Stamping Out Uncertainty: Resolving the Conundrum of Unstamped Arbitration Agreements

[Hrishikesh Goswami and Aryan Soni are 3rd year students at the Gujarat National Law University, Gandhinagar]

The enforceability of arbitration clauses within inadequately stamped agreements has been a longstanding matter of legal scrutiny, with divergent opinions and decisions from various courts, including the Supreme Court. However, a significant resolution was achieved on December 13, 2023, when a seven-judge bench of the Supreme Court addressed this matter in the case titled In Re: The Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996, and the Indian Stamp Act, 1899 (“In Re: The Interplay”). Through this judgement, the Court unambiguously clarified the legal position on the binding force of arbitration agreements included in inadequately stamped agreements. The Court ruled that arbitration clauses in agreements lacking proper stamping are enforceable, but inadmissible in evidence.

This post aims to present an evolution of the Indian judiciary’s stance on the specific legal question. It will analyse the recent Supreme Court judgment, followed by delving into the international perspective. The focus will be on elucidating the implications of this judgment on the Indian arbitration landscape. Additionally, the post will conclude with considerations for the way forward.

Legal Evolution: From Past Precedents to Present Perspectives

In SMS Tea Estates v. Chandmari Tea Co. P. Ltd. (2011), a division bench of the Supreme Court held that an arbitration clause embedded in an unstamped or insufficiently stamped document could not be enforced as per section 35 of the Indian Stamp Act, 1899. In response, in 2015, the Parliament introduced an amendment to the Arbitration and Conciliation Act, 1996, which inserted section 11(6A), which limited judicial intervention to simply determining the existence of an arbitration agreement rather than adjudicating on its validity.

However, in 2019, the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. clarified that the ruling in SMS Tea Estates remained unaffected by the amendment. It underlined that an agreement only becomes a contract when it is legally enforceable; because unstamped agreements are not enforceable, arbitration arrangements included within them are likewise not enforceable. This view was reiterated by a three-judge bench of the Court in Vidya Drolia v. Durga Trading Corporation (2020), asserting that the existence and validity of an arbitration agreement are intertwined, and that an arbitration agreement would not exist if it fails to meet mandatory legal requirements, including the payment of stamp duty.

Subsequently, in January 2021, in deciding NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 1) a three-judge bench of the Supreme Court questioned this stance, contending that an arbitration agreement independent of the underlying agreement should not be invalidated solely due to an insufficiently stamped main contract. The issue was then referred to a larger bench and the Court in a 3:2 majority on April 25, 2023 ruled in N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 2”) that an unstamped arbitration agreement is void and unenforceable.

The Court in NN Global 2 premised its decision on three key grounds. Firstly, it emphasised that only agreements enforceable by law qualify as contracts under the Indian Contract Act, 1872. The majority judgment clarified that section 5 of the Arbitration Act, emphasising minimal judicial intervention, does not negate sections 33 and 35 of the Stamp Act. In interpreting section 35 of the Stamp Act, the Supreme Court held that unstamped or insufficiently stamped documents are inadmissible and did not provide any exemptions. Secondly, the Court highlighted that agreements are typically enforced through civil courts. However, the Stamp Act’s scheme prevents authorities from recognising unstamped agreements, making them unenforceable until validated under the Stamp Act. This aligns withsections 2(j) and 2(g) of the Contract Act and effectively renders unenforceable contracts void. Thirdly, regardingsection 11(6A) of the Arbitration Act, the Court clarified that it requires an enforceable contract, not just an arbitration agreement, for the restriction to operate. The rationale behind this section was to curb excessive court interference, not to disregard existing laws like the Stamp Act. However, on September 26, 2023, a five-judge bench decided to reconsider NN Global 2 due to its broader implications and referred it to a seven-judge bench under the case name ‘In Re: The Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899.’

A Closer Look at Legal Stances in the UK and the US

In both the United Kingdom (“UK”) and the United States (“US”), a shared legal perspective emerges concerning the status of an arbitration agreement embedded within an invalid or ineffective contract. The principle asserts that the arbitration agreement can be distinctively severed and remains valid irrespective of the overall contract’s validity. A noteworthy case reinforcing this stance in the UK is Harbour Assurance Co. Ltd. v. Kansa General International Insurance Co. Ltd., where the UK Court of Appeal determined that the agreement to arbitrate retains its validity even if the encompassing contract is invalid. This perspective is further underscored by section 7 of the UK Arbitration Act, 1996, which explicitly declares that an arbitration agreement intended as part of another agreement shall not be considered invalid or ineffective due to the overarching contract’s invalidity, non-existence, or ineffectiveness. Similarly, in Buckeye Check Cashing, Inc. v. Cardegna, the United States Supreme Court emphasised the separability of an arbitration clause from the rest of the contract.

Decoding In Re: The Interplay

In overturning the NN Global-2, the bench led by Chief Justice Chandrachud conducted a nuanced examination of the interaction between the Arbitration Act and the Stamp Act. The focal point of the dispute presented before the Court revolves around the nature of arbitration agreements, often integral components of larger instruments left either unstamped or insufficiently stamped. This inadequately stamped underlying contract frequently triggered contentions asserting the inadmissibility of the arbitration agreement.

The recent judgment effectively reinstates the position established in NN Global 1 and aligns with the dissenting opinions of Justice Hrishikesh Roy and Justice Rastogi in NN Global 2. In NN Global-1, the Supreme Court explicitly differentiated the arbitration agreement from the underlying contract, deeming the insufficient stamping of these agreements a curable defect. Justice Hrishikesh Roy articulated a two-pronged perspective in his dissent within the NN Global 2 judgment. First, he asserted that failing to stamp an arbitration agreement constitutes a curable defect. Second, he underscored that the foundation of the Arbitration Act itself aligns with the principle of minimising judicial interference in the arbitral process. Additionally, Justice Rastogi’s dissent in NN Global 2 advocated for the tribunal’s independent consideration of all issues, excluding the existence of the arbitration agreement. These dissenting viewpoints collectively form the crux of In Re: The Interplay.

Chief Justice Chandrachud, representing the majority in In Re: The Interplay, establishes the initial finding that “improper stamping of an agreement renders it inadmissible in evidence and not void,” relying on the language of section 35 of the Stamp Act. He discerns a subtle distinction between an instrument being inadmissible and being unenforceable. Unlike an unenforceable agreement, which parallels a void agreement, an inadmissible agreement is a victim of a curable defect, similar to unstamped arbitration agreements.

Concurring with Justice Rastogi’s dissent, Justice Chandrachud asserts that, under the Arbitration Act (section 11(6A)), a court’s competence is limited to examining the existence of an arbitration agreement, with its authority restricted to the stage of the arbitrator’s appointment. Justice Roy’s prior dissent resurfaces as the majority in In Re: The Interplay and underscores the fundamental principle of judicial non-interference in arbitral proceedings, aligned with the UNCITRAL Model Law and inherent in the Arbitration Act.

The pivotal finding in In Re: The Interplay establishes an authoritative ruling on the separability of an arbitration agreement from the underlying contract. The Court emphasises that, unlike other contract clauses, the arbitration agreement involves the separate consent of parties to resolve disputes through arbitration. This distinct contractual freedom, exercised independently of the parent contract, enables the arbitration agreement to endure events like termination or breach of the underlying contract.

A significant judicial innovation in the judgment extends the Kompetenz-Kompetenz rule, empowering arbitral tribunals to decide on issues emanating from improperly stamped arbitration agreements. This extension is facilitated by a liberal interpretation of sections 33 and 35 of the Stamp Act, recognising that the arbitral tribunal, as an authority that derives its jurisdiction from the “consent of parties”, is competent to address and resolve disputes arising from such agreements.

Conclusion: Navigating the Future

The recent judgment, while addressing the contentious stance in NN Global-2, extends the scope of the kompetenz-kompetenz principle, reinforcing the authority of arbitral tribunals. This move aligns with legislative intent, reduces judicial intervention and fosters expeditious adjudication and initiation of proceedings. This alignment with the legal frameworks of the UK and the US reflects a convergence in interpretation. The decision underscores a concerted effort to streamline legal processes in India, aligning them with established international practices.

Consequently, the decision positively enhances the ease of arbitration in the country, marking a significant stride towards India’s aspirations to become a hub for international arbitration. However, several challenges might arise in the judgment’s aftermath, necessitating careful consideration and detailed discussion. Potential issues include the slowdown of arbitral proceedings due to tribunals having to address stamp duty-related disputes. The improper stamping of arbitration agreements may also become a strategic delay tactic for parties with malicious intent. A viable solution lies in promoting a disciplined and widely accepted practice of separately paying stamp duty before commencing arbitrations.  

Hrishikesh Goswami & Aryan Soni

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