SCO Explains: Validity of an Unstamped Arbitration Agreement

Transcript:

Hello everyone and welcome to SCO Explains! I’m Sai Spandana and today, we’ll be talking about the question of the validity of an unstamped arbitration agreement. A question so important that a seven-judge constitution bench of the Supreme Court recently reserved judgment in a case to clarify the position of law on the matter!

So what is this case about and why is the Supreme Court debating an arbitration matter at all? 

Well, although arbitration is an alternative dispute resolution mechanism that is meant to reduce litigation, the Arbitration Act allows Court intervention in some instances. For instance, the Act says that if the parties to an arbitration agreement cannot agree on an arbitrator, they may approach the High Court or the Supreme Court to appoint a person on their behalf. 

Over the years, the Supreme Court has considered the key question in the case —whether an unstamped or insufficiently stamped arbitration agreement is invalid, in a series of cases. 

In 2011, SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. (2011) held that an unstamped arbitration agreement could not be enforced. They reasoned that sufficient stamp duty is needed for an agreement to be valid. 

In 2015, Section 11(6A) was introduced in the Arbitration Act. This provision states that while appointing an arbitrator, the Court should confine its examination to the “existence of an arbitration agreement.” Seemingly, this provision suggests that the Court cannot delve into the validity of an agreement under the Act. 

However, in 2019 in Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019), another three-judge division bench of the Supreme Court held that contracts (including agreements) are only enforceable if duly stamped. The Court held a similar view a year later,  in Dharmaratnakara Rai Bahadur v Bhaskar Raju (2020) 

The present case which is  NN Global Mercantile v Indo Unique Flame arose in 2020 when N.N. Global approached the Supreme Court following a dispute over invoking a bank guarantee in a contract with Indo Unique Flame Ltd. N.N. Global claimed that the agreement was unstamped and hence, unenforceable. In January 2021, a three-judge Bench disagreed with the decisions in SMS Tea Estates and Garware. The Bench also referred the case to a five-judge Constitution Bench to settle the debate once and for all.

Finally, on 25 April 2023, a five-judge Constitution Bench of the Supreme Court comprising Justices K.M. Joseph, Aniruddha Bose, C.T. Ravikumar, Ajay Rastogi and Hrishikesh Roy in a 3:2 majority held that an unstamped arbitration agreement was void and unenforceable.

The decision met with immediate criticism. Many claimed that the judgement created practical difficulties and delays in the arbitration process, especially for urgent matters. Considering that arbitration was an alternate dispute resolution mechanism, designed to create speedy, effective mechanisms to resolve disputes that do not require judicial intervention, this result seemed counterproductive. 

On 26 September 2023, a five-judge bench of the Supreme Court agreed to reconsider the decision in NN Global in view of its “larger ramifications and consequences.” The bench comprised CJI D.Y. Chandrachud and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, and Surya Kant. Curiously, the lead petition in the case was a curative petition against the 2020 decision in Dharmaratnakara. NN Global was a tagged matter.

Over 11th and 12th October 2023, a seven-judge bench comprising CJI Chandrchud and Justices Kaul, Khanna, Gavai, Kant with J.B. Pardiwala and Manoj Misra heard arguments about the NN Global judgement. The bench also renamed the case “In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899.”

Senior Advocates Arvind Datar, Nikhil Sakhardande, Jayanth Mehta, Gourab Banerjee and Darius Khambata petitioned that the majority decision in NN Global was incorrect. They highlighted that the Court could not decide the validity of an arbitration agreement as its powers under Section 11(6A) of the Arbitration Act were limited. The Court could only determine the existence of an arbitration agreement and nothing more. Further, they contended that not stamping or insufficiently stamping an agreement was a “curable defect” and could not be used as a yardstick to render an arbitration agreement invalid.

On the other side of the argument, Senior Advocates Shyam Divan and Nikhil Nayyar appeared for the respondents. Divan asserted that the Court had no jurisdiction to answer any legal questions in the present case. He contended that prima facie, this was a curative petition. By entertaining a petition to reconsider the judgement of one case that is NN Global through a curative petition in another that is Dharmaratnakara, the Court was breaching the rules of the curative jurisdiction. Changing the name of the case, the Senior Advocate said, does not change its nature. 

The bench however reasoned that they had to hear the case as it involved a significant legal question. They assured Divan that they would restrict themselves to answering this question and would not reopen the facts.

Divan and Nayyar then argued that the five-judge bench was right to declare that an unstamped arbitration was void. Under Contract law, they argued, an unenforceable agreement, such as an unstamped arbitration agreement, was void. Further, they also claimed that an arbitration clause could not be severed from the main contract. 

After two days of arguments, the bench reserved judgment in the case. The Court’s decision will clarify once and for all if an unstamped arbitration is valid.

That brings us to the end of this episode of SCO Explains! Read detailed reports about the case on SCOberver.in and stay tuned for more stories from the Supreme Court.