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Development Of Arbitration In India: With Harmoius Construction Between Other Statutory Provisions

Arbitration is an Alternate Dispute Resolution method to resolve disputes without having to go through lengthy litigation process. Arbitration process is comparatively less hectic and cost effective than Litigation. In a world with trade and commercial related disputes arising frequently, thus the process of settling disputes through these alternate legal method becomes a viable option.

Arbitration procedure is a much faster and simpler legal option than regular court process and parties can decide the way they want be heard. It gives the necessary autonomy to the parties for smoother functioning of their business and resolution of their disputes.

With the economic liberalization of the Indian market in the 1991. Legislature felt the need to do away with the old Arbitration act of 1940 and enacted the Arbitration and Conciliation act 1996 (Arbitration Act). This act was drafted keeping in mind the general guidelines of the UNICTRAL Model Law, So to comply with the International Standards. This could help in attracting the foreign investment and build confidence in the investors about their investment security. Since, Arbitration is a Quasi-Judicial proceeding, the need to put limit on Judicial review was there.

This was one of the key reason for the enactment of the Arbitration Act of 1996. Since then, legislature has amended this act three times. The first time the legislature amended the Arbitration Act was in 2015. The Arbitration and Conciliation Amendment Act 2015, provided a statutory framework for time bound completion of arbitration proceedings. It defined the Jurisdiction of the Supreme Court and High Court in case of International Commercial Arbitration.

Again in 2019, legislature amended Certain section of the Arbitration and Conciliation act 1996. It further specified the roles of the Supreme Court and High Courts. Major changes were related to appointment of the Arbitration institution and limiting the scope of the Court to merely as the Referral courts and proposal for the establishment of Arbitration Council of India (ACI) for grading of arbitration institutes in the country. In 2021, legislature again amended the act and clarified some details related to the arbitration amendment act 2015 and omitted the Eighth Schedule from the principal act with minor updates in certain section.

Arbitration agreement can be formed between the parties under a Contract or they have the liberty to form a separate agreement which will be enforceable by law. By Entering into an Arbitration agreement parties give up certain rights. To make the arbitration process more assertive on the parties the decision of the Arbitrator is final and binding on the parties and it cannot be challenged on any ground other than those mentioned in section 12. Therefore, arbitration process becomes one of the most sort-out dispute resolution methods in the world. In fact, In England it was considered a threat to the judicial authority since parties heavily relied on this procedure to resolve their disputes.

Since, Arbitration clause can be found in a contractual document, it had certain restrictions and between two laws which will prevail in case of conflict arises. The enforceability of the arbitration agreement had been in the question for many years and court has finally decided the matter for once for all in:

"In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899" where the a constitution bench of seven judges of the Hon'ble Supreme Court of India has gone through in details of each of the three statutes in conflict namely Indian Contract Act 1872, Arbitration and Conciliation Act 1996 and Indian Stamp Act 1899.

This judgement made the significant step to clarify the enforceability of an Arbitration agreement if the stamp duty is not duly paid then whether the arbitration agreement becomes void and non-existence and whether the Arbitration agreement will still be there? We will discuss on this issue broadly in this essay and under stand the point of view of the court and the prevailing circumstances for the changes in stances of the court.

Relation between the 3 statutes
Let's first understand what constitute a contract in India. It is a legally enforceable agreement between two or more parties. An offer becomes promise once the party whom it was made gives their unqualified acceptance and the acceptance is received by the promisor or the party which makes an offer.

The promise becomes contract once the parties to it perform or omit some duty with some consideration. All contract are agreements but all agreements are not contracts. Therefore, A legally binding and enforceable contract should be without any uncurable error/defect. One such defect is the unstamped contract or unduly stamped contract. This error makes a contract voidable or void.

Stamps are regulated by Indian Stamp Act of 1899. The Stamp Act[1] is a fiscal measure enacted to secure revenue for the state on certain classes of instruments. The stringent provisions of the act are conceived in the interest of the revenue once that object is secure according to law. Thus, the law on stamp act is clear that it is there to generate revenue and to arm litigants with a weapon of technicality. Since, Arbitration can be formed in a contract it also attracts stamp duty which is to be made according to the Indian Stamp Act 1899.

Therefore, if a Contract which contains an Arbitration Clause and that is unduly stamped or unstamped according to Stamp Act then the Arbitration Clause becomes obsolete and Void. However, Unlike Indian Contract Act 1872 and Indian Stamp Act 1899 which are general laws, Arbitration and Conciliation Act of 1996 is a special law. Special laws are those laws which are made to govern specific area of conflict or specific legal matters.

They are narrower than the general laws which governs the wide range of legal matters. It therefore, became necessary for the courts to draw the line between these statutes and build a harmony between them. The arbitration which is a very popular method of dispute resolution in this day and age had to overcome this legal hurdle, which costs the parties their time and money in litigious process.

Judicial Trends and Landmark Decisions
In the realm of contractual agreements, the inclusion of an arbitration clause carries substantial weight, bearing in mind that the very essence of an agreement transforming into a contract hinges on its enforceability by law. A parallel can be drawn with the Stamp Act, wherein an agreement's metamorphosis into a legally binding contract is contingent upon proper stamping, signifying its enforceability.

In light of this, a careful examination of Section 11(6-A), in conjunction with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, elucidates that the existence of an arbitration clause within an agreement is contingent upon its legal enforceability. Put simply, an arbitration clause is rendered nonexistent when the underlying agreement lacks the essential quality of being enforceable by law. This was the principle approach followed in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd[2].

Thereafter, relying on the judgement of the SMS Tea Estates, In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg[3]. The Hon'ble Supreme Court held that an arbitration agreement in an unstamped commercial contract would not "exist" as a matter of law and could not be acted upon until the underlying contract was duly stamped.

These two judgements were largely seen as regressive and damaging steps to India's dream of becoming the global hub for International Arbitration. It was argued that the Arbitration agreement being distinct from the actual contract and being there in case a dispute arose in those contracts cannot be held void because that will defeat the very reason for having a special provision. Critics contended that the Arbitral Tribunal has the statutory backing and primary jurisdiction to deal with such matters and should have the authority to decide these cases.

Thereafter, In the landmark case of N.N. Global Mercantile Ltd. v. Indo Unique Flame Ltd.[4] ("N.N. Global 1"), a three-judge bench of the Supreme Court, led by Justice Indu Malhotra addressed the issue of the enforceability of an arbitration agreement within an unstamped instrument. The court diverged from prior decisions, notably SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., by asserting that an arbitration agreement stands as a distinct entity from the underlying commercial contract. The court declared that the non-payment of stamp duty, even in the context of the underlying contract, does not render the arbitration clause invalid, unenforceable, or non-existent, deeming it a curable defect. This departure reflects a progressive approach, emphasising the autonomy of arbitration clauses.

However, in the case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[5] ("N.N. Global 2"), a constitutional bench explicitly overturned the earlier ruling in N.N. Global 1. The majority, led by Justice K.M. Joseph and Justice Aniruddha Bose, supported by Justice C.T. Ravikumar, opined that an unstamped instrument containing an arbitration agreement is void under Section 2(g)[6] of the Contract Act. They emphasised that such an instrument, lacking enforceability in law, cannot legally exist, thereby challenging the notion put forth in N.N. Global 1.

The majority further clarified that the "existence" of an arbitration agreement under Section 11(6A)[7] of the Arbitration Act encompasses not only a factual presence but also an "existence in law." Additionally, the judges underscored the court's obligation under Sections 33[8] and 35[9] of the Stamp Act to scrutinise and impound unstamped or insufficiently stamped instruments, rejecting the notion that the court acting under Section 11 of the Arbitration Act can disregard such requirements.

The majority also stressed the importance of the certified copy of an arbitration agreement clearly indicating the payment of stamp duty, aligning with the precedents set in SMS Tea Estates and Garware Wall Ropes. The dissenting judgment, however, presented contrasting views on the validity of arbitration agreements in unstamped instruments. This judgement was seen as a very regressive approach to the Arbitration, and various petitions were filed before The Hon'ble Supreme Court.

Supreme Court, taking the view of larger ramifications of the case, formed a Seven Judge Constitution Bench and compiled all the petitions related to similar issues for review. The issue before the bench were whether an unduly stamped Arbitration agreement becomes void and whether this a curable defect.

Thereafter, In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, the Hon'ble Supreme Court held that in NN Global 2 and SMS Tea Estates, the judgment underscores that agreements lacking proper stamping, as per Section 35 of the Indian Stamp Act, are not automatically rendered void, void ab initio, or unenforceable. Instead, the court asserts that non-stamping or inadequate stamping represents a curable defect, challenging the notion that such agreements are inherently flawed.

The decision further clarifies that objections related to stamping are distinct from considerations under Sections 8[10] or 11[11] of the Arbitration Act. The primary focus during the initial examination by the concerned court is whether the arbitration agreement prima facie exists, separating the inquiry into the existence of the agreement from stamping concerns.

Moreover, the judgment holds that objections concerning the stamping of the agreement fall within the purview of the arbitral tribunal, aligning with a more pragmatic approach that recognises the arbitrator's role in addressing procedural matters.

The judgment provides clear justifications. It emphasises that the inadmissibility of unstamped or insufficiently stamped instruments under Section 35 of the Indian Stamp Act does not equate to the instruments being void or void ab initio. The distinction between inadmissibility and outright invalidity is crucial, highlighting that the defect can be cured, and the agreement remains viable once properly stamped.

Furthermore, the judgment clarifies that objections based on under-stamping or non-stamping during the initial stages of arbitration proceedings, such as in Sections 8 or 11 applications, do not carry decisive weight. The court adopts a more pragmatic approach, underscoring that the focus should be on the prima facie existence of the arbitration agreement.

Lastly, it affirms that matters related to insufficient stamping are within the domain of the arbitral tribunal, recognising the competence of arbitrators to address and decide such procedural issues during the course of arbitration proceedings.

This judgement can be marked as a progressive step in the whole stamp vs contract vs arbitration. This shift in judicial approach to minimal judicial review is highly commendable since it paves the way for India's vision of becoming a global hub for International Arbitration. With the mushrooming of the startup in the nation and the new FTA's with developed nations, this decision helps build trust and confidence in investors, and India can be seen as a viable option for investment and trade.

Practical Implications and Recommendations
The judgment emphasising the inadmissibility of unstamped or insufficiently stamped instruments in evidence while highlighting their non-void nature carries substantial practical implications in commercial agreements.

Firstly, legal practitioners must exercise heightened diligence in ensuring that contracts and, specifically, arbitration agreements are adequately stamped to avoid potential inadmissibility challenges. This underscores the importance of collaborating closely with clients and stamping authorities to address any stamp duty deficiencies. It is advisable to adopt a proactive approach by incorporating stamping considerations into the contract drafting and review processes.

Arbitrators should be cognizant of their expanded role in addressing stamping objections during proceedings. The judgment places greater responsibility on arbitrators to decide on procedural matters related to stamping, necessitating a thorough understanding of stamp duty laws. Arbitral tribunals should be prepared to efficiently and effectively handle objections related to stamping, ensuring that procedural hurdles do not unduly impede the arbitration process.

Moreover, parties entering into agreements, particularly those with arbitration clauses, should prioritise compliance with stamp duty requirements. Ensuring that agreements are properly stamped at the outset can prevent unnecessary disputes and delays in arbitration proceedings.

In light of these practical implications, it is recommended that legal practitioners stay abreast of developments in stamp duty laws and related judicial interpretations. This involves continuous education and training to navigate the evolving landscape effectively. Additionally, parties engaged in commercial transactions should incorporate clear stamping clauses in their agreements, specifying the responsibility for stamp duty payment and ensuring compliance with applicable laws.

Arbitration process is an effective legal dispute resolution method. It provides parties autonomy, speedy resolution of their disputes, it is much cost effective and less hectic than regular litigation. Legislature to enacted Arbitration and Conciliation Act 1996 with compliance with the international standards to attract investment and make India favorable destination for trade and commerce. Further, legislature amended the act three time to make it smoother and less administrative.

It fixed the time frame for speedy adjudication of the disputes, proposed establishment of Arbitration Council of India and limited the scope judicial review. Thereafter, the progressive step by the hon'ble Supreme Court, by harmonious construction between the three statutory provisions namely Indian Stamp Act 1899, Indian Contract Act 1872 and Arbitration and Conciliation Act 1996. This forward looking approach by the hon'ble Supreme Court helps in build confidence between the parties and foreign investor. This aligns with the India's goal of becoming global hub of International Hub for Arbitration.

However, this highlights the inadmissibility but non-void nature of unstamped or insufficiently stamped instruments, which significantly impacts legal practitioners, arbitrators, and parties involved in commercial agreements. This underscores the imperative for lawyers to diligently ensure proper stamping, arbitrators to address stamping objections adeptly, and parties to prioritise compliance to avert disputes. The practical implications call for proactive collaboration, education on evolving stamp duty laws, and clear stamping clauses in agreements, emphasising the necessity for a holistic and informed approach to navigate this nuanced legal landscape efficiently.

  1. Hindustan Steel Ltd. v. Dilip Construction Co. (1969) 1 SCC 597
  2. SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd (2011) 14 SCC 66
  3. Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg ( 2019 ) 9 SCC 209
  4. N.N. Global Mercantile Ltd. v. Indo Unique Flame Ltd. (2021) 4 SCC 379
  5. N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2023) 7 SCC 1
  6. Indian Contract Act, 1872, � 2, cl. g.
  7. Arbitration and Conciliation Act, 1996, � 11, cl. 6A.
  8. Indian Stamp Act, 1899, � 33.
  9. Indian Stamp Act, 1899, � 35.
  10. Arbitration and Conciliation Act, 1996, � 8.
  11. Id, at 5.

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