Case Summary: Interplay of the Arbitration and Conciliation Act and the Indian Stamp Act
Case: Interplay Between Arbitration Agreements Under The Arbitration And
Conciliation Act 1996 And The Indian Stamp Act 1899 Vs.
SCR Citation: [2023] 15 S.C.R. 1081
Neutral Citation: 2023 INSC 1066
Date of Judgement: 13 December 2023
Court: The Supreme Court of India
Bench: Dr. Dhananjaya Y Chandrachud, CJI, Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, Surya Kant, J B Pardiwala And Manoj Misra, JJ.
Introduction
In 2021 the Supreme Court (from now on "SC") in the case of NN Global 1[1] held the finding in SMS Tea Estates[2] and Garware Case[3] that non-payment of stamp duty on underlying contract would invalidate the arbitration agreement and it would be non-existent - as incorrect.
Further it noted the Vidya Drolia[4] judgement which affirmed the position in Garware. Since the bench in Vidya Drolia and NN Global 1 were co-ordinate benches, the matter relating to the validity of arbitration agreement in terms of non-payment of stamp duty was referred to a five-judge bench.
The five-judge bench (NN Global 2[5]) rather held that NN Global 1's position is incorrect in law. It held that an unstamped instrument containing an arbitration agreement is void under 2(g) of the Contract Act, and therefore being unenforceable, it becomes non-existent in law.
In 2020 SC through a three-judge bench in Bhaskar Raju[6] citing SMS Tea Estates set aside High Court's decision to refer parties to arbitration relying on an insufficiently stamped contract.
After the NN Global 1 a curative petition was filed in Bhaskar Raju for reconsideration. Meanwhile, the SC while hearing the petition for appointment of an arbitrator in Seka Dobric[7] observed that one of the objections in that were relating to the non-stamping. Thus it ordered the matter to be listed together with Bhaskar Raju.
The five-judge bench took up the petition and considering the larger ramifications and consequence of the decision in NN Global 2 it referred the proceedings to a seven-judge Bench to reconsider the correctness of the view of the five-Judge Bench in NN Global 2.
That's how this case came before the seven-judge bench.
Issues
The pertinent issue to be decided was whether the statutory bar put on by the Stamp Act on instruments which are unstamped or insufficiently stamped to be inadmissible in evidence, also applies when the courts need to ascertain the validity and existence of an arbitration agreement when referring parties to arbitration or appointment of arbitrators under Section 8 or 11 respectively.In the context of the three laws namely, the Arbitration and Conciliation Act 1996 (hereinafter "Arbitration Act", "the Act"), the Stamp Act 1899 (hereinafter "Stamp Act"), and the Indian Contract Act 1872 (hereinafter "the Contract Act"):
The Court's Reasoning
Inadmissibility v. Unenforceability under the Stamp Act
The Court highlighted that inadmissibility is different from voidness or validity in law. An agreement in the context of the Contract Act may be void, but it can at the same time be admissible in evidence. Similarly, an agreement may be valid but inadmissible due to certain reason, in instant case the reason of it being not duly stamped.
The court noted that section 35 of the Stamp Act renders an instrument inadmissible and not void or invalid as a consequence of non-stamping or insufficiency. It further highlighted that the inadmissibility bar levied through section 35 is in itself curable as evidenced by the procedure provided for paying the duty and penalty and thereby the result being admissibility under section 42.
It took note of the observation made by the court in Hindustan Steel[8], wherein it was observed that the Stamp Act was enacted as a fiscal measure and not to be used as an objection by a person to oppose the claims of the opponent.
The Scope of Judicial Interference u/s 8 and 11(6A) of the Arbitration Act
The court observed that the position in NN Global 2 that an agreement is invalid because of it being not duly stamped, is incorrect. The Court held that section 2(j) of Contract Act which states than an agreement becomes void when it ceases to be enforceable is not attracted when an instrument is inadmissible, since the inadmissibility does not result into unenforceability per se.
The court in this case observed that section 11(6A) only contemplates the examination of existence of arbitration agreements and the courts must only confine to that, hence the question of whether it fulfils the requirements of a valid contract or not is for the consideration of the tribunal.
The Principle of Judicial Interference
The court recognised that the principle of minimum judicial interference enables the autonomy of the arbitral tribunal and is fundamental to keep the arbitration process desirable. While recognising this, the court noted Articles 5 and 16 of the Model Law[9] of the UNCITRAL[10] which form the basis for Sections 5 and 16 of the Arbitration Act.
It observed that section 5 gives effect to the intention of parties to solve disputes through arbitration and without the judicial interference. The non-obstante clause of the section ensures that Arbitration Act's provisions operate with full force without any hinderance from any other laws.
In regards to section 16 it said it furthers the minimum interference principle, since it empowers the arbitration tribunal to decide questions of its own jurisdiction and also the validity or existence of arbitration agreement.
It further held that, a Court under section 8 or 11 can only examine the existence of agreement on a prima facie basis, and rather the arbitral tribunals have the authority to deal with it in detail and examine it with evidence. Thus, the sections 8 or 11 read with section 5 are not allowed to determine substantial questions and thereby allow the tribunal to deal with them, upholding the aforesaid principle.
In Regards to Arbitration Law
Doctrine of Separability
It means that the arbitration agreement is, (through a 'legal fiction') separate from the contract in which the arbitration clause resides. It ensures that the arbitration agreement is insulated from the invalidity or the termination of the base contract.
The Court took notice of this doctrine which has developed all over the world and compared its application. The Court noted Article 16 of the Model Law on which section 16 is based, applies the doctrine of separability. It deems an arbitration clause or arbitration agreement, as an agreement independent of the other terms of contract and the ruling of the tribunal that the contract is null and void shall not mean that the arbitration agreement too is invalid.
Therefore, the court held that section 16 allows arbitrators to decide the questions of jurisdiction and validity even in the situation where the base contract is invalid. The agreement literally survives the termination or invalidity of the base contract. The court stated that not only this allows the arbitrators to decide on matters of jurisdiction, but it should be construed to mean that it enables them to also decide all the matters relating to the other terms of contract. Therefore, giving a way to parties to arbitrate even when the base contract is non-existent or invalid.
Doctrine of Competence-Competence
This doctrine implies that the arbitrators have the power to rule on their own jurisdiction with no subsequent judicial review required. However, this is certainly altered in most of the jurisdictions including India, where the arbitrators are given the first opportunity to decide on their own jurisdiction and then the decision may be appealed to the national courts.
The court observed the presence of this doctrine under section 16 which empowers the tribunal to rule on the question of its own jurisdiction and also other objections as to existence or validity of arbitration agreement.
It cited a para from Northern Coal Field[11], stating that section 16 is an inclusive provision and encompasses all issues relating to jurisdiction.
Therefore, the question was raised whether issue of stamping is relating to jurisdiction.
In NTPC[12], the court observed that when there is a refusal to go into merits of claim based on a preliminary requirement, then such refusal or reason may be in the realm of jurisdiction. Thus, the court held that the arbitral tribunal has the wide authority where it can rule on matters relating to its jurisdiction, including the issue of stamping.
It further noted that as per section 33 and 35 the duty to impound an instrument not duly stamped is not just on the authorities of law, but also the person authorised by the consent of the parties. Arbitral tribunal which is formed by consent of parties is thus competent to deal with it.
Harmonious Construction of the Arbitration Act and the Stamp Act
The Court noted the principle that general law must give way to the special law. The court held that the Arbitration Act is a special law while the Stamp Act is a general law.
The court noted the non-obstante clause in section 5 of the Act which indicates that the Act must take precedence over other laws and the courts intervention is allowed only if the Act itself allows it. The act does not allow intervention for impounding an agreement and therefore, Sections 33 and 35 of the Stamp cannot be allowed to operate during the intervention under sections 11 or 8 of the Act.
It stated that section 16 empowers the tribunal to rule on its jurisdiction, and that the tribunal has the jurisdiction to act under Stamp Act. It stated that obligating the court to decide the issues of stamping will defeat the legislative intent behind the Arbitration Act. The court held that the issue of stamping will be under the jurisdiction of the tribunal and the courts are only concerned with prima facie standard of examining the existence of agreement.
In regards to the application of the Stamp Act, the court said that once the tribunal is constituted the arbitrators are bound to proceed to impound the instrument if issue of stamping is present.
It said that the question is not whether arbitration agreements are liable to be impounded, rather it is when they are liable to be impounded.
The courts by refusing to impound during intervention are not refusing their duty but rather are giving effect to the object of the Arbitration Act.
Thus, through this construction the court harmonized the application of Stamp Act to arbitration agreements not duly stamped with the object of the Arbitration Act and also at the same time ensuring Stamp Act is complied with.
Conclusions
The Court held:
End Notes:
SCR Citation: [2023] 15 S.C.R. 1081
Neutral Citation: 2023 INSC 1066
Date of Judgement: 13 December 2023
Court: The Supreme Court of India
Bench: Dr. Dhananjaya Y Chandrachud, CJI, Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, Surya Kant, J B Pardiwala And Manoj Misra, JJ.
Introduction
In 2021 the Supreme Court (from now on "SC") in the case of NN Global 1[1] held the finding in SMS Tea Estates[2] and Garware Case[3] that non-payment of stamp duty on underlying contract would invalidate the arbitration agreement and it would be non-existent - as incorrect.
Further it noted the Vidya Drolia[4] judgement which affirmed the position in Garware. Since the bench in Vidya Drolia and NN Global 1 were co-ordinate benches, the matter relating to the validity of arbitration agreement in terms of non-payment of stamp duty was referred to a five-judge bench.
The five-judge bench (NN Global 2[5]) rather held that NN Global 1's position is incorrect in law. It held that an unstamped instrument containing an arbitration agreement is void under 2(g) of the Contract Act, and therefore being unenforceable, it becomes non-existent in law.
In 2020 SC through a three-judge bench in Bhaskar Raju[6] citing SMS Tea Estates set aside High Court's decision to refer parties to arbitration relying on an insufficiently stamped contract.
After the NN Global 1 a curative petition was filed in Bhaskar Raju for reconsideration. Meanwhile, the SC while hearing the petition for appointment of an arbitrator in Seka Dobric[7] observed that one of the objections in that were relating to the non-stamping. Thus it ordered the matter to be listed together with Bhaskar Raju.
The five-judge bench took up the petition and considering the larger ramifications and consequence of the decision in NN Global 2 it referred the proceedings to a seven-judge Bench to reconsider the correctness of the view of the five-Judge Bench in NN Global 2.
That's how this case came before the seven-judge bench.
Issues
The pertinent issue to be decided was whether the statutory bar put on by the Stamp Act on instruments which are unstamped or insufficiently stamped to be inadmissible in evidence, also applies when the courts need to ascertain the validity and existence of an arbitration agreement when referring parties to arbitration or appointment of arbitrators under Section 8 or 11 respectively.In the context of the three laws namely, the Arbitration and Conciliation Act 1996 (hereinafter "Arbitration Act", "the Act"), the Stamp Act 1899 (hereinafter "Stamp Act"), and the Indian Contract Act 1872 (hereinafter "the Contract Act"):
- Whether inadmissibility means invalidity or unenforceability?
- Whether inadmissibility is a curable defence?
- Are courts empowered and required to ascertain the issues of stamping when examining the validity of arbitration agreement? What is the nature of examination?
- Does the issue of stamping come under the jurisdiction of the arbitral tribunal if not under the courts?
Law
Stamp Act
- The Stamp Act is a fiscal statute which levies duty on all instruments provided therein.
- Section 17 – all instruments chargeable with duty shall be stamped.
- Section 33 – when an instrument not duly stamped comes before a person authorised by law or by consent of parties to receive evidence, then such person shall impound such instrument.
- Section 35 – an instrument which is not duly stamped shall not be admitted in evidence for any person having by law or consent of parties, the authority to receive evidence, and such instrument becomes admissible when the amount required to be paid as duty is paid with penalty if any.
- Section 38 – provides the procedure to be followed after the instrument is impounded and the duty is paid under Section 35, then the person with authority shall send the amount to the Collector.
- Section 42 – an instrument is admissible once the payment of duty and penalty if any is completed.
Arbitration Act
- Section 5 – states that notwithstanding anything contained in any other law, no judicial authority shall intervene in any matters provided for under Part I of the Act (Sec. 2 to 43) except only in manner provided in Part I.
- Section 8 – provides that when an action is brought before a judicial authority which is a subject of arbitration agreement, the court shall refer the parties to arbitration, except if it finds that prima facie no valid arbitration agreement exists.
- Section 11 – provides that whenever a party fails to appoint an arbitrator or the two arbitrators fail to appoint the third, or in case of sole arbitrator, parties fail to agree on an arbitrator then a party may request the SC or HC to take necessary measure.
- Section 11(6A) – states that SC or HC when considering request as mentioned above, shall confine itself to the examination of the existence of an arbitration agreement.
- Section 16 – the arbitral tribunal is empowered to rule on the question of its own jurisdiction and also the objections relating to validity or existence of the arbitration agreement. It further states that arbitration clause contained in a contract shall be treated as a separate agreement from the contract itself, and the decision of the tribunal relating to invalidity of the contract shall not directly mean invalidity of the agreement too.
The Court's Finding
The SC held that an agreement being not duly stamped does not render it void or unenforceable and that objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act and that the same falls within the ambit of the arbitral tribunal.The Court's Reasoning
Inadmissibility v. Unenforceability under the Stamp Act
The Court highlighted that inadmissibility is different from voidness or validity in law. An agreement in the context of the Contract Act may be void, but it can at the same time be admissible in evidence. Similarly, an agreement may be valid but inadmissible due to certain reason, in instant case the reason of it being not duly stamped.
The court noted that section 35 of the Stamp Act renders an instrument inadmissible and not void or invalid as a consequence of non-stamping or insufficiency. It further highlighted that the inadmissibility bar levied through section 35 is in itself curable as evidenced by the procedure provided for paying the duty and penalty and thereby the result being admissibility under section 42.
It took note of the observation made by the court in Hindustan Steel[8], wherein it was observed that the Stamp Act was enacted as a fiscal measure and not to be used as an objection by a person to oppose the claims of the opponent.
The Scope of Judicial Interference u/s 8 and 11(6A) of the Arbitration Act
The court observed that the position in NN Global 2 that an agreement is invalid because of it being not duly stamped, is incorrect. The Court held that section 2(j) of Contract Act which states than an agreement becomes void when it ceases to be enforceable is not attracted when an instrument is inadmissible, since the inadmissibility does not result into unenforceability per se.
The court in this case observed that section 11(6A) only contemplates the examination of existence of arbitration agreements and the courts must only confine to that, hence the question of whether it fulfils the requirements of a valid contract or not is for the consideration of the tribunal.
The Principle of Judicial Interference
The court recognised that the principle of minimum judicial interference enables the autonomy of the arbitral tribunal and is fundamental to keep the arbitration process desirable. While recognising this, the court noted Articles 5 and 16 of the Model Law[9] of the UNCITRAL[10] which form the basis for Sections 5 and 16 of the Arbitration Act.
It observed that section 5 gives effect to the intention of parties to solve disputes through arbitration and without the judicial interference. The non-obstante clause of the section ensures that Arbitration Act's provisions operate with full force without any hinderance from any other laws.
In regards to section 16 it said it furthers the minimum interference principle, since it empowers the arbitration tribunal to decide questions of its own jurisdiction and also the validity or existence of arbitration agreement.
It further held that, a Court under section 8 or 11 can only examine the existence of agreement on a prima facie basis, and rather the arbitral tribunals have the authority to deal with it in detail and examine it with evidence. Thus, the sections 8 or 11 read with section 5 are not allowed to determine substantial questions and thereby allow the tribunal to deal with them, upholding the aforesaid principle.
In Regards to Arbitration Law
Doctrine of Separability
It means that the arbitration agreement is, (through a 'legal fiction') separate from the contract in which the arbitration clause resides. It ensures that the arbitration agreement is insulated from the invalidity or the termination of the base contract.
The Court took notice of this doctrine which has developed all over the world and compared its application. The Court noted Article 16 of the Model Law on which section 16 is based, applies the doctrine of separability. It deems an arbitration clause or arbitration agreement, as an agreement independent of the other terms of contract and the ruling of the tribunal that the contract is null and void shall not mean that the arbitration agreement too is invalid.
Therefore, the court held that section 16 allows arbitrators to decide the questions of jurisdiction and validity even in the situation where the base contract is invalid. The agreement literally survives the termination or invalidity of the base contract. The court stated that not only this allows the arbitrators to decide on matters of jurisdiction, but it should be construed to mean that it enables them to also decide all the matters relating to the other terms of contract. Therefore, giving a way to parties to arbitrate even when the base contract is non-existent or invalid.
Doctrine of Competence-Competence
This doctrine implies that the arbitrators have the power to rule on their own jurisdiction with no subsequent judicial review required. However, this is certainly altered in most of the jurisdictions including India, where the arbitrators are given the first opportunity to decide on their own jurisdiction and then the decision may be appealed to the national courts.
The court observed the presence of this doctrine under section 16 which empowers the tribunal to rule on the question of its own jurisdiction and also other objections as to existence or validity of arbitration agreement.
It cited a para from Northern Coal Field[11], stating that section 16 is an inclusive provision and encompasses all issues relating to jurisdiction.
Therefore, the question was raised whether issue of stamping is relating to jurisdiction.
In NTPC[12], the court observed that when there is a refusal to go into merits of claim based on a preliminary requirement, then such refusal or reason may be in the realm of jurisdiction. Thus, the court held that the arbitral tribunal has the wide authority where it can rule on matters relating to its jurisdiction, including the issue of stamping.
It further noted that as per section 33 and 35 the duty to impound an instrument not duly stamped is not just on the authorities of law, but also the person authorised by the consent of the parties. Arbitral tribunal which is formed by consent of parties is thus competent to deal with it.
Harmonious Construction of the Arbitration Act and the Stamp Act
The Court noted the principle that general law must give way to the special law. The court held that the Arbitration Act is a special law while the Stamp Act is a general law.
The court noted the non-obstante clause in section 5 of the Act which indicates that the Act must take precedence over other laws and the courts intervention is allowed only if the Act itself allows it. The act does not allow intervention for impounding an agreement and therefore, Sections 33 and 35 of the Stamp cannot be allowed to operate during the intervention under sections 11 or 8 of the Act.
It stated that section 16 empowers the tribunal to rule on its jurisdiction, and that the tribunal has the jurisdiction to act under Stamp Act. It stated that obligating the court to decide the issues of stamping will defeat the legislative intent behind the Arbitration Act. The court held that the issue of stamping will be under the jurisdiction of the tribunal and the courts are only concerned with prima facie standard of examining the existence of agreement.
In regards to the application of the Stamp Act, the court said that once the tribunal is constituted the arbitrators are bound to proceed to impound the instrument if issue of stamping is present.
It said that the question is not whether arbitration agreements are liable to be impounded, rather it is when they are liable to be impounded.
The courts by refusing to impound during intervention are not refusing their duty but rather are giving effect to the object of the Arbitration Act.
Thus, through this construction the court harmonized the application of Stamp Act to arbitration agreements not duly stamped with the object of the Arbitration Act and also at the same time ensuring Stamp Act is complied with.
Conclusions
The Court held:
- Inadmissibility under Stamp Act does not mean voidness or invalidity.
- Inadmissibility is in itself a curable defect and therefore adding to the reasoning of it not being voidness or invalidity.
- The Courts under the Arbitration Act are confined only to prima facie examination of existence of arbitration agreement, and are not to be concerned with sections 33 and 35 of the Stamp Act.
- Yes, the Arbitrators have the jurisdiction to proceed under sections 33 and 35 of the Stamp Act.
End Notes:
- M/s. N.N. Global Mercantile (P) Ltd. v. M/s. Indo Unique Flame Ltd. 2021 INSC 12, [2021] 4 S.C.R. 933
- M/s. SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd. 2011 INSC 508, [2011] 9 S.C.R. 382
- Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. 2019 INSC 511, [2019] 5 S.C.R. 579
- Vidya Drolia and Others v. Durga Trading Corporation 2020 INSC 697, [2020] 11 S.C.R. 1001
- M/s. N.N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors. 2023 INSC 423, [2023] 9 S.C.R. 285
- M/s. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities & Ors. v. M/s. Bhaskar Raju & Brothers & Ors. 2020 INSC 194, [2020] 3 S.C.R. 798
- Arbitration Petition No. 25 of 2023
- Hindustan Steel Ltd. v. M/s. Dalip Construction Company 1969 INSC 46, [1969] 3 S.C.R. 736
- UNGA 'Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law' UN CITRAL 40/72 112th Plenary Session, 11 December 1985
- United Nations Commission on International Trade Law
- M/s. Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited 2019 INSC 1292, [2019] 14 S.C.R. 999
- National Thermal Power Corporation Ltd. v. Siemens Atkeingesellschaft 2007 INSC 229, [2007] 3 S.C.R. 399
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