“The concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement. The separate nature of the arbitration agreement from the underlying contract is one of the cornerstones of arbitration law”
Supreme Court: In a matter concerning the validity of unstamped arbitration agreement, a 7 Judge bench comprising of Dr. DY Chandrachud* , C.J.I, Sanjay Kishan Kaul, Sanjiv Khanna* , BR Gavai, Surya Kant, JB Pardiwala, and Manoj Misra, JJ. gave a unanimous judgment, holding that the unstamped agreement is inadmissible under the Stamp Act, but cannot be rendered void ab initio. Thus, arbitration clauses in unstamped or inadequately stamped agreements are enforceable. Justice Khanna has written a concurring judgment.
The Stamp Act imposes duty on “instruments”. An instrument which is unstamped or insufficiently stamped is inadmissible in evidence and cannot be acted upon in terms of its provisions. Arbitration agreements are often embedded in underlying instruments or substantive contracts. When an application is made for the appointment of an arbitrator, an objection is raised on the ground that the arbitration agreement is inadmissible because it is in an instrument which is unstamped or inadequately stamped.
Issue: Whether such arbitration agreements would be non-existent, unenforceable, or invalid if the underlying contract is not stamped?
In N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. , (2021) 4 SCC 379 (NN Global 1) the three-judge bench held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent. Thereafter, the issue was referred to 5 Judge Bench, wherein the 5-Judge Bench comprising of K.M. Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and C.T. Ravikumar, JJ. by a 3:2 majority, held that unstamped arbitration agreements are not valid in law. While KM Joseph, Aniruddha Bose and C.T Ravikumar, JJ. formed the majority, Ajay Rastogi and Hrishikesh Roy, JJ. dissented and opined that unstamped arbitration agreements are valid at the pre-referral stage.
While hearing a curative petition, the 5 Judge Bench comprising of Dr. DY Chandrachud, C.J. Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai and Surya Kant, JJ. referred the matter to a 7-Judge bench to hear the judgment relating to unstamped arbitration agreements.
Having regard to larger ramifications of the N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. , 2023 SCC OnLine SC 495, (NN Global 2) the Supreme Court viewed that proceedings should be placed before a 7-Judge bench to reconsider the correctness of the view by a 5-Judge bench.
The consequences of the failure to stamp an instrument
The Court took note of Section 35 of the Stamp Act, which renders instruments which are not duly stamped inadmissible in evidence. However, Section 42 of the Stamp Act, an instrument is admissible in evidence once the payment of duty and a penalty (if any) is complete. After the payment of the appropriate amount under the appropriate description in Schedule I and the penalty (if any), the Stamp Act provides for the certification of such payment by an endorsement by the appropriate authority. Once an instrument has been endorsed, it may be admitted into evidence, registered, acted upon or authenticated as if it had been duly stamped.
Difference between inadmissibility and voidness
The Court said that the admissibility of an instrument in evidence is distinct from its validity or enforceability in law. Section 2(g) of the Contract Act provides that an agreement not enforceable by law is said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence. An agreement can be void without its nature as a void agreement has an impact on whether it may be introduced in evidence. Similarly, an agreement can be valid but inadmissible in evidence.
The Court remarked that Section 35 of the Stamp Act is unambiguous, it renders a document inadmissible and not void. The effect of not paying duty or paying an inadequate amount renders an instrument inadmissible and not void. Non-stamping or improper stamping does not result in the instrument becoming invalid. The Stamp Act does not render such an instrument void. The non-payment of stamp duty is accurately characterised as a curable defect. The Stamp Act itself provides for the manner in which the defect may be cured and sets out a detailed procedure for it. It bears mentioning that there is no procedure by which a void agreement can be “cured.”
The Court said that the Stamp Act is fiscal legislation which is intended to raise revenue for the government. The Stamp Act is legislation which is enacted in the interest of revenue. The statute must be interpreted with due regard to its purpose.
Further, it noted that one of the main objectives behind the enactment of the Arbitration Act was to minimize the supervisory role of courts in the arbitral process by confining it only to the circumstances stipulated by the legislature
The Court said that being a self-contained and exhaustive code on arbitration law, the Arbitration Act carries the imperative that what is permissible under the law ought to be performed only in the manner indicated, and not otherwise The corollary is that it is not permissible to do what is not mentioned under the Arbitration Act. Therefore, provisions of other statutes cannot interfere with the working of the Arbitration Act, unless specified otherwise
Separability of the arbitration agreement
The Court said that concept of separability or severability of an arbitration agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement. The separate nature of the arbitration agreement from the underlying contract is one of the cornerstones of arbitration law. The rationale for the separability presumption lies in the contractual freedom of the parties to an arbitration agreement to settle their disputes by proceedings before an arbitral tribunal to the exclusion of courts. Thus, separability presumption ensures that an arbitration agreement survives a termination, repudiation, or frustration of a contract to give effect to the true intention of the parties and ensure sanctity of the arbitral proceedings.
The Court noted that Section 16(1) of the Arbitration Act also incorporates the separability presumption, and said the following:
Concerning whether an issue of stamping is a jurisdictional issue, the Court said that in case the issue of stamping is raised before an arbitral tribunal, Sections 33 and 35 of the Stamp Act make it evident that a person having authority by consent of parties” to receive evidence is empowered to impound and examine an instrument. A person having authority “by consent of parties” to receive evidence includes an arbitral tribunal which is constituted by consent of parties.
After taking note of Section 11(6) of the Arbitration Act, which confers powers on the Supreme Court and the High Court, on the failure of the parties to comply with the agreed arbitration procedure, the Court said that to minimise the interference of Courts, Section 11 (6A) was inserted by the 2015 Amendment.
Terming the premise taken in Vidya Drolia v. Durga Trading Corpn. , (2019) 20 SCC 406 as erroneous, because the omission of Section 11(6A) has not been notified and, therefore, the said provision continues to remain in full force. Further, it stated that the 2015 Amendment Act has laid down different parameters for judicial review under Section 8 and Section 11. Where Section 8 requires the referral court to look into the prima facie existence of a valid arbitration agreement, Section 11 confines the court’s jurisdiction to the examination of the existence of an arbitration agreement. Although the object and purpose behind both Sections 8 and 11 is to compel parties to abide by their contractual understanding, the scope of power of the referral courts under the said provisions is intended to be different, as Section 37 of the Arbitration Act allows an appeal from the order of an arbitral tribunal refusing to refer the parties to arbitration under Section 8, but not from Section 11.
The Bench said 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 minitrial 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.
Further, it added that 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 Court said 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.
The Court said that the decision in N N Global 2 (supra) gives effect exclusively to the purpose of Stamp Act. It prioritises the objective of the Stamp Act, i.e., to collect revenue at the cost of the Arbitration Act. The purpose of the Arbitration Act is to ensure that a speedy and efficacious alternative dispute resolution system is available to parties both commercial and otherwise. This purpose is in danger of being undermined by the interpretation accorded to the Stamp Act in N N Global 2 (supra). The impounding of an agreement which contains an arbitration clause at the stage of the appointment of an arbitrator under Section 11 (or Section 8) of the Arbitration Act will delay the commencement of arbitration.
The Court held the following:
Justice Sanjiv Khanna while writing a concurring opinion stated that unstamped agreements are not rendered void or void ab initio.
[ 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, decided on 14-12-2023 ]
Judgment Authored by: Dr. DY Chandrachud, Chief Justice of India
