By: Suyash Pandey
INTRODUCTION
There has been a long legal debate over whether arbitration clauses contained in agreements that are insufficiently stamped can be enforced. Various courts, including the Supreme Court (“SC”), have rendered differing rulings on the subject. However, the SC seems to have finally settled the issue through a seven-judge bench decision in the case titled In Re: The Interplay. The court held that in agreements without the requisite stamping, arbitration agreements are enforceable but cannot be used as evidence.
In this piece, I will trace the jurisprudence on the question of enforceability of unstamped or inadequately stamped arbitration agreements and point out the problems in the same. Then, I will analyse the judgment of the SC to show how it has sought to correct these problems using the conception of directed power and the Coase Theorem.
THE JURISPRUDENCE ON STAMPING: A HAPHAZARD ON STAMPING
A two-judge bench of the Supreme Court ruled in SMS Tea Estates v Chandmari Tea Co. P. Ltd. that Section 35 of the Indian Stamp Act, 1899 prevented the enforcement of an arbitration clause in an inadequately or unstamped contract.
The legislature got involved in the response to the above judgment by amending the Arbitration and Conciliation Act, 1996 (“the act”) and adding Section 11(6A) to the act. The section provided that the role of the court is limited only to the extent of determining the existence of an arbitration agreement. This meant that the courts could not go into the determination of the validity of the arbitration agreement at the initial stage.
In another case titled Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited, the SC, however, upheld the ruling in SMS Tea, even after the amendment of the act. The SC ruled that an unstamped agreement is unenforceable and the arbitration clause, which is a part of that agreement, would not exist until duly stamped. Till this stage, the SC was guided by the notion that since an arbitration agreement is a part of the contract, it cannot exist when the contract itself is unstamped and, hence, unenforceable. This understanding was further reiterated in numerous cases such as Vidya Drolia v. Durga Trading Corporation wherein the court held that an arbitration agreement would not exist if it did not comply with all binding legal requirements, including paying stamp duty.
The NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 1”), wherein the court, diverging from these precedents, referred to the principles of separability of arbitration agreements and Kompetenz-Kompetenz to hold that it is not appropriate for an inadequately stamped underlying contract to be the exclusive basis for invalidating an arbitration agreement, which is separate from such contract. Soon, however, this decision was referred to a five-judge bench in the case of N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (“NN Global 2”).
The court in NN Global 2, emphasized that for an agreement to be enforceable by law, it should qualify as a contract under the Indian Contract Act, 1872. Moreover, the court also held that Section 5 of the Arbitration Act, which limits the judicial intervention during arbitral proceedings to statutorily stipulated situations, does not override Sections 33 and 35 of the Stamp Act that provide for impounding of unstamped documents and inhibit the usage of such documents as evidence. The court went back to the notion that unstamped contracts, being unenforceable, are void and, thus, render the arbitration clause void as well. It also widened the scope of inquiry under section 11 to determine the enforceability of the contract- bringing adjudication of the inadequacy of stamping within the purview of the courts.
Various criticisms of the above judgments included the disregard for the principle of minimal court intervention which forms the basis of arbitration law. This has been connected with the perception of India as an arbitration-friendly nation since the intervention of courts makes the process cumbersome. Authors have also argued that the decision renders the arbitration process vulnerable to misuse as parties might unnecessarily delay the process by using insufficiency of stamping as an excuse. Moreover, since such an excuse will have to be adjudicated by the Courts, the process might get further delayed. Another criticism of the judgment is that it doesn’t come with any guidelines on the exercise of power which can cause the courts to engage in a mini-trial for determining the sufficiency of stamping.
The present judgment seeks to resolve these problems by adopting a directed power framework and moving towards a more efficient regime.
IN RE: THE INTERPLAY: RESOLVING THE PROBLEM OFN THE PREVIOUS CASES
In the present judgment, the SC (a) clarifies the scope of inquiry under sections 8 and 11 of the arbitration law and (b) reverses the position of law on the issue of stamping of arbitration agreements.
Directed Power and Section 8 and 11
The principle of minimal judicial intervention in India comes from section 5 of the Arbitration Act which confines court intervention to situations provided in the statute. Sections 8 and 11 are the provisions under which the judiciary can intervene during the arbitral proceedings. While the court held that inadequate stamping does not invalidate the arbitration agreement, it also precluded its jurisdiction in this regard by limiting the powers of the court under the abovementioned sections to the prima facie establishment of the existence of arbitration agreements.
To hold this, the SC took an Exclusive Legal Positivist conception of directed power under sections 8 and 11. In cases of directed power, the courts are constrained by the legally prescribed aims; and necessity of the exercise of power. It used the separability and Kompetenz-Kompetenz principles to direct its power. While the separability principle provides that the arbitration agreement and the underlying contract are different and the flaws of the latter do not affect the former, under the competence-competence principle, the arbitrators are empowered to adjudicate over their jurisdiction. The SC held that a combination of both these principles maintains that even in cases where the underlying contract has been declared unenforceable due to infirmities, the competence of the arbitral tribunal to determine its jurisdiction and the enforceability of the contract remains intact. Using these principles to guide the jurisdiction under the abovementioned sections also excludes the analysis of the merits of the case without which the validity of the stamping of the agreement cannot be determined.
Thus, by adopting such a view on the powers of courts under sections 8 and 11, the court seeks to eradicate the problem of minimal court intervention and mini-trials highlighted above.
Reversing the Law on Inadequate Stamping
The main issue before the SC was whether the lack of a stamp on the underlying contract would render arbitration agreements void or unenforceable. To answer this, the court looked at section 35 in the Stamps Act and the scheme of the Arbitration and Stamps Act to hold that inadequately stamped arbitration agreements are inadmissible in evidence but cannot be declared void or unenforceable due to that sole reason. The court held that inadequate stamping is a curable defect. It also distinguished between unenforceable and inadmissible agreements. The court opined that inadmissible agreements may be corrected by addressing the curable defect- inadequate stamping in this case. However, declaring the entire agreement unenforceable would render it void ab initio. The court used the separability doctrine again to argue that when the parties sign the underlying contract, they give separate and specific consent to the arbitration agreement. Since the arbitration agreement is distinguished from the underlying contract, it cannot be declared unenforceable merely because the underlying contract is marred by a curable defect. The court, as we saw in the previous section, also removed its jurisdiction from the determination of the validity of arbitration agreements at the initial stages.
The decision of the SC can also be seen from the perspective of achieving efficiency in the arbitration proceedings. The Coase theorem stipulates that even if the initial allocation of rights is inefficient, the parties will rectify it in situations with zero transaction costs. The role of the law in such a situation becomes to minimize the transaction costs to attain economic efficiency. This reduction in transaction costs can be achieved by creating cost-effective remedies for the adjudication of disputes.
In the present case, the court has limited its jurisdiction to leave the determination of the issue of validity of stamping of arbitration agreement upon the tribunal. By doing so, the court relegates two kinds of transaction costs. First, by clarifying the jurisdiction of the courts, the SC has prevented future cases where the validity of arbitration agreements comes before the courts. Given the problem of the delays in judicial adjudication, the future parties can get a speedier resolution of their disputes through tribunals. Second, the above clarification also ensures that the parties to the arbitration agreement do not need to move forums for the adjudication of the validity of their contracts. This saves the litigation costs of the parties and furthers the purpose of the arbitration act, that is, to render speedy justice to the parties. Moreover, it also solves the problem of deliberate delay that parties might cause by arguing for inadequate stamping before the courts.
CONCLUSION
In this piece, the author has considered the erratic development of jurisprudence on the inadequacy of stamping in arbitration agreements. It has shown that these decisions impinged upon the principle of minimal court intervention in arbitration proceedings, rendering the process vulnerable to misuse by the parties. It has shown that the Supreme Court, in the present case, seeks to resolve these problems by envisaging a conception of directed powers for the courts. The court held that at the stage of sections 8 and 11, the courts can only engage in prima facie establishment of arbitration agreements. Moreover, the Supreme Court also took a view of the law that aligns with the reduction of transaction costs for the parties by reversing the earlier decisions and, thereby, precluding the possibility of the misuse by parties claiming inadequate stamping in arbitration agreements.
(Suyash Pandey is a law undergraduate at National Law School of India University, Bengaluru. The author may be contacted via mail at suyash.pandey@nls.ac.in)
Cite as: Suyash Pandey, Closing the Debate on Inadequately Stamped Arbitration Agreements?, 29 January 2024, <https://rmlnlulawreview.com/2024/01/29/closing-the-debate-on-inadequately-stamped-arbitration-agreements/>date of access.
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