This article has been written by Jordi Malayil, pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

Arbitration is considered to be the most comprehensive, efficient, and cost-effective way of litigation. More importantly, unlike litigation in courts, this alternative dispute resolution mechanism saves time. Apart from the progressive steps taken to minimize court interference through the various amendments of the Arbitration and Conciliation Act, 1966, the judiciary has also taken a positive approach to arbitration free of technical impediments. In this context, examining the possibility of enforceability of an arbitration agreement contained in an unstamped/deficiently stamped contract is important. 

In the case of F.C.I. Vs. Joginderpal Mohinderpal (1989), the Supreme Court remarked that the law of arbitration must be simple, less technical, and more responsible to the actual realities of the situation. Whenever the question of stamping of the underlying contract be necessary for the enforcement of the arbitration agreement came for judicial review, different benches of the Apex Court have expressed different opinions. In N.N. Global Mercantile Pvt. Ltd. Vs. Indo Unique Flame Ltd (2021), a three-judge Bench in a recent judgment, took a differing view to the previous judgments and referred the issue to a Constitution Bench in light of the conflicting views of different benches. This article analyses provisions of different laws and rulings of courts of the enforceability of an arbitration agreement in the event of the underlying contract not being stamped.

Stamping of a contract- What laws state

The Indian Stamp Act,1899, requires stamp duty on specific instruments to get it executed. Section 35 of the Act envisions the instruments not duly stamped inadmissible as evidence in the court of law. Section 35 (a) further says, such an instrument that wants to be considered as evidence must be duly stamped. Unless stamp duty and penalty due are paid, the court cannot consider the instrument, i.e., the arbitration agreement, as evidence.

The Arbitration and Conciliation Act, 1996, ensures the competence of the arbitral tribunal to rule on its jurisdiction. Section 16 (a) proposes that an arbitration clause of a contract shall be considered as an independent agreement. Section 16 (b) states that a decision by the arbitral tribunal that a contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

Further, the law does not insist that the arbitration clause incorporated in a contract should be stamped. In G.E.O. Group Communication Inc. Vs. I.O.L. Broadband Ltd. (2010), the Supreme Court observed that on the reason of not stamping the agreement, therefore, the argument that the applicant is not entitled to get relief is not acceptable.

UNCITRAL Model Law on International Commercial Arbitration, 1985, upon which the Indian Arbitration Act established its base, proposes that an arbitration clause of a contract shall be treated as an agreement independent of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail by the law itself the invalidity of the arbitration clause.

The Doctrine of separability and kompetenz-kompetenz

In this context, it is important to have a quick look at the doctrine of separability and kompetenz-kompetenz. An arbitration agreement is decisive and distinct in nature, independent from the underlying substantive contract. It is presumed that when two parties signed a contract having an arbitration clause entering two agreements, i.e., 

1. the substantive contract which comprises the rights and obligations of the parties emanated from the contract; 
2. the arbitration agreement which demands the obligation of the parties to settle their difference through the mode of arbitration.  

The autonomy of the arbitration agreement is based on the doctrine of separability and kompetenz-kompetenz. 

A. Separability means an arbitration clause must be considered as an agreement independent of the other clauses of the contract. It prevents the invalidity of one agreement affects the validity of the other. In other words, it establishes the autonomy of the arbitration agreement and proceedings from the underlying contract. An arbitration agreement is distinctive and independent from the substantive agreement underlying the contract. Therefore, the arbitration agreement is valid irrespective of the invalidity, ineffectiveness, or termination of the underlying contract. 

In National Agriculture Co-op. Mktg. Federation (India) Ltd. Vs. Gains Trading Ltd. (2007), the Supreme Court observed the presence of the doctrine of separability stated that the arbitration clause is to be treated as an agreement independent of the underlying contract. It further opined that an order declaring the contract null and void not necessitates by the law itself the invalidity of an arbitration agreement.

B. Kompetenz-Kompetenz gives the capacity to the arbitral tribunal to rule independently on the question of its jurisdiction, including objections regarding the existence or validity of the arbitration agreement prior to involving the court at a later stage. Firstly, this principle gives authentication to the arbitrators to decide the jurisdiction without the help of the court. Then it gives the arbitral tribunal certain dominance over the decision on the dispute before the interference of the court.

In the case of M/S Duro Felguera S.A. Vs. M/S Gangavaram port Ltd. (2017), the Supreme Court emphasized the principle of Kompetenz-Kompetenz and observed that the intention of the parliament is unambiguous that the court should and must only look into one point, i.e., the existence of an arbitration agreement. In Uttarakhand Purv Sainik Kalyan Ltd. Vs. Northern Coal Field Ltd. (2019), the Supreme Court held that all other preliminary or threshold matters other than the existence of the arbitration agreement are left to be decided by the arbitrator.

Court rulings

Over the years, the Apex Court, in its different orders, has discussed the issue of non-stamping of a contract containing an arbitration clause, and therefore, the invalidity of the arbitration agreement. The issue was first addressed by the Apex court in the case of M/S SMS Tea Estates Pvt. Ltd. Vs. M/S Chandmari Tea Co. Pvt. Ltd (2011). The Bench led by R.V. Raveendran, J., held that the arbitration clause in an unstamped contract has no validity and cannot be enforced until it is duly stamped. Subsequently, in different cases, the Supreme Court has taken the same legal position. It took a decade for the Court to take an opposite view in the case of N.N. Global Mercantile Pvt. Ltd. Vs. Indo Unique Flame Ltd.

i. SMS Tea Estates case

In this case, the Supreme Court had to consider whether an arbitration agreement mentioned in an unregistered instrument not duly stamped is valid and enforceable. Relied on Section 35 of the Indian Stamp Act, which explicitly prohibits the court from acting on an unstamped instrument, the Supreme Court held that the arbitration agreement in an instrument not stamped is invalid and enforceable until the stamp duty and penalty being paid.

Even though, acknowledged the doctrine of separability and observed it in a right manner that the arbitration agreement is independent of the instrument, the Supreme Court held that the severability would not save the arbitration agreement by any provision of the Indian Stamp Act, as it is a part of the instrument.

In Garware Wall Ropes Ltd. Vs. Coastal Marine Constructions (2019), the Supreme Court, recapitulated the rulings of SMS Tea Estates case, has rejected the argument that the arbitration clause to be considered as independent of the underlying contract. It further observed that the Indian Stamp Act pertains to the agreement as a whole. So, it is not possible to separate the arbitration clause from the base contract to give it an independent existence. 

The Court added that the provisions of the Indian Stamp Act, read with the Contract Act, 1872, would give clarity that an arbitration clause in an agreement would not exist when it is not enforceable by law. If it wants to get enforced, it should have got stamped. The three-judge bench headed by N.V. Ramana, J., in Vidya Drolia Vs. Durga Trading Corporation (2020), affirmed the findings in the Garware Wall Ropes case, remarked that the existence and validity are intertwined, and the arbitration does not exist if it is illegal or does not satisfy mandatory legal requirements. An invalid agreement is no agreement.

ii. N.N. Global Mercantile case

In this case, the Supreme Court’s decision showed a transforming shift to a prospective and pro-arbitration approach. Acknowledging the doctrine of separability and kompetenz – kompetenz, the Court remarked that an arbitration agreement is separate and independent from the substantive agreement embedded in the underlying contract. 

The three-judge Bench ruled that the arbitration agreement would not be rendered invalid, unenforceable, or non-existent, even if the substantive contract is not admissible in evidence or cannot be acted upon on account of non-payment of stamp duty. Even though payment of stamp duty on the substantive contract is pending, there are no legal constraints to enforce the arbitration agreement. 

Further, the Bench cited in the present case that Schedule -1 of the Maharashtra Stamp Act does not include an arbitration agreement as an instrument chargeable with stamp duty. This also asserts that even if the substantive contract is not duly stamped, there is no legal impediment to enforce the arbitration agreement.

Another important observation of the Bench is related to the impounding of an instrument. While giving an ad-interim relief on an application filed under Section 9 of the Arbitration Act, the court simultaneously impounds the substantive contract and directs the concerned party to take necessary steps for the payment of the requisite stamp duty in accordance with the provisions of the relevant stamp act within a time-bound period. In Gautam Landscapes (P) Ltd. Vs. Shailesh S. Shah (2019), the Full Bench of the Bombay High Court, also held that the court may grant interim or ad-interim relief in an application filed under Section 9 of the Arbitration Act when a document contains arbitration clause is unstamped or insufficiently stamped.

The Bench categorically pointed out that the decision in the SMS Tea Estates case did not apply the correct position in law on the issue of the enforceability of an arbitration agreement in an unstamped contract. Since the arbitration agreement is an independent agreement and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the underlying substantive contract would not invalidate the arbitration clause or render it unenforceable since it has an independent existence of its own. It again observed that the non-payment of stamp duty on the substantive contract would not invalidate even the main contract. Non-payment or insufficient payment of stamp duty is a deficiency curable on payment of the requisite stamp duty.

The three-judge Bench also remarked that the finding in the Garware Wall Ropes judgment regarding the non-existence of an arbitration agreement in law and its unenforceability, till stamp duty duly paid, is erroneous and does not apply the correct position in law. An arbitration agreement is distinct and independent from the substantive contract. If the arbitration agreement has an independent existence, it can be acted upon, irrespective of the alleged invalidity of the commercial contract. After revisiting the law on the issue of validity, existence, and enforceability of an arbitration agreement in an unstamped document and overruled the judgments of SMS Tea Estates and Garware Wall Ropes cases.

Reference to the Constitution bench

While overruling the judgments of SMS Tea Estates and Garware Wall Ropes cases, the Bench, comprises Justice D.Y. Chandrachud, Justice Indu Malhotra, Justice Indira Banarjee, held that the findings in these judgments are not the correct position in law. Simultaneously, the Bench referred the issue, whether non-payment of stamp duty on the substantive contract invalidates an arbitration agreement, to a Constitution Bench to settle it authoritatively, at the instance of the finding in paragraph 92 of the judgment of Vidya Drolia Vs. Durga Trading Corporation by the co-ordinate bench, which had affirmed the judgment of the Garware Wall Ropes case.  The issue that the Bench referred as follows: 

“Whether the statutory bar contained in Section 35 of the Indian Stamp Act, 1899 applicable to instruments chargeable to Stamp Duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”

Conclusion

Considering the growing importance of alternative dispute resolution, especially arbitration, and hoping to become the hub of arbitration proceedings, the Indian arbitration regime must undergo drastic changes in its approach. Dynamic and proactive dispute resolution mechanism is vital for businesses to consider India as a viable option for investments. The law of arbitration must be simple and less technical. In addition, the judiciary must take a proactive stand to rejuvenate the arbitration mechanism. In Hindustan Steel Limited Vs. M/S Dilip Construction Company (1969), the Supreme Court observed that the Stamp Act is a fiscal measure and not enacted to arm a litigant with a weapon of technicality to meet the case of his/her opponent. Now, the ball is in the court of the Constitution Bench to resolve the dilemma that emerged from the contradicting decisions of different three-judge benches in Vidya Drolia and N.N. Global Mercantile cases. 

References

1. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09955_e_ebook.pdf.
2. https://www.indiacode.nic.in/bitstream/123456789/1978/1/AAA1996__26.pdf.
3. https://main.sci.gov.in/supremecourt/2020/23926/23926_2020_38_1502_25365_Judgement_11-Jan-2021.pdf.
4. https://main.sci.gov.in/jonew/judis/38260.pdf.

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