The Dilemma: Does stamping validate the arbitration agreement?

• By: 'Singhania & Partners LLP'
• Date: 25-Jan-2024
• Post in: Arbitration

In the catena of judgments that we have seen time and again dealing with the relationship between arbitration act and the stamp act, we see how there one approach has been only taken by the courts when dealing with dispute involving the two acts. In December 2023 there came some clarity in this intertwined relationship. The existence of arbitration agreement was shown to have an independent identity which doesn’t vanish or become void without stamping. Therefore, the validity and the inadmissibility is all that makes the difference, the agreement survives without stamping or insufficient stamping by curing the defects and getting the agreement sufficiently stamped, thereby, becoming admissible in the eyes of law. Moreover, the arbitral tribunal can deal with the issues first before it is dealt with directly by the courts at the pre-reference stage, thereby, giving the independence to the arbitral tribunal. 

The abovesaid para is the gist of what was held in the judgment passed by the seven judge bench of the Supreme Court in Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, wherein, the court unanimously observed that the arbitration agreement is not void but it is inadmissible and the thin line of difference that lies in these two terms and their effect is whether the document is admissible into evidence and the proof of genuineness of the document. The judgment very rightly traversed through the interplay between the arbitration agreement and stamping and detangled the long term dilemma that lay tangled up with no clarity in sight.

The 7-judge bench overturned the decision in NN Global Mercantile v. Indo Unique Flame and SMS Tea Estate v. Chandmari Tea Co. Pvt. Ltd., wherein this Hon’ble Court held that an unstamped arbitration agreement is void and unenforceable. This decision led to long deliberations and discussions on its effect on the arbitration process and the delay caused by such unnecessary judicial interventions. The 7-judge bench brought to light the true intent and objective behind the Arbitration and Conciliation Act, 1996. The kompetenz -kompetenz principle finds mention under Section 16 of the Act, thereby authorizing the arbitral tribunal to determine its jurisdiction. From this follows the validity of the arbitration agreement as the same confers powers and authorizes the arbitral tribunal to come into being in the first place. Once the court usurps this important function of the tribunal, it leaves the kompetenz-kompetenz principle redundant. Thus, handing over this power to the courts defeats the very purpose for which the Arbitration and Conciliation Act, 1996 was brought into force. The judgment is laudable on how it tried to preserve the very essence of the Arbitration and Conciliation Act, 1996 and defined the contours of both the conflicting acts and also the intervention of courts and the independence of the arbitral tribunal.

History: Says a lot about why we are where we are

The 7-judge bench overruled the decision in NN Global Mercantile v. Indo Unique Flame and SMS Tea Estate v. Chandmari Tea Co. Pvt. Ltd. but a lot is still left to be read in the timeline between the two judgments that have been overruled.

It started in 2011, when a 2-judge bench of the Hon’ble Supreme Court in SMS Tea Estate v. Chandmari Tea Co. Pvt. Ltd.^[1] made reference to Section 33 and 35 of the Indian Stamp Act and held that an arbitration agreement in an unstamped contract can not be acted upon due to the bar placed by Section 35 of the Indian Stamp Act. Subsequently, with the 2015 Amendment Act, Section 11 (6-A) was inserted to limit the judicial interference and limiting it to only the examination of the existence of an arbitration agreement when adjudicating Section 11 application.

Even after such clear and well-defined provision, the deliberations on the contours of the judicial interference were deliberated upon with further queries on whether the validity or stamping of the agreement comes in the ambit of the courts. One such query was brought about in the year 2019 in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering^[2], wherein the Hon’ble Supreme Court furthered the ruling of the SMS Tea Estate case stating that the Section 11(6-A) brought no change to the stance held in 2011. The Court held that an arbitration agreement in an unstamped contract could not be acted upon and its existence will be questionable until the contract is duly stamped. The whole intent behind Section 11 (6-A) was circumvented, thereby, expanding the scope of judicial interference. Thereafter, the judgments passed from 2021 to 2023 followed the same stance as held in the above stated judgments, bringing in no new perspective to the relation between the two acts and conferred a wide field of interference to the courts and dimming the kompetenz-kompetenz principle safeguarding the arbitral tribunals independence and the objective of the Arbitration and Conciliation Act.

It was in 2021, that a three-judge bench of the Hon’ble Supreme Court in Vidya Drolia v. Durga Trading Corporation^[3], approving the reasoning of the two judge bench further concretized their reasoning by stating that the validity and existence of the arbitration agreement are so intertwined that the existence of an arbitration agreement comes into play once it satisfies all the mandatory requirements as provided under law. The dispute over this dilemma didn’t stop here but took a slight turn when a three judge bench in NN Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.^[4] showed some hesitancy towards the view taken by the court previously in the above said matters. The bench referred the issue of invalidity and unenforceability of the arbitration agreement in an unstamped contract to the 5-Judge bench of the Hon’ble Supreme Court. In pursuance of this, the 5-Judge bench in 2023^[5] held by a majority of 3:2 the observation that an unstamped instrument which is not a contract and is not enforceable cannot exist in law. Here, it feels like it all came back to square one as the relevance of stamping to validate the instrument came back to discussion. Herein, the wide array of powers in the hands of the court was furthered when the bench made an observation on the process under Section 11 of the Act and the courts power to appoint an arbitrator and simultaneously examining as well as impounding the unstamped instruments. The observation by the Hon’ble Supreme Court would be a precedent for the times to come, thus, calling for a revisit or a reconsideration of this issue would bring about a more conscious and well thought decision. In view of this, the bench placed the matter before a 7-Judge bench for reconsideration of the majority view taken in the NN Global matter by the 5-Judge bench.

Here comes the landmark judgment that decided the conundrum that led to numerous judgments with numerous observations on the relationship between arbitration agreement and stamping. It was on 13^th December 2024, when a 7-Judge Constitution Bench of the Supreme Court in Re Interplay Between Arbitration Agreements Under The Arbitration and Conciliation Act 1996 and The Indian Stamp Act 1899^[6] unanimously overruled the decision in NN Global Mercantile v. Indo Unique Flame, wherein this Hon’ble Court held that an unstamped arbitration agreement is void and unenforceable. Furthermore, the court ruled that the issue of stamping of an instrument is not to be decided by the court under Section 8 or 11 of the Arbitration and Conciliation Act, 1996. The judgment dealt in detail with the history of this issue and the dilemma that lay around this issue. The elucidation of the international parameters led to more clarity on the varied perspectives and procedures that prevail and how arbitration is given an independent filed of its own to play with its rules, not calling in for unnecessary and persistent interference of the judiciary, thereby, giving the kompetenz-kompetenz principle alive, to kindle the intent behind the birth of such alternate dispute resolution mechanisms. There are some brief takeaways from this judgment for more perspicuity on this issue:

1. Validity of an unstamped or an insufficiently stamped agreement:

It was observed that the non-payment or inadequate payment of stamp duty will render the instrument inadmissible in law but not invalid. In his concurring decision, Justice Sanjeev Khanna held that such unstamped agreements are not rendered void or void ab initio.

2. Kompetenz-Kompetenz and the Doctrine of Separability:

We find mention of this concept under Section 16 of the Arbitration and Conciliation Act, 1996 wherein it speaks about the intertwined nature of the two concepts. The whole idea behind this concept is to give an independent standing to the arbitration agreement, separate from the main contract, thereby, preserving the dispute resolution mechanism provided under the contract. It is also to keep the interference of courts at bare minimum at the referral stage.

3. Curable defect:

The unstamped or insufficiently stamped document is a curable defect not rendering the document invalid but just inadmissible in law, the same can be admitted once the defect of stamping is cured.

4. NN Global 2 and SMS Tea Estate overruled:

The bench overruled the observations made in these two judgments, wherein, the unstamped arbitration agreement was held to be invalid and unenforceable, thereby, rendering Section 5 of the Act as redundant.

5. Validity of arbitration agreement at pre-reference stage is out of courts league:

The power to decide the issue of stamping at the stage of Section 11 or Section 8 of the Act will be against the intent of the Act. The kompetenz-kompetenz rule clearly outlines the boundary of examination that is confined to prima facie ruling on the existence of an arbitration agreement. Hence, the court overruled SMS Tea Estates and NN Global 2 being contrary to the observations made by the 7-Judge Constitution Bench. Furthermore, the court overruled para 22 and 29 of the Garware Wall case.

The Hon’ble Supreme Court with these observations have cleared way for the smooth functioning of arbitrations in India and have circumscribed the extent of interference by courts in arbitration matters to further the true intent of the Act.

Conclusion: Better late than never

This long standing conundrum finally saw the light of the day and gave way to a more smooth future for arbitration related disputes. It was a sigh of relief as it cured the lacunas that lay in the intertwined nature of these two acts questioning the existence of an arbitration agreement in an unstamped or insufficiently stamped agreement. The observations made by the 7-Judge Constitution Bench will strengthen the foundation of institutional arbitration as it remedied the deficiency when it clarified that the issues discussed in NN Global 2 are not to be dealt with at pre-reference stage and are to be considered by the arbitral tribunal once it is constituted. This judgment laid the foundations for a more arbitration friendly jurisdiction showing a more pro-arbitration mindset and a more inclusive nature. This judgment has brought in a very balanced approach when dealing with an unstamped or insufficiently stamped instrument by giving the right forum the authority to proceed with such clash of provisions at the right stage of the dispute resolution. With this approach we see our way forward to an independent, inclusive and efficient environment for arbitration in India.