INDIAN SUPREME COURT REVERSES RECENT JUDGMENT AND HOLDS THAT (ALLEGEDLY) UNSTAMPED OR INADEQUATELY STAMPED ARBITRATION AGREEMENTS CANNOT HOLD UP APPOINTMENT OF ARBITRATORS OR PREVENT PARTIES FROM BEING REFERRED TO ARBITRATION

In a welcome decision for commercial parties, the Supreme Court has overruled its own controversial decision from earlier in 2023. The Court held that unstamped or inadequately stamped arbitration agreements are not void or void ab initio or unenforceable. Objections as to stamping are not to be determined by courts in proceedings to refer parties to arbitration in pending judicial proceedings or for appointment of arbitrators under Sections 8 or 11 of the Indian Arbitration & Conciliation Act, 1996 (the “Arbitration Act”). Instead, these fall to be determined by arbitral tribunals.

Close on the heels of its decision on the applicability of the group of companies doctrine in India (see our post here) to end the year on a pro-arbitration note, a seven-judge bench of the Indian Supreme Court has swiftly brought to a close 2023's most talked about issue relating to arbitration in India.

The Supreme Court has thus overruled the findings of a recent five-judge bench of the Supreme Court in NN Global Mercantile v Indo Unique Flame (2023) 7 SCC 1 ("NN Global 2") and of two previous two-judge bench decisions of the Supreme Court in SMS Tea Estates v Chandmari Tea Co (2011) 14 SCC 66 ("SMS Tea Estates") and Garware Wall Ropes v Coastal Marine Constructions & Engg (2019) 9 SCC 209 ("Garware").

The Supreme Court's decision offers significant respite to commercial entities with India-related contracts by clarifying that unstamped contracts cannot hold up the appointment of arbitrators or prevent parties in proceedings from being referred to arbitration. This means that defects regarding stamping can no longer be used by parties as a tool to delay the constitution of arbitral tribunals or otherwise hinder arbitration by initiating prolonged litigation in the courts.

However, parties must note that where contracts are unstamped or inadequately stamped, there may be delays after appointment of the arbitral tribunal, since tribunals are empowered to impound agreements to ensure that any defects in stamping are cured in accordance with the applicable procedure. Therefore, for India-related contracts, parties should continue seek advice in relation to stamping and ensure that their contracts comply with all applicable stamp duty requirements.

Background

Under Indian law, stamp duty is a duty payable on instruments such as deeds, bonds, and contracts, as prescribed. Such instruments, when executed by any person in India, are liable to stamp duty at the time of execution. Instruments executed outside India are liable to stamp duty when received in India.

The question of enforceability of arbitration agreements contained in unstamped or inadequately stamped contracts has been the subject matter of significant recent debate in India. In two previous cases (SMS Tea Estates and Garware), two-judge benches of the Indian Supreme Court held that arbitration agreements contained in unstamped contracts would be considered non-existent in law such that an Indian court would not recognise or act upon the arbitration agreement. This view was affirmed by a three-judge bench of the Indian Supreme Court in a subsequent case (while considering a different question), Vidya Drolia v Durga Trading Corpn (2021) 2 SCC 1 ("Vidya Drolia").

In NN Global Mercantile v Indo Unique Flame (2021) 4 SCC 379 ("NN Global 1"), a three-judge bench of the Indian Supreme Court questioned the correctness of the law laid down in the earlier judgments. The Court concluded that an arbitration agreement was considered a separate agreement from the underlying contract and would not be rendered unenforceable, even if the underlying contract was unenforceable for being unstamped or insufficiently stamped. Arbitration could commence and it would be for the arbitral tribunal to determine whether the underlying contract had complied with the requirements regarding stamping.

Given the difference between the conclusion reached by the three-judge bench in NN Global 1 and the view affirmed by a previous three-judge bench in Vidya Drolia, the matter was referred to a five-judge bench of the Indian Supreme Court.

In NN Global 2, a majority of a five-judge bench of the Supreme Court held that the previous cases of SMS Tea Estates and Garware were correctly decided and that an Indian court could not recognise or act upon an arbitration agreement contained in an unstamped or insufficiently stamped contract. As a result, courts could neither appoint arbitrators nor refer parties to arbitration when faced with an unstamped or inadequately stamped contract. It would be necessary to first impound the instrument and require parties to cure the defect regarding stamping before acting further. This meant significant delays to commencement of arbitration.

Reference to a seven-judge bench

Though NN Global 2 ought to have been, in the ordinary course, the final say on the issue, the question of enforceability of arbitration agreements contained in unstamped contracts remained alive. It was considered in other cases before the Supreme Court until the entire issue finally came to be referred to the seven-judge bench given the "larger ramifications and consequences" of NN Global 2.

Decision of the seven-judge bench

The Court carried out a detailed analysis of the provisions of the Indian Stamp Act, 1899 (the "Stamp Act") and the Arbitration Act to conclude that unstamped or inadequately stamped agreements are not void or unenforceable. When faced with applications to refer parties to arbitration or appoint arbitrators, courts only need to satisfy themselves as to the existence of an arbitration agreement and must leave issues of stamping to be dealt with by arbitral tribunals.

Consequences of failure to stamp an instrument

The Court considered the provisions of the Stamp Act and noted that the statutory mandate did not render unstamped agreements void, but provided that unstamped agreements could not be admitted into evidence or acted upon, registered, or authenticated. The Court noted that there was a difference between “void” (relevant to enforceability of an agreement) and “inadmissible” (relevant to whether a court could consider or rely on the agreement). The Stamp Act, which was a fiscal statute, itself provided the procedure for curing a defect regarding stamping. Thus, it did not envisage that unstamped agreements would be void.

Principles underlying the Arbitration Act

The Court noted that the Arbitration Act provided for minimum judicial interference, with one of its main objectives being to minimize the supervisory role of courts in the arbitral process. It also noted that the Arbitration Act is a self-contained code and provides for the separability of the arbitration agreement from the main contract. The Court noted that the presumption of separability was applicable not only for the purpose of determining the jurisdiction of the arbitral tribunal, but that it also "encapsulates the general rule on the substantive independence of an arbitration agreement”. Arbitral tribunals had jurisdiction to determine the limits of their own jurisdiction and the legislative mandate required courts not to interfere “at the referral stage by deferring to the jurisdiction of the arbitral tribunal in issues pertaining to the existence and validity of an arbitration agreement”. According to the Court, Indian courts have a duty to interpret the Arbitration Act "in a manner which gives life to the principles of modern arbitration in India".

Harmonious interpretation of the Stamp Act and Arbitration Act

The Court noted that it was important to construe the Stamp Act and the Arbitration Act harmoniously, so as to give each statute full effect and ensure that the purpose of neither statute is defeated. The Court noted that the Arbitration Act, a comprehensive legal code governing arbitrations, was a "special" statute in the context of this case and ought to have primacy for the purpose of arbitration agreements. The Arbitration Act did not specify stamping as a pre-condition of a valid arbitration agreement and required courts to confine themselves to an examination of the existence of an arbitration agreement at the referral stage.

In other words, an objection as to stamping does not fall for determination by the Indian courts when considering applications under Section 8 (to refer parties in a dispute to arbitration) or Section 11 (to appoint the arbitral tribunal) of the Arbitration Act. Although not an issue that arose in NN Global 2, the Court also observed that Indian courts are not required to deal with the issue of stamping at the stage of granting interim measures under Section 9.

The Court held that it was then for the arbitral tribunal to act in accordance with the law and impound the agreement, if required, to ensure that the procedure under the Stamp Act to cure defects is followed. The issue of stamping is a jurisdictional issue. The provisions of the Stamp Act make it clear that a person having authority by "consent of parties" to receive evidence is empowered to impound and examine an instrument, and that such person having authority "by consent of parties" to receive evidence includes an arbitral tribunal.

The Court noted that this interpretation allows the doctrine of competence-competence to be given life and also ensures that the Stamp Act is not flouted. The Court noted that its interpretation gave effect to:

1. "The principle of minimal judicial intervention in Section 5 of the Arbitration Act;
2. The prima facie standard applicable to Sections 8 and 11 of the Arbitration Act; and
3. The purpose of the Stamp Act which is to protect the interests of revenue and not arm litigants with a weapon of technicality by which they delay the adjudication of the [dispute].
4. The interpretation of the law must give effect to the purpose of the Arbitration Act in addition to the Stamp Act.”

For more information, please contact Andrew Cannon, Partner, Tomas Furlong, Partner, Anuradha Agnihotri, Of Counsel, Divyanshu Agrawal, Senior Associate (India), Didon Misri, Associate (India), or your usual Herbert Smith Freehills contact.