Chambers of Ishaan Garg
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A seven-judge Constitution Bench of the Supreme Court on Wednesday held that while unstamped arbitration agreements are inadmissible, they are not rendered void ab initio (void from the beginning) on account of the fact that they are unstamped [In Re: interplay between Indian Stamp Act and Indian Arbitration Act].
Effect of not paying duty renders an instrument inadmissible and not void and non-payment of stamp duty is curable, the Court held overruling its 5-judge bench decision in NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors case.
The Court ruled that the aspect of whether the arbitration agreement has been stamped or not, is for the arbitral tribunal to decide and not courts. To arrive at this principle, the Court relied on the doctrine of competence-competence which concerns the tribunal's power to rule on its jurisdiction.
"Parties to arbitration agreement conferred jurisdiction on arbitral tribunal, When parties pen their signatures to arbitration agreement they are regarded to independently sign the arbitration agreement. In process the separability provision gives rise to doctrine of competence. The negative aspect of doctrine of competence is that it limits courts interference at referral stage and arbitral tribunal given a chance to rule on their own jurisdiction," the Court said.
The unanimous ruling was passed by a Bench of Chief Justice of India (CJI) DY Chandrachud and Justices Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala and Manoj Misra.
A seven-judge Constitution Bench of the Supreme Court on Wednesday held that while unstamped arbitration agreements are inadmissible, they are not rendered void ab initio (void from the beginning) on account of the fact that they are unstamped [In Re: interplay between Indian Stamp Act and Indian Arbitration Act].
Effect of not paying duty renders an instrument inadmissible and not void and non-payment of stamp duty is curable, the Court held overruling its 5-judge bench decision in NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors case.
The Court ruled that the aspect of whether the arbitration agreement has been stamped or not, is for the arbitral tribunal to decide and not courts. To arrive at this principle, the Court relied on the doctrine of competence-competence which concerns the tribunal's power to rule on its jurisdiction.
"Parties to arbitration agreement conferred jurisdiction on arbitral tribunal, When parties pen their signatures to arbitration agreement they are regarded to independently sign the arbitration agreement. In process the separability provision gives rise to doctrine of competence. The negative aspect of doctrine of competence is that it limits courts interference at referral stage and arbitral tribunal given a chance to rule on their own jurisdiction," the Court said.
The unanimous ruling was passed by a Bench of Chief Justice of India (CJI) DY Chandrachud and Justices Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala and Manoj Misra.
Arbitration 7 Judge Bench
Arbitration 7 Judge Bench
Six judges on the bench including the CJI delivered the lead judgment, whereas Justice Khanna authored a separate but concurring opinion.
The conclusions in the lead judgment were summarised by CJI Chandrachud as follows:
- Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
- Non-stamping or inadequate stamping is a curable defect;
- An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
- Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal;
"The corollary of doctrine of competence is that court may only see if an arbitration agreement exists. Whether stamp duty is paid or not would need detail merit of evidence etc. Interpretation accorded to Stamp Act does not allow law to be flouted and it ensures that Arbitration Act does not detract from Stamp Act," the Court said.
The verdict by the seven-judge Constitution Bench of the Supreme Court came in a case concerning the validity of arbitration agreements embedded in unstamped documents.
The bench had reserved its verdict on October 12.
In September, the Supreme Court had referred a five-judge Constitution Bench judgment on the issue in NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors to a seven-judge bench for reconsideration.
The five-judge Constitution Bench in NN Global had on April 25 held by a 3:2 opinion that unstamped arbitration agreements are not valid in law.
Soon after, the Union Law Ministry constituted an expert committee to recommend reforms to the Arbitration and Conciliation Act and to examine the functioning of arbitration law in the country.
While the questions of law were answered by the seven-judge bench today, the Court informed that the curative petition before it is yet to be decided on facts.
"We have held reference is maintainable. We have kept curative open on facts. We have resolved questions of law. We have said section 35 of stamp act is unambiguous," CJI Chandrachud said.
The matter concerns a Karnataka High Court order passed in 2014.
In December 2014, the High Court held a lease deed with an arbitration agreement between the parties as valid and appointed an arbitrator. In February 2020, a three-judge Supreme Court Bench set aside this order.
The case arose after a charitable trust (respondents) had entered into a lease agreement with the appellants to develop a multi-purpose community hall and office complex, as well as for the renovation of some properties on their land. The agreement, which was for 38 years, was signed in 1996 and contained a clause for a security deposit of ₹55 lakh.
In 2008, a suit was filed by the trust against the appellants, pointing out that only ₹25 lakh had been deposited, while a samadhi in the property had been desecrated. Further, the appellants were accused of trying to file a fresh sale deed in connivance with some of the trust's members.
The Bengaluru City Civil Court passed an interim order of status quo. Two years after the suit proceedings commenced, the appellants invoked the arbitration clause before the Karnataka High Court in 2013.
Notably, after the orders of a single-judge, the Judicial Registrar noted that the document in question was a lease deed and not an agreement to lease. Therefore, the Registrar directed the appellants to pay a deficit stamp duty and penalty of ₹1,01,56,388.
However, the High Court subsequently ignored the Registrar's findings and appointed an arbitrator. In 2020, the Supreme Court set aside the High Court's order.
A curative petition was filed in the matter following the dismissal of a review petition by the Supreme Court in July 2021 on the ground of delay.
The Court delivered its verdict today in this curative petition.
"A historic and the fastest ever curative verdict which boosts the Arbitration Ecosystem of India by not only upholding the legislative intent of the Arbitration Act but also the salutary doctrines of party autonomy, separability and kompetenz – kompetenz whilst simultaneously balancing the interests of the exchequer. A progressive unanimous as well as a candid concurring judgment, which puts to rest retrograde controversies," Kunal Vajani, Joint Managing Partner at Fox & Mandal and Court Member (India) - ICC International Court of Arbitration said on the judgment.
