[Mayank Taparia is a 3rd year B.A, LL.B. (Hons.) student at NALSAR University of Law and Arjav Sethi is a 4th year B.A,. LL.B. (Hons.) student at Jindal Global Law School]
On 25 April 2023, the Supreme Court delivered a judgment in M/S N.N. Global Mercantile vs. M/S Indo Unique Flame Ltd (hereinafter referred to as N.N. Global Mercantile), which has spurred the debate on the law of existence and validity with respect to an arbitration clause in an unstamped agreement. The Constitution Bench of the Supreme Court addressed the issue raised by a three-judge Bench about the question of enforceability of an unstamped arbitration agreement. The Court, with a 3:2 majority, held that if a contract is not as per the requisites of the Indian Stamps Act of 1899 (hereinafter referred to as Stamps Act), it would be non-existent pending the payment of stamp duty. However, this issue has not come for the first time, as previously, the Courts have actively engaged with the question of the unenforceability of an unstamped agreement.
The authors of this article argue that the Constitution Bench, while addressing the issue, neglected to take into account the purpose of the 2015 Amendment in the Arbitration and Conciliation Act 1996 (hereinafter “Arbitration Act”) and Section 16(1)(a) of the Arbitration Act, which undertakes the existence of an arbitration clause and requires that it be treated independently from any other parts of the contract, acknowledging the Doctrine of Separability and the principle of Kompetenz – Kompetenz.
The Enigma of Existence
In N.N. Global Mercantile, the issue was persistent mainly with the question of “existence” under Section 11(6A) of the Arbitration Act. Section 11(6A) states that the Court must restrict its scope to examine whether an arbitration agreement exists.
This judgement comes in contrast to the three-judge Bench decision in N.N. Global Mercantile in which the Supreme Court opined that the position of law governing the arbitration clauses in an unstamped agreement being subject to insufficient stamp duty needs to be reconsidered. The Constitution Bench, in the present case, defied the opinion of three judge bench in N.N. Global Mercantile and instead continued to uphold the earlier position that an arbitration clause in an unstamped agreement is unenforceable.
In the 2011 case of M/S SMS Tea Estates P.Ltd vs. M/S Chandmari Tea Co.P.Ltd (hereinafter referred to as M/S SMS Tea Estates P. Ltd), the Court held that the arbitration agreement contained in an unstamped agreement could not be enforced. It is pertinent to note that the judgment was passed before the 2015 Amendment, and the law, as it stood, was that the Court could examine certain issues at the pre-reference stage under Section 11 (6) of the Arbitration Act. After the amendment in the Act, it was thought that the insertion of Section 11(6A) had solidified the scope of the Court’s intervention, and the scope of judicial scrutiny was curtailed only to determine whether an arbitration clause existed.
The 2015 Amendment was recommended by the Law Commission in its 246th Report. The commission recommended amendments that limited the scope of judicial intervention to the situation where the arbitration agreement does not exist. Even it is apparent in Section 11(6A) that the scope of enquiry is confined only to the existence and not even whether a contract is null and void. [113] [MT4]
Subsequent to the insertion of Section 11(6A), it was for the first time in the M/S Duro Felguera S.A. vs M/S. Gangavaram Port Limited, that the question of “existence” came before the court. It was held that the function of the Court is only to examine whether the arbitration agreement exists – nothing more, nothing less. Notwithstanding the implementation of the 2015 Amendment, the two-judge Bench in Garware Wall Ropers Ltd. Vs. Coastal Marine Constructions came to the same conclusion as was held in the M/S SMS Tea Estates P. Ltd. Moreover, the same view was also approved in Vidya Drolia v. Durga Trading Corporation, and since this case was also decided by a three-judge Bench, the issue was referred to Constitution Bench.
However, the Constitution Bench failed to act in accordance with the 2015 Amendment; instead, they upheld the view observed in United India Insurance Co. Ltd. v. Hyundai Engg. & 51 Construction Co. Ltd that existence and validity of an arbitration agreement are intertwined and an arbitration agreement cannot be considered in existence if it does not satisfy the legal requirements. This marks a deviation from the intention of the lawmakers, as is evident from the 246th Report of the Law Commission and Section 11(6A) of the Arbitration Act which indicates that the question of validity and existence can be perused by the arbitrator under Section 16 instead of the Courts under Section 11 of the Arbitration Act.
Further, in N.N. Global Mercantile, the three-judge Bench and minority view in Constitution Bench observed that the Court should refrain from scrutinizing the stamp duty issue during the pre-referral stage because the competency of an agreement to be a contract can be adjudicated by an arbitral tribunal.
Undermining Arbitration Autonomy
The Court’s reliance, drawing from Section 7(2) of the Arbitration Act and Section 2(h) of the Contract Act and thus, concluding that any agreement on which the stamp duty is not paid would not be considered as a contract enforceable in law within the tenets of section 2 (h) of the Indian Contract Act. This pronouncement without considering the Doctrine of Separability, reflects a flawed interpretation of the law. It leads to the unjust and unwarranted invalidation of arbitration clauses solely based on the absence of stamping in the underlying document. Such an approach not only disregards the principles of party autonomy and the freedom to choose arbitration as a dispute resolution mechanism but also impedes India’s efforts to establish itself as a preferred hub for arbitration.
For instance, Section 16(1)(a) of the Arbitration Act explicitly acknowledges that an arbitration clause is a distinct document and requires it to be treated independently from any other parts of the contract, thereby acknowledging the Doctrine of Separability. It is an inclusive provision that contains crucial aspects such as the Principle of Kompetenz- Kompetenz, which empowers the Arbitration Tribunal to decide on its own jurisdiction as well as any objections on the validity or existence of the arbitration clause. The Supreme Court in A. Ayyasamy v. Parmasivam & Ors opined and emphasized the importance of interpreting the Arbitration Act with the prevalent standards of International Arbitration.
In addition to this, UNICTRAL (United Nations Commissions on International Trade Law) Model law also recognizes arbitration clauses as a separate agreement from the main underlying contract, and it also has its influence on the Arbitration Act, which can be implied from the resemblance in Article 16 of the Model Law with Section 16 of the Arbitration Act.
But the Constitution Bench, in its judgment, paid no heed to the international standards and practices that are most prevalent in the International Arbitration scenario, such as failing to recognize that an arbitration clause is an autonomous and distinct agreement from the main contract containing such clause.
Moreover, the well-established Principle of ‘generalia specialibus non–derogant’ also governs the issue of interpretation of provision when there exists a conflict between the general statute and the special act. This principle is explained by the Supreme Court in Gobind Sugar Mills Ltd. v. State of Bihar & Ors, wherein the Court observed that “when there is a conflict with the interpretation of the two statutes, then the provisions of the general statute must yield to the special act.”
With respect to the provisions of the Arbitration Act and the Stamp Act, there exists a conflict when determining the powers and the scope a judge has in determining a suit under Section 11 of the Arbitration Act. Section 11 only involves determining the existence of an arbitration agreement, not the legal validity at this stage. As opposed to this, the majority held that an arbitration clause, whether as a separate document or in the form of an underlying contract, would itself be considered an agreement. Therefore, they held that proper stamp duty needs to be paid on the same since Section 35 of the Stamp Act puts a limitation on the Court inducing insufficiently stamped documents as evidence, rendering the agreement unenforceable. This makes it very difficult for the Court to ascertain whether an arbitration clause exists because Section 35 of the Stamps Act provides that an unstamped arbitration agreement is not enforceable in the Court of law.
Therefore, to resolve this apparent conflict, a harmonious interpretation of the relevant statutes is important. The right approach, in this case, is to allow the Arbitration Tribunal to decide on the validity of the unstamped document at a later stage rather than at the pre-referral stage by the Court while appointing the arbitrator. This approach will ensure a smooth arbitration process with minimal interference; at the same time, the objective of revenue generation would also be achieved, as the Tribunal dealing with unstamped documents would not be restricted by the limitation imposed upon the Court.
Thus, in cases of such inconsistency, the Arbitration Act being a special act, held in M/s. Consolidated Engineering Enterprises vs. Principal Secretary, Irrigation Department should prevail over the provisions of the Stamp Act. This interpretation ensures coherence with not only the technical requirement but also the legislative intent behind the Arbitration Act, while at the same time maintaining the integrity of the stamping requirements under the Stamps Act.
Conclusion
The recent decision of the Constitution Bench of the Supreme Court in M/S N.N. Global Mercantile highlights a shift in its interpretation of the Indian Stamps Act and the Arbitration Act, giving precedence to the former. This departure from previous rulings, which were supportive of arbitration, marks a significant change in the Court’s stance.
This ruling has the potential to undermine India’s pro-arbitration reputation, which the country has diligently cultivated through legislative measures such as the Arbitration (Amendment) Act of 2015 and 2019. By expanding the scope of judicial intervention, the decision is likely to prolong the process of arbitration, thereby hindering its efficiency and effectiveness. Moreover, it may create obstacles in obtaining urgent interim relief and enforcing emergency awards. The primary purpose of arbitration is to provide an efficient and alternative method of dispute resolution, particularly for commercial matters. However, because of the decision of the Constitution Bench in M/S N.N. Global Mercantile, the reference to arbitration under Section 11 now faces uncertainty.