On 13 December 2023, a seven-judge bench of the Supreme Court rendered its verdict in In Re: The Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996, and the Indian Stamp Act, 1899 (“In Re: The Interplay”) on the validity and enforceability of unstamped arbitration agreements. This issue had become a matter of some consternation for the arbitration community due to a series of vacillating decisions by the country’s top court that led to a great deal of uncertainty afflicting this form of dispute resolution. This week’s ruling sets at rest the debate by articulating the position as it always should have been: that unstamped arbitration agreements are not void or unenforceable but merely inadmissible in evidence.
A guest post on this Blog succinctly outlines the somewhat lengthy chronology of how matters led to the legal poser escalating before the seven-judge bench, and also highlights the key aspects of the ruling. Here, I make two limited points. First, while welcoming the outcome of the ruling in In Re: The Interplay, I argue that the nub of the issue lies in the determination of the fate of an unstamped agreement in terms of the Indian Stamp Act, 1899 as it applies to any agreement for that matter, let alone an arbitration agreement. It is a misinterpretation of this axiomatic legal facet in the judicial thread beginning from a division bench ruling SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd (2011) and culminating in a five-judge bench ruling in N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 2”), with some silver linings along the way in the form of a three-judge bench ruling in 2021 in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 1) that led to the current predicament. Second, while a quintessential interpretation of stamp law would have largely resolved the matter, the Supreme Court in In Re: The Interplay goes to great lengths to preserve the arbitrability of disputes and to provide ultimate determinative authority to the arbitral tribunal to decide on matters relating to unstamped or insufficiently stamped arbitration agreements.
The tenor of this ruling demonstrates the impetus on the part of the Supreme Court to rein in judicial outcomes on this area of the law. As the Court notes, “[t]he maintenance of judicial discipline is important for ensuring consistency and certainty in the development of law” [para 23], and that this “raises question [sic] of seminal importance with regard to the interpretation and application of the arbitration law in India, which in turn has implications for business and commerce in the country.” [para 28]
Fate of an Unstamped Arbitration Agreement
The crux of the matter pertains to section 35 of the Stamp Act, which provides that a document chargeable to stamp duty shall not be admissible in evidence by any person who has the authority to receive evidence either by law (i.e., legal) or by the consent of parties (i.e., contractual), unless such instrument is duly stamped. Section 33 of the stamp legislation confers authority upon the persons who have the authority (either legally or contractually) to impound unstamped documents. On the other hand, section 42 states that a previously unstamped instrument can be admissible in evidence if the concerned party has subsequently paid the stamp duty along with the prescribed penalty.
A plain reading of section 35 of the Stamp Act indicates that an unstamped or inadequately stamped document is only inadmissible in evidence. Nowhere does the statute even remotely indicate that the document is invalid or unenforceable. The main judgment by Chief Justice Chandrachud places considerable emphasis on the crucial distinction between inadmissibility of an instrument in evidence on the one hand, and its invalidity or unenforceability under law on the other. It notes:
“The effect of not paying duty or paying an inadequate amount renders an instrument inadmissible and not void. Non-stamping or improper stamping does not result in the instrument becoming invalid. The Stamp Act does not render such an instrument void. The non-payment of stamp duty is accurately characterised as a curable defect. The Stamp Act itself provides for the manner in which the defect may be cured and sets out a detailed procedure for it. It hears mentioning that there is no procedure by which a void agreement can be ‘cured’”
As the Court itself notes, and as transactional practitioners would constantly encounter on a regular basis, this has been the longstanding position of the law under the Stamp Act. Why then did this lead to a high level of judicial indeterminacy? Part of the concern, it seems to me, is how the Court previously interpreted the interplay between the stamp duty legislation and contract law.
The Intersection between the Stamp Act and the Contract Act
Perhaps the legal perplexity is attributable to a previous misreading of section 2(g) of the Contract Act, which provides that an “agreement not enforceable by law is said to be void”. For example, the majority in NN Global 2 concluded that an unstamped or insufficiently stamped agreement is not enforceable and, hence, is void in terms of section 2(g). This is because the Court in NN Global 2 linked the non-payment of appropriate stamp duty to the fact such an agreement would therefore be unenforceable as a matter of contract law. It is this judicial misconception that the Court seeks to rectify in no uncertain terms in In Re: The Interplay by observing that NN Global 2 effectively conflated “the distinction between enforceability and admissibility.” [para 47]
The Intersection between the Stamp Act and the Arbitration Act
The majority in NN Global 2 extended the above notion of voidness of an unstamped or inadequately stamped instrument into the interpretation of the Arbitration Act. Under section 11(6A) of that legislation, courts, when called upon, are to confine themselves “to the examination of the existence of an arbitration agreement.” NN Global 2 treated the term “arbitration agreement” to mean a contract that fulfills the requirements of the Contract Act, which the Court found to be incorrect in In Re: The Interplay for the reasons outlined earlier.
More interestingly, the Court sought to deploy a harmonious interpretation of the Stamp Act and the Arbitration Act (as well as the Contract Act) in arriving at its conclusion. It found that the Arbitration Act is a special law, while the Contract Act and Stamp Act are general laws, with the general laws ceding any overlapping territory to the special law. As for the purpose of these legislation, it is clear that the Stamp Act is a revenue legislation that must be interpreted in the light of that purpose. As far as the Arbitration Act is concerned, the Supreme Court engaged in a detailed analysis of the evolution of the legislation, underscoring the fact the Arbitration Act is a complete code, which thereby minimizes the intervention of the courts in the adjudicatory process. Specific reliance was placed on section 5 of the Arbitration Act, which limits judicial intervention in the arbitral process, and that too “[n]otwithstanding anything contained in any other law for the time being in force”.
The effort of the Court in building up the framework under the Arbitration Act is ultimately to delineate the powers of the arbitral tribunal to rule on its own jurisdiction. Here, the Court also highlights the concept of severability whereby the validity of the arbitration agreement is untouched by the legal fate of the underlying commercial contract to which the arbitration agreement relates. It does so by engaging in a comparative analysis among different leading arbitration jurisdictions around the world. In the Court’s words: “The separability presumption gives effect to this by ensuring the validity of an arbitration agreement contained in an underlying contract, notwithstanding the invalidity, illegality, or termination of such contract. Finally, the Court dwells upon the doctrine of kompetenz-komptenz by which “arbitrators are empowered to make a final ruling on their own jurisdiction, with no subsequent judicial review of the decision by any court.” [para 115]
A lengthy treatise-like approach adopted on matters of arbitration law enables the Supreme Court to deal with the more important question of whether arbitration agreement is adequately stamped is a jurisdictional issue or whether it is a matter that courts can exercise their oversight domain. The Court unequivocally answers the question by stating that “the issue of stamping is a jurisdictional issue. The principle of negative competence-competence requires the courts to leave the issue of stamping to be decided by the arbitral tribunal.” [para 132] Hence, issue of stamping are within the domain of the arbitrators, at least to begin with.
At the same time, the Court sounds a note of caution:
“The interpretation accorded to the Stamp Act by this Court in the present judgment does not allow the law to be flouted. The arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The interpretation of the law in this judgment ensures that the provisions of the Arbitration Act are given effect to while not detracting from the purpose of the Stamp Act.”
In the end, the harmonious interpretation of the legislation would lead to a situation where the efficacy of the arbitration process can be preserved without undermining the revenue implications for the state from a potential loss of stamp duty. The Court has taken on the challenge to “preserve the workability and efficacy of both the Arbitration Act and the Stamp Act.” [para 165]
Concluding Remarks
In all, the ruling In Re: The Interplay and the fact that it was rendered by a seven-judge bench of the Supreme Court (a rarity in commercial matters) exhibits the keenness of the Court to resolve once and for all a somewhat confounding legal issue that has left numerous arbitration agreements in suspended animation. While at the first blush, and as discussed based on the Court’s present ruling above, the matter appears rather straightforward, the judicial history that led to the present reference has been an arduous one that has been riddled with divergences of judicial opinion. It is intriguing that within only eight months from a split verdict (3:2) of the Court in NN Global 3 (25 April 2023) ruling that unstamped arbitration agreements are void and unenforceable, the tide turned towards a unanimous ruling of seven judges in In Re: The Interplay (13 December 2023) holding that such agreements are only inadmissible in evidence and not void or unenforceable.
This has enormous implications at a practical level too. Under the NN Global 2 scenario, unstamped or inadequately stamped arbitration agreements were essentially outside the domain of arbitral tribunals. Under the In Re: The Interplay dispensation, those very tribunals are conferred with the power to determine the fate of such arbitration agreements, and even to impound such agreements, if required. As the earlier guest post too notes, arbitral tribunals are likely to be inundated with questions relating to the adequacy of stamp duty paid on arbitration agreements that activated the disputes before them, thereby arguably affecting the efficacy of proceedings. The arbitral ecosystem may have to attune itself to this reality by equipping itself to deal with these matters efficaciously.