Enforcing Arbitration Clauses in Unstamped Contracts | A Huge Step Forward
Introduction
In a significant development, the Supreme Court of India, comprising a 7-judge bench, reversed a prior decision by a 5-judge bench on the enforceability of arbitration clauses in unstamped contracts. The case stemmed from a question raised in the M/s. N. N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. & Ors (2021), where the 5-judge bench, with a 3:2 majority, deemed arbitration clauses in unstamped contracts as invalid.
A subsequent 7-judge bench overturned this view, asserting that arbitration clauses in agreements with insufficient stamping are valid and enforceable. The Court clarified that the stamping deficiency renders the agreement inadmissible as evidence but does not nullify or make it unenforceable, emphasizing the remediable nature of this defect under the Indian Stamp Act, 1899 (the Stamp Act).
The decision had a wide reaching impact as it put into serious doubt the dispute resolution mechanisms in several commercial arrangements, including from credit card debt to complicated investor disputes. Section 11 of the Arbitration and Conciliation Act, 1996 seemed to be the only way out for several hundreds and thousands of parties to disputes. This in turn, would have impacted the backlog of cases at court registries.
Historical Context
The Court had previously tackled a similar issue in cases like SMS Tea Estates v. M/s Chanmari Tea Co. (2011), Garware Wall Ropes v. Coastal Marine Constructions and Engineering Ltd. (2019), and Vidya Drolia v. Durga Trading Corporation (2021).
In SMS Tea Estates (2011), the court acknowledged the doctrine of separability considering arbitration clause to be standalone clauses from the main contract. However, considering the Stamp Act, the court further opined that the lack of proper stamping makes the entire document, including the arbitration clause, inadmissible. This dual stance appeared to undermine the doctrine of separability.
Garware Wall Ropes Case (2019) maintained this position, despite the 2015 amendment to the Arbitration and Conciliation Act, 1996 (the Act) designed to minimize court intervention [Section 11(6A) of the Act]. The court, in overlooking the doctrine of separability, held that the Stamp Act applies to the entire contract, rejecting the possibility of seperability of the arbitration clause. Notably, the court, directly intervened in addressing the dispute without making an attempt to refer it to the arbitral tribunal (Section 16 of the Act), completely ignoring another fundamental doctrine in arbitration i.e. doctrine of kompetenz — kompetenz.
In Vidya Drolia Case (2021), the court, in line with SMS Tea Estates, reiterated its position, creating a conflict of views on the enforceability of arbitration clauses in unstamped agreements.
The court’s opinion in the above mentioned cases clearly undermined the two principle doctrines of arbitration ecosystem i.e. the doctrine of seperability and the doctrine of kompetenz — kompetenz.
NN Global Case (2021)
A turning point came with the NN Global Case, where a 3-judge bench, recognizing the doctrines of separability and kompetenz — kompetenz, declared that arbitration clauses in unstamped agreements are enforceable. The court emphasized the independence of arbitration clauses, relying on Section 16 of the Arbitration Act. This decision further aligned with the legislative intent of minimal court intervention post the 2015 Amendment.
View of the 5-judge Bench
The majority in this bench upheld the SMS Tea Estates and Garware Wall Ropes decisions, considering unstamped arbitration agreements as non-existent in law until validated under the Stamp Act. This view again seemingly ignored the two fundamental doctrines of arbitration discussed above.
The minority, however, supported the NN Global perspective, asserting that unstamped agreements should not render arbitration clauses unenforceable, treating stamping as a curable defect. (Read my views in detail at: https://dailyjus.com/world/2023/06/unenforceability-of-arbitration-clause-in-unstamped-contracts)
View of the 7-judge Bench
The recent 7-judge bench clarified the distinction between inadmissibility and voidness of the contract, emphasizing that stamping deficiencies make instruments inadmissible but not void under the Stamp Act. The Court recognized the distinct and separable nature of arbitration agreements from the main contract and also held that the issue of stamping is a jurisdictional matter and if such issue is raised before an arbitral tribunal, then the tribunal can impound and examine such instrument. Such views clearly demonstrate the court’s intention of reviving the doctrines of separability and kompetenz — kompetenz which was ignored in previous cases.
Harmonizing Statutes
The Court further advocated a harmonious interpretation of the Arbitration Act, the Stamp Act, and the Contract Act. It asserted the primacy of the Arbitration Act in relation to arbitration agreements over other statutes since it is a special law designed for conducting arbitration.
Conclusion
The decision of the 7-judge bench signifies a shift in the Indian perspective on enforcement of arbitration clauses in unstamped contracts, reaffirming the principles of separability and kompetenz — kompetenz. The ruling, overturning prior decisions, establishes a strong precedent, emphasizing the remediable nature of stamping deficiencies and the autonomy of arbitral tribunals.
It also paves the way for efficient handling of disputes. Together with the rapid adoption of Online Arbitration, the decision promises to boost the use of alternate dispute resolution and reduce the pressure on courts.
