the point at which the dependence on national courts begins and ends. An issue as recurrent as this finds its way to have been finally settled in the light of the significant development in the case of NN Global Mercantile Private Limited v. Indo Unique Flame Limited and Others. The 7-Judge Bench has finally brought the recent conundrum of stamping an arbitration agreement to dust by holding that an unstamped arbitration agreement is enforceable in the eyes of the law and has overruled cases such as SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (SMS Tea) and Garware Wall Ropes Limited v. Coastal Marine Construction & Engineering Limited (Garware).
Upholding Fundamental Principles
As rightly upheld by the court, in the view taken by the courts in previous instances such as NN Global Mercantile v. Indo Unique Flame (NN Global II), SMS Tea and Garware, the fundamental features and principles of separability and kompetenz-kompetenz were duly undermined. It is a well-settled and accepted principle in law that the doctrine of separability applies when the validity of the main contract has been put in question. The said principle provides that a clause containing the arbitration agreement is independent of the principal contract and it finds a mention under Section 16 of the Arbitration and Conciliation Act 1996 (Arbitration Act).
This helps in preventing any sort of interference with the enforcement of an arbitration agreement. In the instant case, as has been rightly observed by the court, although the principal contract that contains the arbitration agreement has not been adequately stamped, the arbitration agreement would still be considered to be an independent agreement from the principal contract. To hold that the arbitration agreement would be invalid or unenforceable on merely a technical ground like stamping would negate the established rule of separability.
Another fundamental principle incorporated under Section 16 is kompetenz-kompetenz, meaning that the arbitral tribunal shall have the authority to decide on its jurisdiction. Under Indian law, the arbitral tribunal can ‘rule on its jurisdiction’ including ‘the existence or validity of the arbitration agreement.’ This principle has made sure that the scope of judicial involvement at the pre-reference phase is minimal. When the arbitral tribunal is empowered to decide on the said matters, the court’s interference is uncalled for. It is to be noted that under Section 11(6A) of the Arbitration Act, the court shall confine itself by looking at ‘the existence’ and not the validity ‘of an arbitration agreement’, while appointing an arbitrator. The court shall ensure that a mini-trial is not conducted, giving the due authority to the arbitral tribunal. By giving primacy to the said established principles, the apex court has rightly delivered by overruling the erroneous position of law as held in NN Global II and other cases.
Calling for a Prima Facie View
What needs sufficient emphasis is that the court has also clarified and rectified the earlier position of law as laid down in the case of Vidya Drolia v. Durga Trading Corp. In the latter case, the court therein had read the element of ‘validity’ as mentioned under Section 8 of the Arbitration Act into ‘existence’ as mentioned under Section 11 of the Arbitration Act by holding that an arbitration agreement would only said to exist when it is valid and enforceable in nature. Such a view only led to the courts’ unwanted intervention, thereby defeating the legislative intent of minimal judicial intervention, as can be seen from Section 5 of the Arbitration Act. It also very conveniently ignores the ‘prima-facie view test’ that has been adopted in India as well as several renowned global arbitral institutions.
The intent of bringing in the Arbitration Act was to provide for a speedy and effective arbitration system in India. This intent was further crystallized by implementing Section 11(6A) in 2015. The correct scope of Section 11(6A) was laid down in Duro Felguera, SA v. Gangavaram Port Limited (Duro Felguera), wherein the court held that, from a simple read, all that the court has to do is enquire about the existence of the arbitration agreement, “nothing more, nothing less”. The court cannot examine the validity of the agreement as the same should be determined by the tribunal. Therefore, the court has rightly held that it is only the ‘existence’ of the agreement that would be checked. The said parameter would be checked off by merely ensuring that the conditions as mentioned under Section 7 of the Arbitration Act are adhered to.
Once the requisite conditions as mentioned under Section 7 of the Arbitration Act are met, the referral court can either refer the parties to arbitration or appoint an arbitrator, as the case may be. This ‘prima-facie view’ gives way and effect to ‘kompetenz-kompetenz’, giving the arbitral tribunal the absolute jurisdiction to decide on issues like the ‘existence or validity of an arbitration agreement’. If the courts were to delve into matters concerning the stamping of ‘instruments’, it would only result in unnecessary and unwanted delays and costs, which is against the basic premise of arbitration. Therefore, the court has also rightly observed that it should be the arbitral tribunal that shall deal with the said issue.
Why were the Earlier Judgments Wrong?
Apart from undermining the fundamental principles, the earlier decisions on the very same question were either not applicable or that they were answered erroneously. For instance, the court in NN Global II, in its majority opinion, placed reliance on cases such as SMS Tea and Garware that had earlier dealt with a similar question of law. The court in SMS Tea relied on SBP & Co. v. Patel Engineering Limited and Another and National Insurance Company Limited v. Boghara Polyfab, both of them being passed prior to the 2015 amendment. The said cases gave wide powers to the court to conduct a detailed adjudication, which runs against the principles laid down under Section 11(6A) of the Arbitration Act.
Similarly, in Garware, despite considering both the 2015 amendment and the 246 Law Commission’s Report, the court went to hold that SMS Tea laid down the correct position of law. However, it is to be noted that this view cannot be accepted because of the non-obstante clause as provided under Section 11(6A) which states that notwithstanding any judgment, the court shall restrict itself only to the existence and validity of an arbitration agreement (thereby overruling SMS Tea and Garware). Further, the reliance on United India Insurance Company Limited v. Hyundai Engineering and Construction Company Limited (Hyundai Engineering) in Garware was wrong because the question before the court in Hyundai Engineering had nothing to do with the stamping of an arbitration agreement; rather, the question before the court was concerning the applicability of an arbitration agreement that would become operable only when the insurer accepts his liability. Therefore, the judgment in Hyundai Engineering ought to have been distinguished.
Moreover, to hold an unstamped arbitration agreement to be unenforceable because of the inadequacy of stamp duty runs against the intent of the Indian Stamp Act 1899 (Stamp Act). The primary objective is to enable the government to generate revenue. It cannot be used as a weapon to fight on the grounds of technicality. At most, an ‘instrument’ that is unstamped would be inadmissible in evidence, and not making it void and unenforceable. No provision of the Stamp Act provides for an agreement to be invalid on the mere grounds that adequate stamp duty has not been affixed.
Harmoniously Constructing the Way Ahead
The view that has been previously adopted by the court gave rise to multiple problems. For instance, if an emergency award has been passed, it could easily be challenged and set aside on the ground that the arbitration agreement is unenforceable and non-est in law on account of there being a deficit of stamp duty. Also, in cases where the arbitration proceedings have come to an end or where an award has been passed, the same can be challenged because of the unenforceability and invalidity of the arbitration agreement. Such a narrow and restrictive view was an obstacle to the quick resolution of disputes that is guaranteed by arbitration.
The above challenges are now put to rest with the 7-Judge bench unanimously holding that an unstamped arbitration agreement would not be invalid in the eyes of the law, by harmoniously construing the Arbitration Act, Stamp Act, and the Indian Contract Act 1872 (Contract Act). The court held that the Arbitration Act will have primacy over the Stamp Act and the Contract Act, for the following reasons viz. (a) the Arbitration Act is a special law and the Contract Act and the Stamp Act are general laws; and (b) the non-obstante clause in the Section 5 makes the Arbitration Act a special law in itself, by providing precedence over any law for the time being in force.
Thus, by harmoniously constructing the said legislations, a court under a Section 11 application will not dwell on the stamping of an agreement. Rather, after adopting a prime facie view as required under Section 11, the court will refer the matter to the arbitral tribunal or the arbitrator, who will then decide on issues pertaining to the inadequacy of stamp duty. It is not the case that an arbitrator cannot be a lawful authority to impound an agreement under Section 35 of the Stamp Act. Therefore, through the transfer of the responsibility of impounding an ‘instrument’ to the arbitral tribunal, the doctrine of kompetence-kompetence is given life, allowing arbitration proceedings to maintain their status as a quicker and viable alternative to litigation. By adopting such a view, the legislative intent of both the legislations is duly met.