BLOG DETAILS

By- M. I. Choudhury & Ekta Chaudhary, Advocates

In a landmark verdict, a seven-judge Constitution Bench headed by
Chief Justice D.Y.Chandrachud has unanimously affirmed the
validity of arbitration clauses within unstamped agreements, thereby
overturning the precedent set by the ‘NN Global’ decision. The
Constitution bench rendered the decision on December 13, 2023, in
the case titled “Re: Interplay between Arbitration Agreements under
the Arbitration and Conciliation Act 1996 and the Indian Stamp Act
1899,” the judgment elucidates that while unstamped or inadequately
stamped agreements are considered inadmissible under Section 35 of
the Indian Stamp Act 1899, they are not ipso facto void or
unenforceable, as non-stamping is regarded as a remediable
deficiency.
The genesis of this legal development lies in prior legal conflicts. The
SMS Tea Estates case, heard by a two-judge bench, established that
arbitration agreements within unstamped contracts lacked
enforceability. However, subsequent amendments to the Arbitration
and Conciliation Act in 2015 sought to reduce judicial intervention
during arbitrator appointments. In 2019, the Garware Case reiterated
that arbitration agreements within unstamped contracts were legally
invalid unless properly stamped. Conversely, the NN Global 1 Case in
2021, adjudicated by a three-judge bench, introduced the concept of
a correctable defect regarding stamp duty non-payment.
Subsequently, in 2023, the NN Global 2 Case, decided by a five-judge
constitution bench, overturned this stance, asserting that unstamped
instruments, being unenforceable, could not legally host arbitration
agreements without proper stamping.
The crux of the issue pertains to the validity of arbitration agreements
within unstamped or inadequately stamped contracts. The petitioners
contend that Section 11(6A) of the Arbitration Act circumscribes the
court’s jurisdiction to examining the existence of an arbitration
agreement, eschewing scrutiny of its stamping adequacy. They further
assert that the NN Global 2 Case imperiled the efficacy of Section
11(6A) by extending the court’s ambit. Additionally, they argue that
the Arbitration Act confines the court’s purview to arbitration
agreement scrutiny exclusively, relegating stamping matters to the
arbitral tribunal. The petitioners also invoke Section 5 of the
Arbitration Act, which curtails judicial intervention, to buttress their
position.
In sum, the Supreme Court’s ruling reaffirms the enforceability of
arbitration clauses within unstamped agreements, departing from
antecedent constructions and endeavoring to reconcile statutory
provisions with the expediency of arbitration proceedings.
Moreover, supplementary arguments were tendered concerning the
arbitral tribunal’s competence to adjudicate stamping-related issues
and the interpretation of Section 5 of the Arbitration Act, which
restricts judicial intervention in arbitration proceedings. The
contention posited is that the exigency of stamping does not vitiate an
instrument but rather renders it inadmissible as evidence until the
stamping deficiency is rectified pursuant to the Stamp Act’s
provisions.
Conversely, respondents contend that the preconditions for the
maintainability of a curative petition, as articulated by the Supreme
Court in the Rupa Ashok Hurra case, were not met. Additionally, they
posit that the court’s examination under Section 11(6A) of the
Arbitration Act extends beyond a mere facial arbitration agreement
existence assessment to encompass a prima facie evaluation of its
validity. Furthermore, they underscore the mandatory obligation
imposed on courts by Section 33 of the Stamp Act to impound
unstamped or inadequately stamped instruments, rendering them
inadmissible until the requisite stamp duty and penalty are remitted.
The Supreme Court abstained from addressing the curative petition’s
maintainability issue, leaving it open for the parties to raise before the
appropriate forum. It underscored the significance of Section 35 of the
Stamp Act, which stipulates that an instrument lacking proper stamp
duty shall not be admitted as evidence unless duly stamped.
Nonetheless, upon payment of the deficient stamp duty, the
instrument becomes admissible. The court expounded that while
Section 35 renders a document inadmissible as evidence, it does not
render it void, thus delineating a dichotomy between enforceability
and admissibility.
Furthermore, the court scrutinized the concept of the severability or
separability of an arbitration agreement from the underlying contract,
affirming its legal autonomy. The bench emphasized that pursuant to
the Arbitration Act, 1996, arbitral tribunals possess jurisdiction to
ascertain their own competence in accordance with the Kompetenzkompetenz principle delineated under Section 16. Consequently, it
was asserted that arbitral tribunals, rather than judicial bodies, are
vested with the authority to evaluate the validity of arbitration
agreements with respect to stamping requirements. The bench
contended that the involvement of courts in adjudicating stamping
matters would contravene the objectives of the Arbitration Act.