Source: Supreme Court

Why in News?

A seven-judge bench of Chief Justice of India (CJI) DY Chandrachud, Justices Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, Surya Kant, JB Pardiwala, and Manoj Misra observed that non-stamping or inadequate stamping of arbitration agreement is a curable defect.

• The Supreme Court gave this judgment in In Re Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 And the Indian Stamp Act, 1899.

What is the Background of In Re Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 Case?

• Challenge by Petitioners:
  • The petitioners contended that the deficiency in stamping is a curable defect, the effect of which ceases to operate as soon as the revenue interest of the state is secured.
  • The non-payment of stamp duty, being a temporary affliction, cannot affect the validity of an arbitration agreement.
  • Petitioners said that mandating the courts at Section 8 or Section 11 stage of the Arbitration and Conciliation Act, 1996 (A&C Act) to examine the issue of stamping will defeat the legislative purpose of minimal judicial interference enshrined in Section 5 of the A&C Act.
  • The arbitral tribunal has the competence to rule under its own jurisdiction, including on issues pertaining to stamping under doctrine of competence-competence.
• Reference by Supreme Court:
  • SC was called upon to resolve an issue which arose in the context of three statutes that are A&C Act, Indian Stamp Act, 1899 and Indian Contract Act, 1872 (ICA).
  • The major issue before the court under reference was whether such arbitration agreements would be non-existent, unenforceable, or invalid if the underlying contract is not stamped?
• Challenge to Landmark Judgments:
  • N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2023):
    • Judgment given by a constitutional bench of SC was taken under consideration where the SC held that an unstamped instrument containing an arbitration agreement is void under Section 2(g) of the ICA.
    • The court further said that a court acting under Section 11 of the A&C Act cannot disregard the mandate of Sections 33 and 35 of the Stamp Act, 1899 requiring it to examine and impound an unstamped or insufficiently stamped instrument.
  • SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd (2005):
    • SC considered its Judgment where it held that an arbitration agreement in an unstamped contract could not be acted upon.
  • Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd (2019):
    • In this case SC said 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.

What were the Court’s Observations?

• The Difference Between Inadmissibility and Voidness:
  • The court said when an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the court may consider or rely upon it while adjudicating the case.
    • This is the essence of the difference between voidness and admissibility.
• Primacy of A&C Act:
  • The Court said that the A&C Act is a legislation enacted to consolidate the law relating to arbitration in India. It will have primacy over the Indian Stamp Act, 1899 and ICA in relation to arbitration agreements as the latter are general laws.
  • It is trite law that a general law must give way to a special law.
• Position of Unstamped Arbitration Agreement:
  • Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Indian Stamp Act, 1899.
  • Such agreements are not rendered void or void ab initio or unenforceable.
• Court’s Power to Examine Arbitration Agreement:
  • An objection to stamping does not fall to a determination under Sections 8 or 11 of the A&C Act.
  • The court concerned must examine whether the arbitration agreement prima facie exists.
• Overruled Landmark Judgments:
  • The SC overruled its judgment given in N N Global Mercantile Case (2023), SMS Tea Estate Case (2005) and Para 22 of Garware Wall Ropes (2019).

What are the Legal Provisions of the Arbitration and Conciliation Act, 1996 Involved in the Case?

• Section 8: Power to refer parties to arbitration where there is an arbitration agreement
  • Section 8 of the A&C Act generally pertains to the judicial intervention in the arbitration process.
  • It addresses the issue of referring parties to arbitration and staying court proceedings when there is an arbitration agreement.
  • It typically emphasizes the importance of respecting arbitration agreements and allowing the arbitration process to proceed as agreed upon by the parties.
• Section 11 of A&C Act: Appointment of Arbitrators
  • Section 11 of the A&C Act pertains to the appointment of arbitrators.
  • It outlines the procedure for the appointment of arbitrators in cases where the parties are unable to agree on the appointment themselves.
  • The section provides for the intervention of the SC and the High Court to have the power to designate, arbitral institutions, from time to time and appoint arbitrator.