Introduction
The UNCITRAL Model Law on International Commercial Arbitration, 1985 served as the foundation for the modern law known as the Arbitration & Conciliation Act, 1996 (Arbitration Act), which was put into effect with the aim of giving Indian conflicts an alternate resolution method. The Act, being a well-thought-out piece of law, has been designed to prohibit judicial examination, save in a few specific situations, such as where the arbitration agreement’s existence is questioned.
In any event, it has been consistently affirmed that the Act has precedence over other legislation. However, there have also been a few, albeit isolated, exceptions to this norm. One such instance was the recent case of N.N. Global Mercantile Pvt. Ltd. vs. Indo Unique Flame Limited & Ors., in which the court determined that the arbitration agreements were subject to the Stamp Act’s (often known as the “Stamp Act”) application.
Several judicial rulings have addressed the question of whether an arbitration clause in an unstamped or poorly stamped agreement may be enforced. Numerous High Courts have rendered contradictory judgements, and even the Supreme Court (“SC”) did not take a firm stance. However, a five-judge bench of the Supreme Court recently resolved the law regarding the enforceability of arbitration clauses in unstamped or inadequately stamped arbitration agreements through its ruling in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (“NN Global”).
Background : Pre NN-Global
In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., a Division Bench of the Supreme Court declared that if a document is discovered to be unstamped or inadequately stamped, Section 35 of the Indian Stamp Act, 1899 (“Stamp Act”) prohibits even the arbitration provision from being used. The Court also established the process to be used where an arbitration clause is present in a contract but is not properly stamped in accordance with the Stamp Act’s design [¶17-19].
Following the judicial decision, Section 11(6A) of the Arbitration and Conciliation Act, 1996 (the “Act”) was added, which limited judicial participation to only determining if an arbitration agreement existed. After the insertion, the SC ruled that the Courts’ responsibility in deciding whether to grant a request to choose an arbitrator is limited to just determining if an arbitration agreement exists [¶19].
This opinion was once again altered when the division bench of the SC ruled in the case of Garware that the addition of Section 11(6A) to the Act had no effect on the decision made in SMS Tea Estates [¶16]. The SC pointed out that an agreement only qualifies as a contract if it is legally enforceable, and as unstamped agreements are not legal contracts, they cannot contain arbitration clauses either. An arbitration agreement would not exist if it is illegal or does not meet the necessary legal requirements for it to be enforceable, one of which is payment of stamp duty. This perspective, adopted in Garware, was specifically supported by a three-judge bench of the SC in Vidya Drolia.
A three-judge SC panel cast doubt on this claim in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited, noting that as an arbitration agreement is a separate contract, it cannot be rendered illegal by a main contract that is just poorly stamped. Due to the fact that the previous Vidya Drolia ruling was also delivered by a three-member bench, the SC sent the case to a bigger bench for consideration.
Analysis of NN Global
A 3:2 majority of a Constitution Bench of five SC judges determined the reference, with the majority opinion disagreeing from the opinions presented in the prior case.
The Majority View – Paying Stamp Duty Necessary for Valid Arbitration Agreement
According to the majority decision, contracts may only be regarded legally binding and in compliance with the Contract Act. The majority also noted that, unlike registerable documents, which are not registered, Section 35 of the Stamp Act, which forbids any unstamped or inadequately stamped documents from being used as evidence in court, does not provide any exemption to such documents for collateral purposes [¶62(ii)].
The overwhelming view holds that public agencies and civil courts are often used to enforce agreements. Such agreements cannot be regarded as enforceable since the Stamp Act prohibits any authority from acting upon or giving effect to an unstamped or inadequately stamped agreement. However, the majority included a warning that the question might be allowed to be resolved by the arbitrator based on the preexisting arbitration agreement if the document seems to be stamped but its sufficiency is disputed and such disputed looks to be without substance [¶62(ii)].
The majority further pointed out that using an unstamped document with an arbitration provision as evidence would amount to establishing a transaction involving collateral. The majority ruled that courts cannot avoid their legal obligations and abdicate their duty to the arbitrator [¶107(iv)]. The majority rejected the claim that the arbitrator should resolve the question of whether the stamping was sufficient. However, the majority included a warning that the question might be allowed to be resolved by the arbitrator based on the preexisting arbitration agreement if the document seems to be stamped but its sufficiency is disputed and such disputed looks to be without substance.
The Minority View – Defeats Purpose of Arbitration Act
According to Justice Rastogi, stamping mistakes or insufficient stamping would not render an agreement irrevocably void or impossible in the eyes of the law since they may be corrected in the future [¶50]. According to Justice Roy, the 2015 revisions to the Arbitration Act were introduced with the intention of avoiding courtroom litigation. As a result, the provisions of the Stamp Act and the Arbitration Act were interpreted similarly. He continued by saying that imprisoning an arbitration agreement at the pre-referral stage would be counterproductive and should be avoided [¶87.3].
The Gordian Knot
India is in a hazardous situation in its attempt to become a center for Commercial Arbitration since the well-established principle of separability in arbitration law was not taken into account while making the judgement in N.N. Global. The concept of separability recognizes the independence of an arbitration agreement from the business contract it is a part of. The ideas of separability and kompetenz-kompetenz serve as the foundation for this autonomy. According to this concept, the arbitration agreement will not be void if the underlying commercial contract is void or ineffective. This is also reflected in Section 16(1) of the UNICITRAL Model Law, which gives the Arbitral Tribunal the authority to decide on issues pertaining to the existence and legitimacy of its own jurisdiction
Positions in Other Jurisdictions
An examination of various case laws from other countries reveals that courts have been inclined to maintain the legitimacy of arbitration agreements even when the contract including the arbitration agreement is deemed illegal for whatever reason.
United Kingdom
The Arbitration Act of 1996 in the United Kingdom states in Section 7 that an arbitration agreement that is or was intended to be a part of another agreement (whether or not in writing) shall not be regarded as invalid, nonexistent, or ineffective because that other agreement is invalid, did not come into existence, or has become ineffective, and shall instead be treated for all intents and purposes as a separate agreement. Despite being comparable to Section 16 of the Act, it uses far more general wording than its Indian equivalent. The phrase stipulates that an arbitration agreement will remain in effect even if the other agreement—of which the arbitration agreement is a part—does not or if its validity is in doubt.
USA
In Buckeye Check Cashing, Inc. v. Cardegna et al., the Supreme Court of the United States cited Prima Paint and Southland Corp. and noted that under federal arbitration law, an arbitration clause in a contract can be separated from the rest of the contract, and if there is a challenge to the validity of the contract overall, other than the arbitration clause itself, the arbitrator will decide on the matter first.
There are many forms of objections to an arbitration agreement, according to the US Supreme Court. It was decided that a court may nonetheless enforce a specific arbitration agreement even if a party objected to another clause or the whole contract. This legislation acknowledges that an arbitration provision may be “severed” from the remainder of a contract.
Singapore
The High Court of Singapore held in BNA v. BNB and BNC that the only restriction on the doctrine of separability is that it should not go any further than is necessary to give effect to the parties’ intention to arbitrate their disputes. This ruling dealt with a challenge to the establishment of an arbitration tribunal on the grounds that the law governing the contract would also govern the arbitration. The Court went on to say that the doctrine’s main goal is to defend a thorough arbitration agreement that amply establishes the parties’ willingness to settle their differences through arbitration. With this safeguard, the agreement is guaranteed to be enforceable even if the underlying contract is declared void for other reasons [¶74].
Impact of NN Global 2023
The parties that engage into arbitration agreements in India would be affected by this decision significantly. It emphasizes how crucial it is to make sure that all contracts are appropriately stamped in compliance with the Stamp Act. The agreement might become void and unenforceable if this isn’t done, which would be a disaster for the parties concerned. The ruling also emphasizes the need for further education and comprehension of the Stamp Act’s effects on arbitration agreements.
In circumstances when parties are not aware of the stamping requirements, it raises ambiguity in the arbitration process. Section 11(6A) of the 1996 Act, added by an amendment in 2015, restricted the scope of a court’s assessment at the pre-arbitration reference stage to the presence of an arbitration agreement. However, the current ruling could lead to more litigation and disagreements about the legality of arbitration agreements, which might cause conflicts to take longer to resolve.
It is significant to remember that paying stamp duty and penalty can be a laborious and time-consuming process. Determining the amount of stamp duty and penalty that must be paid may cause further delays in the settlement of disputes and undermine the whole point of arbitration.
Another problem with the decision is that it could make it harder for parties who have signed arbitration agreements that are not properly stamped to get justice. This might lead to the right to arbitrate conflicts being denied, which could have major repercussions for parties who might lack the financial wherewithal to pursue disagreements in court.
It might also result in parties that want to avoid arbitration abusing the stamping requirement. Parties may try to take advantage of the arbitration requirement by purposefully prolonging the stamping procedure. Additionally, parties may raise unfounded objections to the enforcement of arbitration agreements, which would result in pointless legal action.
Conclusion
The long-running dispute about the enforceability of an unstamped agreement and its arbitration clause has finally been resolved by the current judgement. However, this Supreme Court judgement departs from the approach that is in favor of arbitration and requires the least amount of judicial interference by introducing an extra level of judicial review that will cause (even more) delay in the selection of arbitrators. The Supreme Court wasted the chance to establish rules for courts, preventing them from conducting a mini trial on the sufficiency of stamping in the pre-reference stage.
Even though this decision is prospective and establishes a useful benchmark for subsequent arbitration agreements, it is likely to have a significant impact on current arbitration proceedings in India where the preliminary issue of enforceability due to insufficient stamping is being considered.
Author(s)
Viral Shah
Student at SLS, Pune