Unstamped Arbitration Agreements Inadmissible But Not Void, Overruling Nn Global Mercantile: Supreme Court

Synopsis:

In a landmark decision,[1] a seven-judge Constitution Bench comprising Chief Justice of India (CJI) DY Chandrachud and Justices Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala, and Manoj Misra, on 13^th December 2023, clarified the legal status of unstamped arbitration agreements. The Hon’ble Court held that although such agreements are deemed inadmissible, they are not automatically void ab initio due to their lack of stamping.

Timeline:

• 1996: Parties sign a lease agreement for the development of a community hall and office complex, lasting 38 years, including an arbitration clause. The agreement is for the renovation of properties on the trust’s land.
• 2008: The trust files a suit against the appellants for deposit discrepancies, desecration of samadhi, and alleged attempts to file a new sale deed.
• 2013: Two years into the suit proceedings, the appellants invoke the arbitration clause before the Karnataka High Court.
• 2014: The High Court deems the lease deed with the arbitration agreement valid, appoints an arbitrator, and orders status quo.
• 2020: A three-judge Supreme Court Bench sets aside the High Court’s order, stating it’s a lease deed and not an agreement to lease. The appellants are directed to pay a deficit stamp duty and penalty.
• 2021: After dismissing a review petition in July, a curative petition is filed.
• 2023: The seven-judge Constitution Bench of the Supreme Court delivers a historic and quick curative verdict.

Background:

The case revolves around a lease agreement signed in 1996, containing an arbitration clause. The dispute arose in 2008 when the trust filed a suit against the appellants, leading to arbitration proceedings initiated by the appellants in 2013. The Karnataka High Court deemed the arbitration agreement valid in 2014, but the Supreme Court overturned this decision in 2020, highlighting it as a lease deed and not an agreement to lease.

Facts:

In 2008, the trust accused the appellants of deposit discrepancies and desecration of a samadhi, initiating a legal battle. In 2013, during the suit proceedings, the appellants invoked the arbitration clause. The High Court, in 2014, considered the lease deed with the arbitration agreement valid, appointed an arbitrator, and ordered status quo. The Supreme Court, in 2020, reversed the High Court’s decision, emphasizing the document as a lease deed, demanding a deficit stamp duty and penalty.

Contentions raised by the parties:

The appellants assert the validity of the arbitration agreement within the lease deed, claiming it falls within the ambit of the Arbitration Act.

The trust, opposing this, argues that the document is a lease deed, not an agreement to lease, leading to stamp duty non-payment issues.

Observations made by the court:

The Supreme Court, in its seven-judge Constitution Bench decision, addresses the critical issue of unstamped arbitration agreements. The lead judgment, delivered by six judges including the Chief Justice of India, interprets the interplay between the Indian Stamp Act and the Indian Arbitration Act, whereas a separate but concurring opinion is authored by Justice Khanna.

The court’s key observations include:

Inadmissibility vs. Void Ab Initio: Unstamped arbitration agreements are deemed inadmissible under Section 35 of the Stamp Act but are not void ab initio. Non-stamping is viewed as a curable defect.

Curative Power: The court clarifies that an objection regarding stamping does not fall under Sections 8 or 11 of the Arbitration Act. The determination of the existence of the arbitration agreement is the court’s role while stamping issues are within the arbitral tribunal’s purview.

Competence-Competence Doctrine: The court emphasizes the doctrine of competence-competence, stating that the arbitration tribunal has the authority to rule on its jurisdiction. The parties, by signing the arbitration agreement, confer jurisdiction on the tribunal.

Decision and its Analysis:

This landmark decision by the seven-judge Constitution Bench represents a pivotal moment in Indian arbitration law. The court holds that unstamped arbitration agreements, while inadmissible as evidence, are not void from the beginning. The non-payment of stamp duty is viewed as a curable defect, aligning with the principles of the Arbitration Act.

The court’s reliance on the competence-competence doctrine is noteworthy. It highlights the tribunal’s power to determine its jurisdiction, limiting the court’s interference at the referral stage. This decision upholds the legislative intent of the Arbitration Act, emphasizing party autonomy, separability, and kompetenz – kompetenz.

The overruling of the previous five-judge bench decision in NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors[2] clarifies the legal landscape surrounding unstamped arbitration agreements. The court firmly establishes that stamp duty issues are within the arbitral tribunal’s domain, ensuring a more streamlined and efficient resolution process.

This judgment not only settles the specific case concerning the Karnataka High Court’s 2014 decision but also sets a precedent for the treatment of unstamped arbitration agreements. The court’s recognition of curability provides flexibility in addressing procedural lapses, promoting the enforceability of arbitration agreements.

Conclusion:

In conclusion, the Supreme Court’s decisive ruling contributes to the evolution of India’s arbitration ecosystem. It balances the interests of the exchequer while upholding the fundamental principles of arbitration law. The decision reinforces the sanctity of arbitration agreements, providing clarity and coherence in the resolution of disputes governed by such agreements.

[1] IN RE: INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT 1899 [Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020]

[2] NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors, (2021) 4 SCC 379