India - Consequences Of An Unstamped Arbitration Agreement.

Legal News & Analysis - Asia Pacific - India - Dispute Resolution

India - Consequences Of An Unstamped Arbitration Agreement.

 

23 June 2021

 

Asia Pacific Legal Updates

 

The world over, contracts are the touchstone of commercial interaction. By entering into contracts, one assumes that each party will hold up their end of the bargain. However, the mere fact that there exist dispute resolution processes in all civilized countries for dealing with resolving commercial disputes, is indicative that in many situations misunderstandings arise between contracting parties. One way to settle commercial disputes globally and in India is by using arbitration.
 

In India, the arbitration law is governed by the Arbitration and Conciliation Act of 1996 (“Act”). The courts in India which enforce the Act, namely the Supreme Court of India (“SC”) and the various High Courts have tried over the years to make India an arbitration friendly nation. One of the recent judgments of the SC deals with the issue of whether an unstamped arbitration agreement can be enforced in India.
 

STAMPING IN INDIA
 

Agreements and/or other instruments are required to be stamped in India. Stamping is a fiscal measure, whereby the government collects duty upon the execution of documents that create or transfer rights from one party to another. A similar duty is levied in a number of other countries, such as the United Kingdom, the United States of America, and Singapore, albeit with modifications in the nomenclature and application of the duty. The Indian Stamp Act of 1899 (“Stamp Act”) is the central legislation which deals with the mandatory stamping of certain classes of instruments, while the States in the Union of India have adopted local acts laying down the duty payable. As per Section 35 the Stamp Act, any document which is mandatorily required to be stamped, will be inadmissible as evidence, unless it is so stamped. However, the non-stamping of any document is a curable defect, which can be rectified by following the procedure laid down by law. Further, the party bringing the document before the court is responsible to produce a stamped document. In the event a stamped document is not produced, the same will not be accepted as evidence and shall be impounded to ensure that the stamp duty is paid on the document. Keeping the above in view, we have discussed in this article, the recent change in law relating to stamping of arbitration agreements.
 

STAMPING OF ARBITRATION AGREEMENTS
 

Arbitration agreements by themselves are not required to be stamped under the Stamp Act or the state legislations. It is mandated under the Act that arbitration agreements in India have to be in writing, and an arbitration agreement could even be entered into via email or any other form of communication. However, as a practice, arbitration clauses are usually contained in the substantive agreement which is the subject matter of the arbitration clause. These substantive agreements are usually required to be stamped. It is in this regard, that the admissibility of arbitration agreements contained in unstamped substantive agreements becomes a pertinent question.
 

JUDICIAL INTERVENTION AND VALIDITY OF ARBITRATION AGREEMENTS
 

There are a number of instances in which an arbitration agreement would have to be presented as evidence in the pre-reference stage in an arbitration. An application may be made under Section 8 or Section 45 of the Act, if there exists an arbitration agreement in relation to a dispute that has been referred to a judicial authority. As per Section 8 and Section 45 of the Act, the matter must be mandatorily referred for arbitration by the judicial authority, if it is satisfied that the parties have agreed to refer their disputes to arbitration. Section 8 is applicable in case of domestic arbitrations, whereas Section 45 shall be applicable to foreign seated arbitrations.
 

Further, an application may also be made under Section 9 of the Act, whereby any party to an arbitration agreement may seek urgent reliefs from a judicial authority for preservation of the subject matter of a dispute before the arbitral tribunal is constituted. An application may also be made under Section 11 of the Act, for the appointment of arbitrators if there is a dispute in relation to such appointment.
 

In all of the above cases, the arbitration agreement, or the substantive agreement containing the arbitration agreement, is to be produced before the judicial authority, who shall pass relevant orders once the existence of the arbitration agreement has been established. It is in such cases, that the existence of an arbitration agreement may be challenged on the ground of non-stamping of the substantive agreement.
 

RULINGS ON VALIDITY OF ARBITARTION AGREEMENTS IN UNSTAMPED AGREEMENTS
 

The Supreme Court of India has dealt with this issue in its recent judgment of M/s N. N. Global Mercantile Pvt. Ltd. vs M/s Indo Unique Flame Ltd. (2021 SCC OnLIne SC 13) (“N. N. Global”). The three judge bench while passing the judgment has set a new position of law, which is in contrast to the earlier SC judgments in the matters of SMS Tea Estates vs Chandmari Tea Company Pvt. Ltd. ((2011) 14 SCC 66) (“SMS Tea Estates”), Garware Wall Ropes Limited vs Coastal Marine Constructions and Engineering Limited ((2019) 9 SCC 209) (“Garware Wall Ropes”), and Vidya Drolia and Ors. vs Durga Trading Corporation ((2021) 2 SCC 1) (“Vidya Drolia”).
 

EARLIER JUDGMENTS
 

In the judgment of SMS Tea Estates, a two judge bench had held that an arbitration agreement in an unstamped agreement is unenforceable in law, and that an arbitration agreement would be invalid where the contract or instrument is voidable at the option of either party. Subsequently, a two judge SC bench in Garware Wall Ropes was of the opinion that the arbitration clause would be non-existent in law and unenforceable until the stamp duty is paid on the substantive commercial agreement. The SC judgment in Garware Wall Ropes was approved by a three judge bench in the matter of Vidya Drolia.
 

JUDGMENT PASSED IN N. N. GLOBAL
 

The SC has changed its stance on the enforceability of such agreements in the judgment passed in the matter of N. N. Global and has taken a pro-arbitration stand. The SC has held that arbitration agreements contained in unstamped agreements are valid, existent and enforceable in law even prior to the curing of any defects in stamping the agreements.
 

The three judge bench considered the doctrines of separability of an arbitration agreement and kompetenz – kompetenz while deciding on the matter. The bench while expounding on the issue elaborated that as per the doctrine of separability, the invalidity, ineffectiveness, or termination of the substantive agreement, would not have any effect on the validity of the arbitration agreement, except if the arbitration agreement was itself void ab initio, as per the established principles of arbitration or contract law. Further, the doctrine of kompetenz – kompetenz implies that the arbitral tribunal has the competence to determine any question relating to its own jurisdiction including questions on the validity or scope of the arbitration agreement. This doctrine goes further to establish the legislative policy of minimum judicial interference in an issue arising in relation to an arbitration agreement, especially in the pre-reference stage.
 

While analysing the applicable stamp law, the bench noted that non-payment of stamp duty or insufficient payment of stamp duty on an agreement does not render the agreement invalid and that the defect is curable. The bench also took note that no stamp duty is payable on an arbitration agreement. Accordingly, the bench held that, as the arbitration agreement and the substantive commercial agreement are two separate agreements and an arbitration agreement is not required to be stamped, the validity of the arbitration agreement cannot be called into question by a judicial authority for reasons of non-stamping. This is also in line with the doctrine of kompetenz – kompetenz, and judicial authorities in case of arbitrable disputes, cannot declare deficiently stamped agreements as non-arbitrable. The courts shall only look at whether the parties intended to enter into an arbitration agreement and if the requirements of a valid arbitration agreement have been met. Every other aspect of the existence or validity of an arbitration agreement would be determined by the arbitral tribunal.
 

PROCEDURE IN CASE OF UNSTAMPED AGREEMENTS
 

An important result of this judgment is that courts in India will now be able to pass directions, even if the substantive agreement containing the arbitration agreement is unstamped. The bench has clarified that the defect relating to the unstamped agreement must be cured before the same is admitted as evidence before the arbitral tribunal, but until such time, the courts may pass directions under Sections 8, 9 or 11 of the Act, if such directions are sought.
 

The bench has also clarified that if any unstamped document is produced as evidence before an arbitral tribunal, the same must be impounded and sent for stamping. If any directions are sought from a judicial authority under Sections 8, 9 or 11 of the Act, the court may pass appropriate directions, and shall also either impound the agreement and direct the parties to cure the defect in a time-bound manner, or may direct the parties to cure the defect before the same is presented before the arbitral tribunal.
 

APPLICABILITY OF THE N. N. GLOBAL JUDGMENT
 

It must be noted that this judgment was passed by a three-judge bench of the Supreme Court. While this judgment has overruled the 2011 judgment passed by a two judge bench in SMS Tea Estates, the three-judge bench lacked the constitutional authority to overrule the judgment passed in Garware Wall Ropes, as the same was approved by a three-judge bench in the Vidya Drolia judgment. Accordingly, this three-judge bench has referred the matter for final adjudication to a five judge constitutional bench of the apex court. It must be kept in mind that, as of date there exist two contrary judgments that have been passed by benches of an equal number of judges, and accordingly, there may be confusion regarding the binding effect of both the judgments on the lower courts. In such an event, a number of high courts, including the Bombay High Court in Jaydeo vs State of Maharashtra (2005 SCC OnLine Bom 1283), have held that the lower courts must follow the decision which appears to it, to state the law more elaborately and accurately (Vol 9, DD. Basu, Commentary on Constitution of India, (9th ed, 2014)).
 

OUR THOUGHTS
 

While the earlier judgments of 2011 and 2019 were heavily criticized by stakeholders for rolling back the law on arbitration, the judgment in N. N. Global is a step in the right direction. Pursuant to this judgment, and its subsequent approval by a constitutional bench of five judges of the SC, foreign parties to an arbitration agreement that is seated in India, will be greatly benefited as they shall no longer have to fulfill the compliance requirement of stamping the agreement before they can approach a judicial authority to obtain interim reliefs for the preservation of the subject matter of the dispute.
 

The judgment is significant as it will limit judicial intervention at the pre-reference stage to only certain aspects of an arbitration dispute and arbitration agreements will not be susceptible to be discarded by the judicial authorities for reasons of non-stamping or insufficient stamping. This judgment shall prevent parties to a contract from being able to get out of their contractual obligations on technical grounds such as insufficient stamping. This shall go a long way in creating confidence in the Indian arbitration mechanism, and making it easier to enforce contracts and resolve contractual disputes via arbitration. This judgment is an indication of the shift of the approach taken by Indian courts to a more pro-arbitration setting and shall encourage international institutions to refer their agreements for arbitration in India, making India a global arbitration hub.
 

 

 

For further information, please contact:  


Souvik Ganguly, Partner, Acuity Law

[email protected]