[Akash Kumar Surya is a 3rd year B.A., LL.B. (Hons.) student at the National Law School of India University, Bengaluru]
In the case of In Re: Interplay the Supreme Court recently delivered its verdict on the legal position of unstamped arbitration agreement in India. The judgement has settled the issue, bringing clarity on a matter whose jurisprudence has otherwise been marked by chequered approaches. The key debate in this context has been this: how is the court expected to approach an application under section 11 of the Arbitration and Conciliation Act, 1996 when an objection regarding the invalidity of the arbitration agreement is raised on the grounds that it is contained in an inadequately stamped contract.
In this post, I firstly comprehensively examine the manner in which this question has been dealt with by the courts in India, including the highest court and, secondly, I analyse the present judgment to highlight the novel approach it adopted in settling the issue.
Validity of Unstamped Arbitration Agreements: The Traditional View
The Supreme Court dealt with this issue for the first time in the case of SMS Tea, where the question before the court was whether an arbitration agreement in an unstamped contract could be acted upon or not. Answering this question in the affirmative, the Supreme Court relied on section 35 of the Stamp Act to observe that it did not permit the court to admit an unstamped instrument containing an arbitration clause in evidence for any purpose. It further reasoned that since the arbitration agreement was a part of the instrument itself, it could not be acted upon under a section 11 application unless the underlying instrument is adequately stamped. The court drew an analogy from the Registration Act as well. It noted that the Stamp Act did not contain a provision similar to section 49 of the Registration Act which permitted the courts to act upon arbitration clauses contained in unregistered contracts in order to establish collateral transactions. So, had a section 11 application been made in terms of an arbitration clause contained in an unregistered instrument, the court could have appointed the arbitrator in view of section 49. However, the Supreme Court reasoned that a lack of a similar provision in the Stamp Act bound its hands and constrained it to hold that an unstamped arbitration agreement could not be acted upon.
However, SMS Tea was delivered prior to the introduction of section 11(6A) to the Arbitration Act. Beginning with a non-obstante clause, this provision states that irrespective of any judgement, order or decree of a court, the court’s examination of the arbitration agreement at the section 11 stage was to be confined only to the determination of the “existence” of an arbitration agreement. Note that it only refers to the notion of existence and not validity of the arbitration agreement, which is a separate exercise altogether. Thus, the legislative intent was clearly to narrow down the scope of judicial intervention at this stage. Hence, the force of the judgement in SMS Tea seemed to be legislatively overturned.
However, in the subsequent case of Garware, which was decided after the introduction of section 11(6A), the Supreme Court again re-affirmed the view taken in SMS Tea. In Garware, the Court simply observed that an arbitration agreement could not be bifurcated from the underlying contract. It acknowledged that while section 11 (6A) seemed to limit the scope of judicial intervention, section 33 of the Stamp Act required the court to first impound the unstamped instrument and not act upon it unless the stamp duty is paid. Since the Stamp Act applied to entire instrument, and the arbitration clause was contained in that very instrument, the Court reasoned that it was impossible to bifurcate the arbitration agreement from the underlying unstamped instrument.
Therefore, in Garware, the Court suggested that even the introduction of section 11(6A) did not change anything in this context as it did not address the basis of the judgement in SMS Tea, which was that sections 33 and 35 of the Stamp Act applied to the whole of the unstamped instrument; hence, it was impossible to bifurcate the arbitration agreement from the main contract and the court was bound to apply the norm set out in sections 33 and 35 while dealing with an unstamped arbitration agreement at the stage of appointing arbitrators under section 11.
This line of reasoning was further solidified in the case of Vidya Drolia where the Supreme Court adopted a contextual interpretation of section 11(6A) to observe that the existence of an arbitration agreement presupposed its validity, thereby making them intertwined. Thus, according to the Court, an arbitration agreement existed only when it was valid and enforceable. In this way, the Court effectively nullified the true import of section 11(6A) and held that an unstamped arbitration agreement could not be acted upon at section 11 stage.
Welcome Winds of Change: Overcoming the Roadblock Introduced by NN Global II
The direction of the winds however changed with the judgement in NN Global I where, on the same issue, the Supreme Court held that an unstamped arbitration agreement was not void and could be acted upon for appointing arbitrators. The basis of the Court’s judgement was that the arbitration agreement was independent and separate from the underlying contract due to the operation of section 16 of the Arbitration Act which recognises the principle of arbitral autonomy and posits the doctrines of separability and competence-competence as the fundamentals of arbitration in India. On this basis, the Court reasoned that even if an unstamped contract was assumed to be invalid and unenforceable by virtue of section 35 of Stamp Act, it would not impact the arbitration agreement contained therein whatsoever as an arbitration agreement is a separate agreement meant to resolve disputes arising out of the main agreement.
The Court construed sections 33 and 35 of Stamp Act and section 11(6A) of the Arbitration Act harmoniously in the following manner: although sections 33 and 35 apply to the instrument in whole thereby barring the court from acting upon it, the arbitration agreement contained has an independent existence due to principle of separability contained in section 16 of the Arbitration Act. Hence, even if the main contract were assumed to be invalid for being unstamped, the court could still act in pursuance of the arbitration agreement. The Court also expressed doubts on the correctness of the reasoning in Vidya Drolia but refrained from dealing with the view that since existence presupposed the validity and enforceability of an arbitration agreement, section 11(6A) did not reduce the scope of intervention.
Once again, however, the Supreme Court went back to the first line of view as adopted in SMS Tea through its judgement in NN Global II, where it overruled NN Global I on the ground that the principle of separability as contained in section 16 of the Arbitration Act would not apply in context of the duties of a court under sections 33 and 35 of the Stamp Act. The basis of the Court’s reasoning was once again the fact that if an arbitration agreement contained in an unstamped instrument were permitted to be acted upon, it would mean that the instrument is being used to establish a collateral transaction which is not permissible since the Stamp Act lacks a provision like section 49 of Registration Act. Thus, the Court held that if the contract was unstamped, it was duty bound to impound it under section 33 of Stamp Act and was constrained to not act upon the arbitration agreement contained therein.
This decision was criticised vehemently as it went back to a school of thought that ended up undermining one of the most fundamental principles of modern arbitration: arbitral autonomy. By permitting judicial interference for questioning the validity of the arbitration agreement itself, it held the very reference to arbitration at the section 11 stage in a state of suspended animation. It was in this context that the present judgement brings a welcome and well-needed change to settle the law on question.
Unpacking the Present Judgement: A Novel Approach to the Old Problem
The seven-judge bench in this case overruled NN Global II, and has the effect of affirming the ratio in NN Global I.However, in doing so, the Court adopted a novel route to justify its position which is analysed below.
Firstly, it relied on section 5 of the Arbitration Act which intends to minimise judicial interference in arbitral process by limiting it only to matters expressly provided for under Part 1 of the Act. The Court noted that section 5 began with a non-obstante clause and, as a result, it prevailed over the duties of the court envisaged in sections 33 and 35 of the Stamp Act. Section 5 thus contains a positive facet, which permits intervention for matters expressly provided for under Part 1 of the Act and a negative facet, which does not permit intervention in situations where the arbitral tribunal has been given exclusive jurisdiction. Now, section 16 of the Act vests exclusive jurisdiction to the arbitral tribunal to determine its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement.
Therefore, the Court held that the combination of sections 5 and 16 was that judicial authorities could not interfere in matters dealing with the jurisdiction of the tribunal. Moreover, since the power of examining the validity of arbitration agreement for determining the jurisdiction of the tribunal has been vested solely upon the tribunal, it implies that courts cannot decide the question of validity of arbitration agreement in a section 11 application and have to limit their only to examine for its existence.
Secondly, the Court observed that the Arbitration Act was a self-contained code, due to which matters like appointment of arbitrators, determination of tribunal’s jurisdiction, and the like, will have to be strictly decided in accordance with the Arbitration Act. The Court reasoned that in a section 11 application the scheme of the Arbitration Act takes precedence over other legislations like the Stamp Act.
Lastly, the Court observed that by virtue of section 16 the arbitration agreement was to be treated as independent and separate to the main contract. This was an application of the principle of separative presumption which provides contractual freedom to the parties in settling disputes through arbitration to the exclusion of national courts. After a thorough discussion of precedents on this issue, the Court highlighted the significance of respecting separative presumption. It observed that the separative presumption was fundamental to give effect to the intention of the parties and for the meaningful operation of the competence-competence doctrine. Hence, the Court held that the arbitration agreement was completely separate from the underlying contract. On this basis, the Court concluded that even if the underlying contract were assumed to be unenforceable for being unstamped, it would not affect the enforceability of the arbitration agreement. Thus, objections relating to stamping, which can be classified as a determination of the very validity of the arbitration agreement, cannot be made at section 11 stage and such a question falls within the exclusive jurisdiction of the tribunal.
Conclusion
The judgement under discussion reflects the Supreme Court’s awareness of the realities of arbitration process. Through its conclusions, the Court has achieved two important things. Firstly, it has substantially reduced the time and resources that parties would have had to spend in court litigation as opposed to a relatively simpler process in the tribunal. Secondly, it balances the objectives of both the Arbitration Act and the Stamp Act. By leaving the question of stamping to be determined by the arbitral tribunal, the Court is respecting the legislative intent of minimal judicial intervention at pre-arbitral stage, with the tribunal nevertheless obtaining the opportunity to exercise the powers under sections 3 and 35 of the Stamp Act if it finds the contract to be unstamped. In this manner, the Court has ended up closer to the most efficient outcome that facilitates the object of each of the two pieces of legislation.
– Akash Kumar Surya
