A seven-judge Constitution Bench of the Hon’ble Supreme Court of India pronounced its unanimous decision in the matter of ‘In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899’ [Curative Petition (C) No. 44 of 2023] (“NN Global 3”) on December 13, 2023. The Court settled the question of the effect of arbitration agreements in non-stamped or inadequate stamped underlying instruments.

Dr. Dhananjaya Y. Chandrachud CJI authored the judgment on behalf of five other judges of the Court. Sanjiv Khanna J. authored a concurring decision. 

Facts of the Case:

A stream of conflicting judgments finally led to the reference to the seven-judge bench. Briefly, among other cases, SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (2011) 14 SCC 66 (“SMS Tea Estates”), Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (2019) 9 SCC 209 (“Garware Wall Ropes”) and Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 (“Vidya Drolia”) held that an arbitration agreement in an unstamped or inadequately stamped contract could not be acted upon. However, a three-judge bench in N N Global Mercantile Private Limited v. Indo Unique Flame Limited (2021) 4 SCC 379 (“NN Global 1”) doubted the correctness of the views expressed in Vidya Drolia and held that non-payment of stamp duty would not invalidate even the underlying contract since the same is a curable defect.

Since both NN Global 1 and Vidya Drolia were judgments by contemporary three-judge benches, the matter was referred to a five-judge bench. In N N Global Mercantile Private Limited v. Indo Unique Flame Limited (2023) 7 SCC 1 (“NN Global 2”), the five-judge bench, by a narrow margin of 3:2, overruled NN Global 1 and held, inter alia, that an unstamped instrument containing an arbitration agreement is void and the arbitration agreement cannot be acted upon until the instrument was duly stamped.

The five-judge bench in Bhaskar Raju and Brothers v. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities [Curative Petition (C) No. 44 of 2023] took note of this and held that due to the larger ramifications of the decision in NN Global 2, the limited question of the effect of non-stamping or inadequate stamping of arbitration agreements should be referred to a seven-judge bench. (Order dated September 26, 2023, in Curative Petition (C) No. 44 of 2023).

Issues:

The reference to the Court was to answer whether, if the underlying contract is not stamped, arbitration agreements contained therein would be non-existent, unenforceable, or invalid.

In answering the above issue, the Court also answered the following: -

1. Whether an unstamped arbitration agreement is rendered unenforceable pending the payment of stamp duty so as to interpose a bar on the referral court to refer parties to arbitration?
2. The scope of judicial review of the referral court in proceedings under sections 8 and 11 of the ACA.

Findings:

The Court noted that it was faced with the issue of harmoniously interpreting the Arbitration and Conciliation Act, 1996 (“ACA”) and the Indian Stamp Act, 1899 (“Stamp Act”). In furtherance of this challenge, it held that the ACA, being a special law, it will have primacy with respect to arbitration agreements over the Stamp Act and the Indian Contract Act, 1872 (“Contract Act”) which are general laws.

The Court centred its discussion on the kompetenz-kompetenz (competence-competence) doctrine as encapsulated in section 16 of the ACA. It noted the positive aspect of the doctrine whereby the arbitral tribunal is prioritized in initially deciding challenges to their authority instead of courts. It also noted the corresponding negative aspect of the doctrine which instructs courts to limit their interference at the referral stage by deferring to the jurisdiction of the arbitral tribunal on issues pertaining to challenges to the tribunal’s jurisdiction, including on issues of validity and existence of the arbitration agreement. The Court held that the issue of stamping, being a jurisdictional issue, the principle of negative competence-competence required the courts to leave the issue of stamping to be decided by the arbitral tribunal.

The Court noted that objections to non-stamping or inadequate stamping of documents require detailed consideration of evidence and submissions and findings on law and fact. It held that the referral court is not the appropriate authority to conduct a mini-trial in regard to the existence and validity of an arbitration agreement and the determination of the same was left to the arbitral tribunal. It further held that obligating the courts to decide on such issues in proceedings under sections 8 or 11 will defeat the legislative intent of the ACA.

The Court held that in view of the non-obstante clause in section 5 of the ACA, sections 33 and 35 of the Stamp Act, which govern impounding of non-stamped or improperly stamped instruments and inadmissibility of such instruments in evidence respectively, will not operate in proceedings under sections 8, 9 or 11 of the ACA.

The Court overruled the decision in NN Global 2 holding, among other reasons, that it misapplied section 5 of the ACA and prioritised the objectives of the Stamp Act while ignoring the purpose of the ACA. It also held that SMS Tea Estates and Garware Wall Ropes were wrongly decided and that Vidya Drolia did not decide the issue of the effect of an unstamped or inadequately stamped instrument on the existence or validity of an arbitration agreement.

Key Take-aways:

1. Non-stamping or inadequate stamping of an instrument only renders it inadmissible in evidence and not void. An arbitration agreement contained in an unstamped or inadequately stamped instrument can be acted upon. Such agreements are not rendered void or void ab initio or unenforceable.
2. Non-stamping or inadequate stamping of an instrument is a curable defect.
3. Courts will not be required to deal with issues of non-stamping or inadequate stamping of the arbitration agreement at the referral stage in proceedings under sections 8, 9 and 11 of the ACA. They must only examine whether an arbitration agreement prima facie exists.
4. The competence-competence doctrine must be given life to and the question of assessing whether there exists a valid arbitration agreement is to be determined by the Arbitral Tribunal.
5. Once the Arbitral Tribunal has been appointed, it may impound the agreement under section 33 of the Stamp Act if it sees fit to do so. It will thereafter proceed in terms of section 35 of the Stamp Act.

Please find a copy of the judgment, here.

This update has been contributed by Somdutta Bhattacharyya (Partner) and Mohit Dang (Associate).

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