Kushagra Tolambia
I. Introduction
The interpretation of unstamped arbitration agreements has been a contentious issue before various Courts worldwide. The Indian Supreme Court, for instance, has faced numerous cases dealing with the enforceability of arbitration clauses within unstamped contracts. Historically, the Court's stance leaned towards upholding the validity of arbitration agreements, even in unstamped contracts, if the agreement itself could be treated independently from the underlying contract.
The Indian Arbitration and Conciliation Act, 1996, was enacted to align with international practices and streamline the arbitration process. Section 11 of the Act empowers the court to appoint arbitrators unless the agreement is null and void, inoperative, or incapable of being performed. The Supreme Court, in a series of landmark judgements, emphasized the separability doctrine, asserting that an arbitration agreement could exist independently from the underlying contract. Recently, a seven judge bench of the Supreme Court in the case of In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 And the Indian Stamp Act, 1899 (“In Re: The Interplay”), has upheld the validity of unstamped or inadequately stamped agreements in an arbitration proceeding.
II. What is the issue about?
The issue arose in the context of the interplay between the Arbitration and Conciliation Act, 1996 (“the Act, 1996”), the Indian Stamp Act, 1899 (“the Stamp Act, 1899”)and the Indian Contract Act, 1872 (“the Contract Act, 1872”). Under the Stamp Act, 1899, an instrument which is unstamped or inadequately stamped is inadmissible in evidence and cannot be acted upon. Often, contracts containing arbitration clauses are unstamped. When a party seeks appointment of an arbitrator under Section 11 of the Act, 1996, objections are raised that the arbitration agreement is inadmissible since the underlying contract is unstamped. The key question was whether such an unstamped contract (and consequently the arbitration agreement) would be non-existent, unenforceable or invalid.
In N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.,2021 (“N.N. Global"), a three-judge bench held that an arbitration agreement is separate and distinct from the underlying commercial contract, and would remain valid and enforceable despite the contract being unstamped. This view differed from the earlier judgments in SMS Tea Estates v. Chandmari Tea Co. P. Ltd. (“SMS Tea Estates”) and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd (“Garware Wall Ropes”). A five-judge Constitution Bench in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 (“the N.N. Global (II)”)” subsequently affirmed SMS Tea Estates and Garware Wall Ropes and held that an unstamped contract containing an arbitration clause is void under Section 2(g) of the Indian Contract Act, 1872, and the arbitration agreement cannot be acted upon until the underlying contract is duly stamped.
Thereafter, a three-judge bench decision in Vidya Drolia v. Durga Trading Corporation, 2020 cited SMS Tea Estates and Garware Wall Ropes with approval. This led to a reference before a larger seven-judge bench in the case of In Re: The Interplay to reconsider the correctness of N.N. Global and related issues concerning stamping of arbitration agreements.
III. The Court’s Conclusion?
1. Unstamped instruments are inadmissible in evidence but not void
The Court held that merely being unstamped does not render an instrument void under the Stamp Act 1899. The consequence of non-payment of stamp duty is that the instrument is inadmissible in evidence. However, this does not amount to invalidity. Being a fiscal statute, the Stamp Act, 1899 renders an instrument inadmissible in evidence to ensure payment of stamp duty. It does not prescribe the substantive consequences of voidness, unenforceability or non-existence.
2. Non-stamping is a curable defect
The Court held that non-stamping or insufficient stamping is merely a curable defect. The Stamp Act itself provides a procedure for having the instrument stamped on payment of requisite stamp duty and penalty. This indicates that unstamped instruments are not void ab initio. There is no procedure for ‘curing’ a void instrument.
3. Arbitration agreements are valid despite unstamped underlying contract
The Court relied on the doctrine of separability enshrined in Section 16 of the Act, 1996 to hold that an arbitration agreement contained in an unstamped underlying contract remains valid and enforceable. The non-stamping of the substantive contract does not ipso facto invalidate the arbitration agreement therein, since the latter is a separate agreement.
4. Limited prima facie examination under Section 11 of the Act, 1966
Under Section 11, a court is confined to examining the existence of an arbitration agreement prima facie. It cannot undertake a detailed adjudication on stamping or impound the instrument at the pre-arbitral stage. This would undermine the competence-competence principle and the arbitral tribunal’s jurisdiction. Issues of stamp duty and impounding fall within the domain of the arbitrators.
5. The Act, 1996 has primacy over the Stamp Act, 1899 with respect to arbitration agreements
The Court held that the Act, 1996 being a special law governing arbitrations, will prevail over the more general Stamp Act, 1899 and Contract Act, 1872 qua arbitration agreements. The minimal judicial intervention mandate of Section 5 of the Act, 1996 implies that provisions of the Stamp Act, 1899 cannot interfere with the operation of the Arbitration Act, which has primacy.
IV. Settling Down the Controversy of Unstamped Arbitration Agreements (Analysis)
The Supreme Court's judgment settles the controversy on the validity of arbitration agreements in unstamped contracts. It steers a middle path so that neither the Act, 1996 nor the Stamp Act, 1899 is rendered otiose. The ruling upholds party autonomy and the competence-competence principle which are cornerstones of arbitration law. At the same time, it preserves the object of the Stamp Act, 1899 in securing revenue by requiring payment of stamp duty before the underlying contract is acted upon.
By holding that unstamped instruments are not void ab initio, the Court followed a long line of precedents including Thiruvengadam Pillai v. Navaneethammal, 2008 and Gulzari Lal Marwari v. Ramgopal 1936 which had distinguished between voidness and inadmissibility. The Court correctly held that the Stamp Act, 1899 renders a document inadmissible in evidence and not void or invalid. The ruling settles this confusion in jurisprudence.
The Court has also authoritatively applied the doctrine of separability to hold that defects in the underlying contract do not ipso facto invalidate the arbitration clause, which remains a distinct agreement. This finding accords with international arbitration jurisprudence and gives full effect to party autonomy.
The judgment helpfully clarifies the contours of Sections 8 and 11 of the Act, 1996. The prima-facie existence test under Section 11 excludes issues of stamping which must be left to the arbitrators. This upholds competence-competence and speedy constitution of tribunals. At the same time, issues of stamp duty can be agitated later during arbitration or challenge to the award.
V. Implications of the Judgment
The Supreme Court's judgment will have far-reaching implications. First, it settles the law by holding that unstamped contracts and arbitration agreements are not void or invalid. Second, it secures the validity of India's position as an arbitration friendly jurisdiction and a global hub for international arbitrations. Third, it upholds party autonomy and minimises judicial intervention at the pre-arbitral stage. Fourth, it reduces litigation over the appointment of arbitrators and ensures speedy constitution of tribunals.
Commercially, the judgment is a boon for business transactions and contracts containing arbitration clauses. Parties need not rush to pay stamp duty at the time of execution for fear of subsequent invalidation. The ruling incentivises business entities to choose arbitration over litigation. At the same time, it preserves the revenue interests of states since stamp duty remains payable before substantive rights and obligations under a contract can be enforced.
For arbitral institutions and foreign parties, the verdict assures that unstamped contracts will not derail India-seated arbitrations at the outset. It promotes arbitration as a time and cost effective dispute resolution mechanism. Court delays over impounding contracts at the pre-arbitral stage will also reduce. However, courts can still test the validity and enforceability of unstamped underlying contracts if an award is challenged on such grounds later under Section 34 of the Act, 1996.
VI. The Way Forward
The Supreme Court has given a pro-arbitration interpretation to reconcile party autonomy under the Act, 1996 with the state's fiscal interests under the Stamp Act, 1899. Lower courts must adhere to this authoritative pronouncement and refrain from delaying arbitration proceedings due to unstamped contracts.
However, access to justice concerns may arise if arbitration becomes an exclusive domain for affluent parties, while weaker parties are unable to invoke arbitration due to procedural costs and delays in stamping contracts. Courts should adopt a balanced approach. For domestic and small-value disputes, substantial stamping compliance must be ensured at the initial stage itself. For high-value commercial and international arbitrations, exorbitant stamp duty requirements should not hamper arbitration.
The onus is also on states to rationalize and simplify stamp duty administration, adopt technology solutions and minimize penal consequences for unstamped instruments. This will complement the Supreme Court's judgment in fulfilling the objectives of both the Stamp Act, 1899 and the Act, 1996. The ruling lays the ground for India's economic growth, global role and emergence as an arbitration hub.
*Kushagra Tolambia is a third-year B.A. LL.B (Hons.) student at National Law University, Lucknow