Validity of an unstamped arbitration agreement | Judgement Summary

Unstamped arbitration agreement is inadmissible as evidence but not void

The judgement held that an unstamped agreement is valid but inadmissible as evidence in a Court of law. For this, they relied on Section 35 of the Stamp Act which says that an unstamped instrument is inadmissible as evidence. However, Section 42 of the same Act states that an insufficiently stamped instrument may be admissible in evidence once the stamp duty and the penalty, if any, are paid. This means that an unstamped arbitration agreement is a curable defect.

The judgement stressed the difference between the “admissibility of an instrument in evidence” and the validity of an instrument. An agreement is void when it is unenforceable in a court of law. But, admissibility is limited to whether the Court can rely on the said instrument while adjudicating a case. Thus, a void agreement may still be admissible in Court and vice versa.

Therefore, the bench concluded that Section 35 of the Stamp Act, speaks specifically about the admissibility of the instrument as evidence and not about its validity.

This is in stark contrast to the majority judgement in N.N. Global which conflated this distinction between admissibility and validity.

“Arbitral autonomy” prevents judicial interference

The judgement clarified that the principle of “arbitral autonomy” is a globally recognised arbitration standard. They held that this principle is enshrined under Section 5 of the Arbitration Act. The judgement noted that the main purpose of the Indian Arbitration Act was to provide “speedy and efficient resolution[s]” to disputes between parties in connection with their obligations.

“Arbitral autonomy” flows from the mutual intention of parties and the authority of arbitral tribunals to adjudicate on matters. This means that parties can exercise their rights in a contract and clearly state what they want without getting into the complex legal procedure. The principle of judicial non-interference reflects the autonomy of arbitral tribunals. 

Every provision of the Act, the judgement said, must be interpreted per this principle. Additionally, it also states that the Arbitration Act is a self-contained code, which means that anything covered by this Act should follow the procedure defined by the Act, and not the general legal process. 

Arbitration Act recognises the separability of arbitration agreement

The judgement held that the separability presumption is incorporated under Section 16 of the Arbitration Act. The concept recognises the judicial independence of the arbitration agreement from the underlying contract in which it is contained. Simply put, if an arbitration clause is included in a contract, it can be a separate agreement in itself. 

Separability distinguishes the contract, which deals with the substantive rights and contractual obligations of the parties, from the arbitration agreement. The arbitration agreement sets out a procedural framework to resolve disputes that arise out of these contracts.

Most importantly, separability ensures that the arbitration agreement survives despite the termination of underlying contracts. This means that if the contract is terminated, disputes may still be resolved under the contract’s arbitration clause. 

The concept of separability is derived from the Doctrine of Competence-Competence, which sets out the authority of the arbitral tribunal to determine its own jurisprudence. This means that the tribunals decide on all substantive matters of a dispute including the validity and existence of the arbitration agreement. 

The judgement traced the approach of different jurisdictions in the world, and their application of the concept of separability and competence-competence principles. In the United Kingdom, the judicial approach is to consider the arbitration clause in the contract as a distinct agreement.  With respect to the doctrine of competence-competence, the English courts have held that although the arbitral tribunal is empowered to determine its jurisdiction, the determination would be subject to examination by the courts.    

Similarly, the US Federal Arbitration Act presumes the doctrine of competence-competence and the separability of arbitration agreements from the underlying contracts. 

In Singapore, the law statutorily recognises the doctrine of separability and competence-competence through Section 21 of the Singaporean Arbitration Act, 2001. 

In India, the doctrine of presumption is enshrined under Section 16 of the Arbitration Act. This provision states that the arbitral tribunal is authorised to rule on its own jurisdiction and on any disputes related to the existence or validity of an arbitration agreement. The competence-competence principle finds its roots in Section 17 of the Act which states that the arbitral tribunal has the power to issue enforceable orders on its competence and jurisdiction.   

Arbitration Act, Stamp Act, and Indian Contract Act must be read harmoniously

The judgement held that the three statutes have to be harmoniously interpreted together in deciding the validity of an unstamped arbitration agreement. It held that the Arbitration Act would have primacy regarding arbitration agreements over the other two statutes namely the Stamp Act and Contract Act. 

To elaborate, the Judgement lists down the following reasons: 

1. The Arbitration Act is a special law whereas the Stamp Act and Contract Act are general laws
2. The principle of “arbitral autonomy” under Section 5 of the Arbitration Act overrides other provisions. 
3. Even though the legislators were aware of the Stamp Act while enacting the Arbitration Act, they did not specify stamping as a pre-condition for a valid arbitration agreement.

The judgement also held that the interpretation of “arbitral autonomy” under Section 5 in N.N. Global would make the principle meaningless. In N.N. Global, the five-judge bench held that the Court had jurisdiction to consider the validity of an arbitration agreement while considering the appointment of arbitrators. The seven-judge bench held that such interpretation is erroneous and amounts to judicial intervention. 

Intent of arbitration to minimise judicial intervention

The judgement emphasised that arbitration is supposed to be a “one-stop forum” for dispute resolution with minimal judicial intervention. Applying the competence-competence doctrine, the judgement held that the power and authority to decide the admissibility of an unstamped document lies with the arbitral tribunal, not the courts.

The validity of the underlying contract will be determined by the existence of a valid arbitration agreement. The bench also interpreted the word “shall” in the procedure for the examination and impounding of instruments under the Stamp Act. It held that although the word “shall” is mandatory in nature, it must be interpreted by the Court after determining the intention of the legislature at the time of making the statute.  

In the present case, the Court observed that the arbitral tribunal is bound by the Stamp Act. The bench held that the tribunal must ensure that provisions of the Arbitration Act are not accomplished in contravention of the Stamp Act.

SMS Tea Estates and Garware Wall Ropes judgments overruled

The Court in NN Global had referred to its previous rulings in SMS Tea Estates (2011) and Garware Wall Ropes (2019) to decide whether an unstamped arbitration agreement could be enforced.

In SMS Tea Estates, it was held that an arbitration agreement in an unstamped contract cannot be enforced, and therefore, the courts were permitted to impound documents under Section 33 of the Stamp Act during the stage of appointment of arbitrators. 

In Garware Wall Ropes Ltd., a two-judge bench determined that an arbitration agreement in an unstamped instrument lacks legal existence. Relying on this, the Court held that Garware Wall Ropes misinterprets the law by deeming unstamped arbitration agreements as non-existent.

Consequently, the Court overruled the judgment in SMS Tea Estates and the Garware Wall Ropes case as they were “wrongly decided”.

Justice Khanna’s concurring opinion

In his concurring opinion, Justice Khanna provided an overview of the Sections of the Stamp Act to support the opinion of the bench. He concluded that Section 33 of the Stamp Act states that an instrument must be produced before a person who is authorised to receive evidence during the performance of their functions. Also, Section 35 allows admission of unstamped or under-stamped instruments, provided they have been duly stamped afterwards, including payment of duty and penalty.