Validity of an Unstamped Arbitration Agreement | Day 1: Seven-Judge Bench hears arguments against the decision in NN GlobalValidity of Unstamped Arbitration Agreement
Today, seven judges of the Supreme Court including CJI D.Y. Chandrachud, and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, Surya Kant, J.B. Pardiwala and Manoj Misra assembled to reconsider the five-judge bench decision in NN Global Mercantile v Indo Unique Flame (2023). In this case, the bench, in a 3:2 majority, held that an unstamped arbitration agreement was invalid and void.
The bench heard arguments from Senior Advocates Arvind Datar, Nikhil Sakhardande, Jayanth Mehta, Gourab Banerjee and Darius Khambata who petitioned that the majority decision in NN Global was incorrect.
Under the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), if parties cannot agree on an arbitrator they may approach High Courts or the Supreme Court to appoint one for them. At this stage, the Court can only confirm the ‘existence’ of an arbitration agreement and cannot get involved in the case any further. This restriction was imposed through the 2015 Amendment to the Arbitration Act so that arbitration disputes could be speedily disposed of.
However, the Supreme Court has gone back and forth on what constitutes a valid arbitration agreement to prove its ‘existence’. Specifically, if the parties haven’t paid stamp duty on the contents of the agreement, is it still valid?
In 2011 a Supreme Court Division Bench decided the case of SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. The Bench held that an unstamped arbitration agreement cannot be enforced. This position was restated in Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019), where the SC held that contracts (including agreements) are only enforceable if they are duly stamped.
Following a dispute over the invocation of a bank guarantee in a contract for coal transportation between Indo Unique Flame Ltd. and N.N. Global Mercantile Pvt. Ltd., the latter approached the Supreme Court and claimed the agreement was unstamped and unenforceable. In January 2021, a 3-Judge Bench disagreed with the decisions in SMS Tea Estates and Garware. However, despite overruling the two decisions the Bench also referred the case to a 5-Judge Constitution Bench to settle the debate once and for all.
In April 2023 , a bench comprising Justices K.M. Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and C.T. Ravikumar in a 3:2 majority,held that an unstamped arbitration agreement was void and unenforceable. Writing the majority opinion, Justice Joseph affirmed the views in SMS Tea Estates and Garware. In the dissent, Justices Rastogi and Roy, cautioned against judicial intervention in arbitration cases. They opined that an unstamped arbitration agreement was valid at the pre-referral stage. The judgment resulted in serious criticism.
In September 2023, a five-judge bench headed by CJI Chandrachud with S.K. Kaul, Sanjiv Khanna, B.R. Gavai and Surya Kant were hearing a curative petition in the case of Dharmaratnakara Rai v Bhaskar Raju (2020). A three-judge bench of CJI S.A. Bobde and Justices B.R. Gavai and Surya Kant in Dharmaratnakara had held that an unstamped agreement with an arbitration clause could not be acted upon by the Court. The bench hearing the curative petition also took note of the NN Global decision to be reconsidered, and referred the case to a seven-judge bench.
Interplay of three legal regimes
Datar argued that section 5 of the Arbitration Act discouraged excessive judicial intervention in arbitration matters. The provision states that except for where the Act specifically provides, there must be no judicial intervention in arbitration. More specifically, in this case, it meant the rule under Section 11(6A) of the Act.
Section 11 provides for the appointment of arbitrators. Typically parties to the arbitration choose the arbitrators themselves. However, if they fail to come to a consensus on an arbitrator, a party may approach the High Court or Supreme Court to appoint one under Sections 11(4) and 11(5). Section 11(6A) says that when considering an application under subsections 4 or 5, the Court “shall confine to the examination of the existence of an arbitration agreement.” These words, Datar said, proved that examination powers of the Courts under 11(6A) were confined to determining whether an arbitration agreement exists—not to venture into its validity.
However, the majority in NN Global, Datar contended, wrongly interpreted the Court’s powers under Section 11(6A) to hold that an unstamped arbitration agreement was invalid. Under the provision, he argued, the Court could not delve into the validity of the agreement itself. That power is vested completely with the appointed arbitrator under Section 16.
Next, he referred to the Stamp Act. In NN Global Datar submitted, the majority ventured into the correctness of the agreement under Section 33 of the Stamp Act. As this provision stipulates that every document that is not duly stamped (after payment of Stamp Duty), shall be impounded, the majority in NN Global held that an unstamped arbitration agreement was also invalid and therefore must be impounded. However, this lies outside the scope of the judiciary.
“There are two examinations involved here,” he said, “one under Section 11(6A) of the Arbitration Act (existence) and one under Section 33 of the Stamp Act (validity), the second one is excluded from the jurisdiction of the Court.” Moreover, the purpose of the Arbitration Act, Datar said, was to ensure speedy redressal. By venturing into the nitty-gritty of stamping, registration and validity, the Court added hurdles to the arbitration process.
Lastly, Datar highlighted the interplay of the Contracts Act in the case. He argued that the Court was wrong to declare an unstamped arbitration agreement “void” under Section 2 of the Act.
Section 2(g) of the Contract Act stipulates that an agreement not enforceable by law is void. However, Datar argued, this must be read along with Sections 10 and 23 of the Act.
Under Section 10 of the Act, all agreements are contracts if they are not expressly declared void. According to Section 23, every contract with an unlawful object or consideration is void. The lack of stamp duty, Datar argued, did not constitute such unlawful consideration. Therefore, while an unstamped arbitration agreement may be unenforceable under the Stamp Act, it is not void under the Contract Act. Ensuring that an agreement is stamped is not an inherent precondition for a valid contract—it is an incidental part that can easily be rectified, he said.
Moreover, Datar pointed out, that declaring an unstamped arbitration void and then rendering it valid after it is stamped was legally impermissible—“void” means that a contract never existed and therefore, it can not be resurrected later.
Procedural Delays, Public Policy and International Standards
Sakhardande, appearing next, reiterated Datar’s arguments and submitted that the lack of a stamp was “rectifiable and curable”. Therefore, it could not be used to invalidate an arbitration agreement.
Mehta followed and argued that under the Stamp Act, the time taken for various procedures was uncertain. By making the validity of an arbitration agreement dependent on the provisions of the Stamp Act, the majority judgement in NN Global paved the way for unnecessary delays in the process of arbitration.
Further, he asserted that by vesting the “entertainability” of a petition on fiscal legislation (the Stamp Act), the decision on NN Global played foul on public policy. This requirement was not an inalienable precondition to an agreement that without it, it was invalid. If that was the case, the legislature would have indicated it in clear written words.
Mehta then drew a parallel to the Civil Procedure Code, 1908. Under Section 149 of the code, when a party has not been able to pay the requisite Court fee in the given time frame, the Court has the discretion to allow the payment of the fee at a later time. Therefore, a plaintiff under the Code was on a higher pedestal than a petitioner under arbitration law, whose agreement was rendered invalid because of the lack of stamp duty. Mehta argued that this was impermissible and that the majority of NN Global was wrong in its decision.
Banerjee appeared next and suggested that the majority in NN Global were wrong to rely on Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019). In Garware Wall Ropes, the SC held that contracts (including agreements) are only enforceable under Section 11(6A) of the Arbitration Act if they are duly stamped. The purpose of Section 11, Banerjee said, was for the Court to appoint an arbitrator and leave questions of validity to the arbitral tribunal under Section 16. He claimed that this view was in tune with International arbitration laws as well.
Moreover, Banerjee urged, that being a fiscal legislation, the object of the Stamp Act is “to protect public revenue, and not to hinder commercial life.” Therefore, a curable defect cannot invalidate an agreement altogether.
Khambata, addressed the bench for a few minutes before the close. The heart of the debate in this case, he said, was a question posed by Justice Khanna—if the stamping (or lack thereof) of the main agreement could render an arbitration agreement invalid.
The Stamp Act, he said, is meant to provide the State with a stream of income through trade and commerce—arbitration was a means to further this. Therefore, using a technicality in the former to invalidate the latter was impractical.
Khambata will conclude his arguments tomorrow, that is, 12 October 2023.