Avineet Singh Chawla works as a Lecturer and Assistant Proctor at Jindal Global Law School
Recently, the Constitution Bench (5-judge bench) of the Supreme Court of India (‘the Court’) answered a pertinent question raised by the 3-judge bench in the case of M/s. N. N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. & Ors (2021). The question of enforceability of an arbitration clause in an unstamped contract was addressed by the Constitution Bench. The bench, with a 3:2 majority, opined that if a contract is not stamped as per the Stamp Act, 1899 (‘the Stamp Act’), then even the arbitration clause in the contract will be considered as invalid which raised a few eyebrows. As per most arbitration practitioners, this is not the correct position in Indian law. The case further tried to address the two questions of (1) position of arbitrators in addressing the question of validity of an arbitration agreement (doctrine of kompetenz-kompetenz) with minimal court intervention and (2) the applicability of doctrine of separability in such situations by discussing some earlier stances taken by the Court.
The Court previously addressed the same issue in the cases of SMS Tea Estates v. M/s Chanmari Tea Co. (SMS Tea Estates)(2011), Garware Wall Ropes v. Coastal Marine Constructions and Engineering Ltd. (Garware Wall Ropes)(2019) and Vidya Drolia v. Durga Trading Corporation (Vidya Drolia Case) (2021).
In SMS Tea Estates case (2011), the 2 – judge bench of the Court acknowledged the doctrine of separability and stated,
‘Even if it (arbitration agreement) is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument.’
But while addressing the question on the Stamp Act, stated that
‘If the document is found to be not duly stamped, Section 35 of Stamp Act bars the said document being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The court should then proceed to impound the document under section 33 of the Stamp Act and follow the procedure under section 35 and 38 of the Stamp Act’.
Such mixed views of the Court clearly demean the existence of the doctrine of separability which had far reaching consequences. The Court further held that an arbitration clause in an unstamped agreement, that is compulsorily registrable or chargeable to stamp duty cannot even be the basis for the appointment of an arbitrator which further raised questions and usability of the doctrine of kompetenz-kompetenz.
The 2- judge bench of the Court again addressed the similar issue in Garware Wall Roes Case (2019) and maintained their stance and reasoning in the SMS Tea Estates Case, despite the 2015 amendment to the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) coming into force. Wherein, section 11(6A) and Section 11(13) were introduced in the Arbitration Act. The sole purpose of Indian legislature to include Section 11(6A) was to minimize the Court intervention in arbitration proceedings, specifically, when it comes to deciding on whether Courts can intervene and decide on the existence of an arbitration agreement. Further, Section 11(13) of the Arbitration Act calls for an expeditious disposal of such applications within 60 days. The addition of these two sections clearly demonstrate the legislative intent of minimal court interference and speedy disposal in arbitration.
Surprisingly, the Court upheld the decision of SMS Tea Estates and opined by siding with the reasoning given in the case over insertion of Section 11(6A). The Court reiterated that the Stamp Act applies to the deed/contract as a whole including the arbitration clause. The Court completely neglected the doctrine of separability and concluded, ‘it is not possible to bifurcate the arbitration clause contained in [an] agreement or conveyance so as to give it an independent existence’.
In its attempt to completely neglect the doctrine of separability, the Court tried to support its decision by reading Section 7(2) of the Arbitration Act and Section 2(h) of the Indian Contract Act, 1872 (Contract Act) together. Section 7(2) of the Arbitration Act resembles Article 7(1) of the UNCITRAL Model Law which states that an arbitration agreement may be in the form of an arbitration clause or a ‘contract’. The term ‘contract’ has been defined under Section 2(h) of the Contract Act which states that a ‘contract’ means ‘ an agreement enforceable by law’.
The Court tried to connect this definition with the Stamp Act whose provisions state that an unstamped document is unenforceable by law, therefore, concluding that an arbitration clause in such an unstamped document—which is not a “contract”— will also be invalid. The opinion of the Court may seem logical, but is completely unethical because the doctrine of separability, which is a very importance doctrine applicable where arbitration clauses exist in a substantive contract, was completely ignored.
Further, the Court, directly intervened in addressing the dispute without making an attempt to refer it to the arbitral tribunal (Section – 16 of the Arbitration Act), completely ignoring another fundamental doctrine in arbitration i.e., doctrine of kompetenz – kompetenz. Section – 16 of the Arbitration Act is wide enough to allow the arbitrators to adjudicate on the matters which are not only related to the jurisdiction but also extend to the stamping of the document.
This view was further reaffirmed by a 3-judge bench of the Court in Vidya Drolia case (2021).
View in NN Global Case
The decision by a 3-judge bench in the NN Global Case (2021) was a transforming point in addressing the issue of enforceability of an arbitration clause in an unstamped agreement. The Court, while recognizing the two fundamental principles in arbitration (doctrine of kompetenz – kompetenz and doctrine of separability), opined that the arbitration clause in an unstamped agreement will be enforceable. The reasoning provided by the Court evidenced that Indian Courts are still considerate about the fundamental principles of arbitration and demonstrated a pro-arbitration stance.
Firstly, the Court acknowledged the doctrine of separability and observed that Section – 16 of the Arbitration Act is sufficient enough to support the doctrine of separability and proved that fact that arbitration clauses in substantive contracts are independent and separate. Subsequently, the Court stated that since arbitration clauses survive independence, they are enforceable and an Arbitral Tribunal can be appointed. Therefore, the tribunal will be eligible to address such concerns related to validity of arbitration agreement under the doctrine of kompetenz – kompetenz. The Court shall only address the question of existence of the arbitration agreement and once that is established, the Tribunal shall be the one addressing the question of its validity. The opinion of the Court in this case righteously implemented the legislative intent with insertion of Section – 11(6A) in the Arbitration Act i.e., minimal court intervention.
The Court clearly doubted the correctness of the three previous decisions on the same issue which were held otherwise, one of which was addressed by the bench of equal strength (3 – judge bench) in Vidya Drolia Case.
Since there was a conflicting view from two benches of equal strength, the following issues were referred to a Constitution Bench.
View of the Constitution Bench
The majority, in this case, upheld the views in SMS Tea Estates Case and Garware Wall Roes Case. They massively ignored the findings by the 3-judge bench in the NN Global Case and have decided that
“An arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act attracts stamp duty and which is not stamped or insufficiently stamped cannot be acted upon in view of Section 35 …..the arbitration agreement contained in such instrument as being non-existent in law until the instrument is validated under the Stamp Act.”
The majority, again ignored the fundamentals of arbitration and paid no heed to the existence of doctrine of separability. Moreover, they also found that the court intervention, at Section -11 stage, must include the examination of the instrument/agreement. If such instrument/agreement is not stamped or insufficiently stamped, it must be impounded at this stage itself. This view leads to more confusions in addressing a pertinent question i.e., till what extent shall courts intervene in addressing arbitration matters?
The minority, in this case, justly tried to state that the arbitration clauses in unstamped agreements should not be considered unenforceable. Albeit it was accurately opined that stamping is a curable defect, therefore, it should not render the arbitration clause unenforceable. On the issue of court intervention, the minority agreed with the view of the 3-judge bench and stated that an arbitration clause in an unstamped agreement will be an enforceable document for appointment of the arbitral tribunal.
Varied views of the Court in addressing a similar issue demonstrates the prevailing distrust of Indian Courts in arbitration mechanism. The arbitration mechanism has been flourishing across the world, not only in domestic matters but in international matters as well. The two fundamental principles of separability and kompetenz – kompetenz are not new principles in law. These principles have contributed majorly in the making of arbitration mechanisms, a self-sustainable and a trustable system. The Court has not provided any strong reasoning in not addressing these two doctrines in addressing the two pertinent questions above. The outcome by the Constitution Bench requires a deeper scrutiny.
Avineet Singh Chawla is working as a Lecturer and Assistant Proctor at Jindal Global Law School (India’s Number 1 ranked Law School as per the World QS Rankings). Avineet was called to the bar in 2017 post which he pursued his LL.M from Queen Mary University of London specialising in International Dispute Resolution (2018-2019). Avineet is an arbitration enthusiast and works actively in promoting arbitration as one the smoothest and accurate forms of dispute resolution across India.