[Basil is a student at National Law University Jodhpur.]
Arbitration is a commonly used alternative dispute resolution method for commercial conflicts. It entails a contractual agreement between two parties, specifying that any disputes arising between them will be resolved through arbitration. However, if the agreement lacks the required stamp, it can be disputed regarding its enforceability, according to the provisions outlined in the Indian Stamp Act 1899 (Stamp Act).
According to the Stamp Act, any agreement that lacks the proper stamp cannot be presented as evidence in a court of law. Consequently, an unstamped agreement cannot be utilized to prove the presence of an arbitration agreement, which is a necessary requirement for initiating arbitration proceedings. The Supreme Court (SC) provided a final resolution to this issue in the case of NN Global Mercantile Private Limited v. Indo Unique Flame Limited (NN Global). In this article, the author analyses the said judgment by comparing it to the pre-conditions of this judgment and its impact on the arbitration mechanism in India.
Situation Before the Proclamation of NN Global
The Stamp Act necessitates the payment of stamp duty upon the execution of specific documents. According to Section 33 of the Stamp Act, it is the duty of the courts to examine whether an instrument has been properly stamped. Furthermore, Section 35 of the Stamp Act specifies that an inadequately stamped contract cannot be admitted as evidence in a court of law. The issue of whether an arbitration agreement contained within a contract, which lacks the appropriate stamp as per the provisions of Sections 33 and 35 of the Stamp Act, can be enforced and binding has been a topic of extensive deliberation in recent times.
In the SMS Tea Estates (Private) Limited v. Chandmari Tea Company (Private) Limitd case, the SC stated that an unstamped agreement can be enforced in arbitration if it is stamped before filing the arbitration petition. The court emphasized that the Stamp Act aims to ensure government revenue from agreements, not to invalidate them. Hence, the court held that an unstamped agreement can be stamped before initiating the arbitration petition, allowing the enforcement of the arbitration agreement within it.
Additionally, the court ruled that an unstamped agreement cannot enforce its arbitration agreement if it is not properly stamped before the arbitration petition is filed. The court acknowledged that the Stamp Act aims to prevent the evasion of stamp duty, and enforcing an unstamped agreement would contradict the objectives of the statute. Therefore, the court held that if an agreement remains unstamped at the time of filing the arbitration petition, the contained arbitration agreement cannot be enforced.
In Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited, the SC addressed the issue of appointing an arbitrator when the agreement, including the arbitration clause, lacks the necessary stamp. The court determined that the arbitration clause cannot be treated as separate from the agreement as a whole. They clarified that the Stamp Act applies to the entire agreement, making it impossible to enforce the arbitration clause independently if the agreement is not properly stamped.
The SC established a principle that if a contract with an arbitration clause lacks proper stamping, it cannot be enforced. However, the court reconsidered its stance, overturning previous judgments on the validity and enforceability of unstamped arbitration agreements.
NN Global
Interplay between the Arbitration Act and the Indian Contract Act 1872
In the present case, the SC made an observation that only agreements that can be enforced by law are regarded as contracts according to the Indian Contract Act 1872. The court then proceeded to interpret Section 35 of the Stamp Act, which states that any document lacking appropriate stamping or having insufficient stamp duty cannot be admitted as evidence. The court also noted that this provision is explicitly worded and does not provide any exceptions for unstamped documents, unlike unregistered registerable documents.
The court observed that unstamped or insufficiently stamped agreements cannot be enforced as per the Stamp Act. Such agreements are not considered legally valid until they undergo the validation process outlined in the statute. The court also noted that the arbitration clause, being independent of the main contract, cannot be used if the instrument is unstamped, as it would create a separate transaction.
Section 33 and Section 35 of the Stamp Act
The court interpreted Section 33 of the Stamp Act as whenever an authority is presented with an instrument or document, it is their obligation to assess whether the proper stamp duty has been paid. If it is discovered that the instrument does not comply with the stamping requirements mentioned in Section 33(2), the authority is required to seize the said instrument.
While interpreting Section 35 of the Stamp Act, the court stated when an instrument is considered inadmissible because it is either unstamped or inadequately stamped, it can still be made admissible by paying the required stamp duty and a penalty later on. This demonstrates that the requirement stated in Section 35 is not strict and can be addressed at a later stage. An instrument that lacks proper stamping does not lose all validity; instead, it can be legalized and used as evidence once the conditions outlined in the proviso to Section 35 are fulfilled.
Section 11 of the Arbitration Act 1996
Regarding Section 11(6A) of the Arbitration and Conciliation Act 1996 (Arbitration Act), the court stated that a valid contract is necessary for this provision to apply. It means there must be a legally enforceable agreement, not just an arbitration agreement. The aim of Section 11(6A) is to reduce court interference and not to ignore other laws like the Stamp Act.
The court also discussed the submission of a certified copy of the arbitration agreement when appointing arbitrators. It was argued that since the certified copy cannot be held back under the Stamp Act, the court cannot consider the sufficiency of stamp duty. The court clarified that while a certified copy is required, the original document must show proof of stamp duty payment. If the original document is not adequately stamped, the court cannot take any action based on the certified copy, even if it can’t be held back under the Stamp Act.
The doctrine of severability in arbitration
In international arbitration, it is widely accepted that an arbitration agreement is separate from the underlying commercial contract. This principle, known as severability or separability, means that if the main contract becomes invalid or ends, the arbitration agreement remains valid. The UNCITRAL Model Law and the Arbitration Act recognize this distinction. As long as the arbitration agreement is not null, inoperative, or impossible to fulfil, parties must resolve their disputes through arbitration.
Doctrine of kompetenz-kompetenz
The doctrine of kompetenz-kompetenz was also raised as an argument in the NN Global case. This doctrine states that the arbitral tribunal has the competence to determine and rule on its own jurisdiction, including objections regarding the existence, validity, and scope of the arbitration agreement. Over time, this doctrine has developed to minimize court interference at the pre-arbitration stage and to discourage baseless challenges to the tribunal’s jurisdiction. In the NN Global case, it was contended that considering the legislative intent, the goal should be to facilitate a seamless and unobstructed process for seeking arbitration. In simpler terms, unless blatantly void, decisions regarding the arbitrability of a subject matter should be left to the arbitral tribunal.
The dissenting opinion
The minority held that the court could skip examining stamp duty before referring the case to arbitration. They believed it would complicate the process and cause delays. They also noted that stamping is a curable defect, so it doesn’t invalidate the arbitration agreement. They emphasized party autonomy in arbitration and the need for limited court intervention, and mentioned that Section 11(6) of the Arbitration Act restricts judicial interference to administrative orders.
The minority view stated that all disputes should be resolved by the arbitrator(s) under Section 16 of Arbitration Act, including the examination of stamp duty, to prevent delays in initiating proceedings.
Analysis
The recent decision presents a dilemma for arbitration agreements executed outside India. Instruments executed abroad are not stamped according to Indian fiscal laws. While initially valid and enforceable outside India, they lose their validity upon entry into the country unless properly stamped. The stamping requirements depend on the jurisdiction where the document is used to enforce the arbitration clause. For instance, in Mumbai, the Maharashtra Stamp Act 1958 applies. The stamp authorities of that jurisdiction handle the adjudication process, which may involve fees and specific procedures. Parties opting for arbitration must be aware of the stamping laws in the relevant state and anticipate potential delays in the adjudication process.
The SC’s majority view lacks clarity on how parties should handle urgent requests for interim relief or emergency awards when there are doubts about the adequacy of stamp duty. According to the NN Global decision, it appears that parties must first address the stamping issue before proceeding with such requests, which could be particularly challenging in international commercial arbitrations governed by Part I of the Arbitration Act. Even if interim relief is granted in the name of justice, if it later turns out that the arbitration agreement was not properly stamped, it could invalidate the entire agreement and any outcomes resulting from it.
In contrast to the majority judgments, the minority judgments acknowledge the principles of severability and separability within arbitration agreements, which align with international standards. One could argue that these minority judgments better capture the true intent and essence of the Arbitration Act, as they seek to minimize judicial interference.
Also, the Delhi High Court (DHC), in the case of ARG Outlier Media Private Limited v. HT Media Limited, held that if an agreement with insufficient stamping is admitted as evidence and used as the basis for an arbitral award, it cannot be challenged under Section 34 of the Arbitration Act. The DHC invoked Section 36 of the Stamp Act which prohibits questioning the admissibility of an instrument once it has been accepted as evidence, except under Section 61 of the Stamp Act. The court made it clear that it does not act as an appellate court in relation to the award, thereby lacking the powers granted by Section 61 of the Stamp Act. Even if Section 61 were found to be applicable, the court’s authority would be confined to impounding the document and referring it to the Collector of Stamps to ascertain the proper stamp duty and penalty. However, this process would not have any bearing on the enforceability or validity of the arbitral award.
In conclusion, the recent ruling by the larger bench in NN Global has once again raised questions about the interplay between substantive contracts and the arbitration clauses contained therein. Going forward, parties will need to be cautious about complying with the stamp duty payment requirements mandated by the Stamp Act. Additionally, the decision has also created a problem for parties using institutional arbitration. Even after fixing stamping defects, they may have no enforceable remedy. The strict interpretation of the fiscal law allows the other party to deny rights, leaving the claimant unable to enforce valid contractual rights. This makes institutional arbitration riskier than ad hoc arbitration. Without government intervention, institutional arbitration may no longer be preferred in India.