Supreme Court’s Seven Judge Bench Overrules Verdict On Unstamped Arbitration Agreements

Supreme Court’s Seven Judge Bench Overrules Verdict On Unstamped Arbitration Agreements

States that reference in the matter was maintainable, as apart from the curative petition, a Special Leave Petition was pending.

A seven-judge bench of the Supreme Court has unanimously held that unstamped or inadequately unstamped arbitration agreements do not become void or void ab initio or unenforceable.

The bench comprising Chief Justice of India DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice BR Gavai, Justice Surya Kant, Justice JB Pardiwala, and Justice Manoj Misra ruled, “The nature of objections to the jurisdiction of an arbitral tribunal on the basis that stamp duty has not been paid or is inadequate cannot be decided on a prima facie basis.”

The judges added, “Objection of this kind will require a detailed consideration of evidence and submissions and the finding as to the law as well as the facts. Obligating the courts to decide the issue of stamping under Section 8 or Section 11 stage will defeat the legislative intent underlying the Arbitration Act, 1996.”

In the N.N. Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd case, the court overruled the decision stating that reference in the matter was maintainable because apart from the curative petition, a Special Leave Petition (SLP) was pending.

As per the law, agreements that are not stamped or are inadequately stamped, are inadmissible in evidence under Section 35 of the Stamp Act, 1886. Such agreements are not rendered void or void ab initio or unenforceable. Non-stamping or inadequate stamping is a curable defect. An objection to it does not fall under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists. Any objection to the stamping of the agreement falls within the ambit of the tribunal.

While hearing a curative petition, a five-judge-bench of Chief Justice of India DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice B R Gavai, and Justice Surya Kant had constituted a seven-judge bench to hear the decision on the unstamped arbitration agreements.

The Court also remarked when the referral court renders a prima facie opinion, neither the arbitral tribunal, nor the court enforcing the arbitral award will be bound by such a view. Thus, if a prima facie view as to the existence of an arbitration agreement is taken by the referral court, it still allows the arbitral tribunal to examine the issue in-depth.

The Bench also remarked that such a legal approach will help the referral court in weeding out prima facie non-existent arbitration agreements. It will also protect the jurisdictional competence of the arbitral tribunals to decide on issues pertaining to the existence and validity of an arbitration agreement Harmonious construction of the Arbitration Act, the Stamp Act, and the Contract Act.

The Supreme Court observed that Arbitration Act is a legislation enacted to inter alia consolidate the law relating to arbitration in India. It will have primacy over the Stamp Act and the Contract Act in relation to arbitration agreements for multiple reasons. It further explained about the harmonious construction of the Arbitration Act, the Stamp Act, and the Contract Act.

• The Arbitration Act is a special law and the Indian Contract Act and the Stamp Act are general laws.

• Section 5 is effectively rendered otiose by the interpretation given to it in the case of N N Global 2. The court failed to provide a reason for holding that Section 5 of the Arbitration Act does not have the effect of excluding the operation of Sections 33 and 35 of the Stamp Act in proceedings under Section 11 of the Arbitration Act. The non-obstante clause in Section 5 does precisely this. In addition to the effect of the non-obstante clause, the Arbitration Act is a special law.

• Parliament was aware of the Stamp Act when it enacted the Arbitration Act.

The court had observed the judgment in the SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd case, the Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209 case, and the Dharmaratnakara Rai Bahadur case, wherein the unstamped contract containing an arbitration agreement and the steps to be taken by the court were considered as the correct law.

An appeal against a three-judge bench judgment in the present case was challenged for non-admissibility of an unstamped arbitration agreement and judicial court’s intervention. The five-judge bench by a 3:2 majority held that the unstamped arbitration agreements were not valid in law.

The judgment read, “The interplay between the Acts and how its objective is achieved during arbitral proceedings either at the referral stage or thereafter, is much too important to be left lingering for a clarificatory verdict by a larger bench. Therefore, I would appeal to the legislative wing of the State to revisit the amendments that may be necessary in the Stamp Act in its application to the Arbitration Act.

It further added that the burden of proving the existence of arbitration agreement generally lies on the party seeking to rely on such agreement. In jurisdictions such as India, which accept the doctrine of competence-competence, only prima facie proof of the existence of an arbitration agreement must be adduced before the referral court. The referral court is not the appropriate forum to conduct a mini trial by allowing the parties to adduce the evidence in regard to the existence or validity of an arbitration agreement. The determination of the existence and validity of an arbitration agreement based on evidence ought to be left to the arbitral tribunal.

The Court went on to hold that the Courts have to limit their interference at the referral stage by deferring to the jurisdiction of the arbitral tribunal in issues pertaining to the existence and validity of an arbitration agreement. Thus, the negative aspect of the doctrine of competence-competence suggests that the courts should refrain from entertaining challenge to the jurisdiction of the arbitral tribunal before the arbitrators themselves have had an opportunity to do so.

Allowing arbitral tribunals to first rule on their own jurisdiction and later allowing the courts to determine if the tribunal exercised its powers properly safeguards both the power and authority of the arbitral tribunal as well as the courts. The negative aspect of the doctrine has been expressly recognized by Indian courts. Considering both the positive and negative facets, the principle can be defined as a rule whereby arbitrators must have the first opportunity to hear challenges relating to their jurisdiction, which is subject to subsequent review by courts.

The Court held the following:

• Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.

• Non-stamping or inadequate stamping is a curable defect.

• An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act.

• The Court concerned must examine whether the arbitration agreement prima facie exists. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal.

• The decisions in NN Global (5 Judge bench) and SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66, were overruled. Further, Paragraphs 22 and 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 were overruled to that extent.