Shaswat Kashyap & Snigdha Dash[1]
The noteworthy decision by a three-judge bench of the Supreme Court in N.N. Global 2021, diverted from previous judgments in SMS Tea Estates, Garware Wall Ropes, and Vidya Drolia.
It was stated in the earlier judgments that arbitration agreements without the appropriate stamping could not be legally enforced. However, in the 2021 ruling, the Supreme Court adopted a pro-arbitration position and declared that even arbitration agreements that were not stamped nor had insufficient stamping could still be directed to arbitration.
In the N.N. Global 2021 case, the Supreme Court paid reliance on the UNCITRAL Model Law and the doctrine of severability, which was introduced in the Heyman v. Darwins case. It dismissed the conclusions reached in the SMS Tea and Garware, and stated that the absence of stamp duty payment does not render the arbitration agreement null and void. The Garware judgment attempted to harmonize the Indian Stamp Act, 1899 with the Arbitration and Conciliation Act, 1996 by prescribing a timeline for resolving issues related to stamping, making a distinction between the “validity” and “existence” of an arbitration agreement, and emphasizing that the Stamp Act applies to the agreement or conveyance as a whole. The court in N.N. Global 2021 dismissed Garware’s perspective as flawed. The court stressed the importance of disassociating the fate of the arbitration agreement that lies underneath the contract. Additionally, it ruled that the non-payment or insufficient payment of stamp duty could be rectified as a ‘correctable error’.
However, the court recognized that Vidya Drolia had upheld the decisions made in Garware, and both cases were decided by benches of equal strength. In light of this conflicting situation, the Court decided to refer the matter to a Constitutional Bench comprising five judges in the N.N. Global 2021 case. The purpose of this referral was to resolve the disagreement and reconcile the differing opinions between Vidya Drolia and N.N. Global 2021, which had created a conflict in the interpretation of the law.
In the wake of the uncertainty surrounding unstamped arbitration agreements, the Constitution Bench of the Honorable Supreme Court of India delivered a significant judgment in the N.N. Global 2023 case, aiming to bring clarity to the situation. This ruling clarified the enforceability of arbitration agreements that lacked proper stamping or had insufficient stamping. With a majority decision of 3:2, the court established that an arbitration agreement must adhere to the stamping requirements outlined in the Indian Stamp Act, 1899. Failure to meet these requirements renders the agreement legally nonexistent and unenforceable.
Foreign Legal Framework
Article 23 of the UNCITRAL Arbitration Rules, 2021, states that the invalidity of the main agreement does not automatically render the arbitration clause invalid. This principle is commonly referred to as the "severability or separability of the arbitration clause. Judge Stephen Schwebel from the International Court of Justice explains that the concept of an “arbitration agreement” itself implies the existence of a separate or detachable agreement, which can be separated from the main agreement if necessary. The principle of separability is of great significance and has been acknowledged by the International Chamber of Commerce (ICC) in its arbitration rules. The ICC initially recognized the concept of separability in its 1955 Arbitration Rules and has further reinforced it through the amended ICC Rules of 2012. Notably, Article 6(8) of the ICC Rules explicitly promotes the principle of separability, highlighting its importance in the arbitration process.
United Kingdom:
The Court of Appeal’s decision in Harbour Assurance v. Kansa General International Insurance supports the notion that the validity of an arbitration agreement can be maintained even if the underlying contract is deemed invalid, as long as the arbitration clause itself is not directly challenged. An arbitration agreement must be in writing to be enforceable and valid, but there is no requirement for the agreement to be signed or stamped.
Pakistan:
The issue of enforceability of unstamped arbitration agreements has been settled in Pakistan, as established in the Supreme Court judgment of Union Insurance Company of Pakistan v Hafiz Muhammad Siddique. In this case, the Supreme Court through Dorab Patel emphasized the language of Section 35 of the Stamp Act, 1899, and reiterated that expanding the interpretation of the section would go against established principles. Patel further explained that the objective of the Stamp Act is to preserve public revenue, and the absence of a stamp on the document does not affect the validity of any contract it contains. However, it renders the document inadmissible as evidence. This ruling overturned the Lahore High Court’s decision and clarified that while the non-stamping of an arbitration agreement makes it defective per se, it does not render it invalid in the eyes of the law.
China:
China has a ruling similar to that of Pakistan concerning the validity of unstamped arbitration agreements. This ruling was established in the case of Luck Treat Ltd. v. Shenzhen Zhong Yuan Cheng Commercial Investment Co., Ltd. In this particular case, even though one party failed to sign or stamp the main contract, the court affirmed the legitimacy and enforceability of the arbitration clause. The court emphasized the principle of separability, which ensures that the arbitration agreement is valid and independent of the main contract. Reference was made to Article 10 of the Interpretation of the Supreme People’s Court Concerning Some Issues on the Application of the Arbitration Law, which explicitly states that the absence of a main contract does not impact the validity of the arbitration agreement, relying on the separability clause. Furthermore, Article 19 of the Arbitration Law of the People’s Republic of China underscores that the existence of an arbitration agreement remains unaffected and separate from any modifications, cancellations, terminations, or invalidations of the underlying contract.
Other Jurisdictions:
Additionally, Section 178(3) of the Swiss Federal Statute on Private International Law (Swiss PIL) affirms that the validity of an arbitration agreement cannot be disputed solely based on the potential invalidity of the underlying contract.
Legal Implications & Concluding Remarks
Indian courts, through several rulings, have consistently supported the notion that non-payment of stamp duty is considered a “curable defect.” This means that an unstamped document can still be valid and enforceable once the stamp duty is paid. By allowing the defect to be rectified through the payment of a penalty, it is argued that an unstamped instrument cannot be deemed non-existent in the eyes of the law.
Moreover, the addition of Section 11(6A) to the 1996 Act in 2015 aimed to simplify the pre-arbitration stage by limiting the court’s role in verifying the continuance of an arbitration agreement. This provision sought to expedite the arbitration process and reduce unnecessary court interference. However, the recent judgment may lead to an increase in disputes over the validity of arbitration agreements. This could result in delays in resolving disputes as parties now have the opportunity to challenge the enforceability of such agreements, leading to additional legal proceedings. The interpretation of this provision is closely tied to crucial arbitration principles such as the doctrine of severability, minimal judicial intervention, and kompetenz-kompetenz. For instance, the interpretation of the seemingly innocuous phrase ‘existence’ in Section 11(6A) of the Arbitration & Conciliation Act, 1996 has sparked intense debates among legal scholars and experts. The debate stems from differing opinions among the Supreme Court benches. Some argue that the court’s examination should be limited to the mere factum of the existence of an arbitration agreement, leaving issues of scope, validity, and enforceability to the arbitral tribunal to decide under Section 16(1) of the Act. This interpretation aims to minimize the court's intervention and aligns with the legislative policy of the 2015 amendment. However, others argue that the term “existence” should be understood in a contextualized manner, taking into account the statutory norms that determine the nature of an arbitration agreement. It emphasized on the existence of an arbitration clause being contingent on enforceability and adherence to statutory requirements.
The amendment to Section 11(6A) focuses the court’s inquiry solely on determining whether an arbitration agreement exists, without disregarding the need for appropriate stamping or the enforceability of the entire agreement. The interpretation of the term "existence" in Section 11(6A) plays a crucial role in deciding the enforceability and relevance of an arbitration clause within a broader agreement.
Internationally, the principle of separability, recognized by the UNCITRAL Model Law and various arbitration institutions such as the ICC, holds significant importance. It emphasizes that the arbitration agreement is a separate and distinct entity from the parent contract and can be enforced independently, even if the main contract is invalidated. This principle has been acknowledged in different jurisdictions, including China, the United Kingdom, the United States, France, and Switzerland. The Supreme Court ruling has introduced an extra level of scrutiny during the arbitrator appointment process, deviating from the original legislative intent, in order to assess the legality and existence of the arbitration agreement. The decision has the potential to significantly prolong the arbitration process from the very beginning, causing increased delays.
[1] Shaswat Kashyap, a 3rd-year B.A., LL.B. (Hons.) student at Gujarat National Law University, and Snigdha Dash, a 3rd-year B.A., LL.B. (Hons.) student at National Law University, Odisha.