The Supreme Court, vide its 7 Judge judgement¹ dated December 13, 2023, has brought the legal conundrum around the validity of an Arbitration Agreement in an unstamped or insufficiently stamped contract to finality and it was unanimously held that an instrument which is unstamped or insufficiently stamped would be inadmissible in evidence, however the same is a curable defect and that in itself does not make the agreement void or unenforceable.

In doing so, the Supreme Court has overruled the judgment passed by a five-judge bench of the Court in NN Global Mercantile Private Limited v. Indo Unique Flame Limited², (“NN Global 2”) and has settled the issue by holding that Courts need not consider the objection as to under-stamping or non-stamping of underlying contract at the time of deciding applications under Section 8³ and 11⁴ of the Arbitration and Conciliation Act, 1996, and deciphering whether Arbitration Agreement exists in the underlying instrument.

In April 2023, the Supreme Court had previously ruled by a 3:2 majority in NN Global 2 that unstamped or insufficiently stamped arbitration agreements are unenforceable. As a consequence of N.N. Global 2’s far-reaching ramifications, the decision was referred to a seven-judge bench for review.

Analysis by the Court:
The major takeaways from the 7-judge judgement have been mentioned hereunder:

• Distinction between inadmissibility and voidness:The Court defined the difference between the concepts of 'admissibility' and 'voidness' and clarified that while a void agreement implies that such an agreement is not enforceable in law, admissibility refers to whether that agreement can be introduced in evidence or considered or relied upon by a court while adjudicating a case. It was observed that there need not be a correlation between voidness and inadmissibility since a void agreement can still be admissible in evidence should it be attempted to be enforced. The Court further noted that Section 35 of the Stamp Act, 1899, unambiguously stipulates that no instrument chargeable with duty shall be admitted in evidence. In conclusion, the Court held that the Stamp Act, 1899, does not render an unstamped or insufficiently stamped instrument 'void' under Section 2(g) of the Contract Act⁵ but only renders it ‘inadmissible’ in evidence; a defect that is ‘curable’ under the provisions thereunder in contrast to ‘voidness’ in an agreement that cannot be cured.
   
• Separability of the Arbitration Agreement: The Court observed that the concept of separability or severability of an Arbitration Agreement from the underlying contract is a legal fiction which acknowledges the separate nature of an arbitration agreement. The separate nature of the Arbitration Agreement from the underlying contract is one of the cornerstones of arbitration law. The Court further observed that the separability presumption ensures that an Arbitration Agreement survives a termination, repudiation, or frustration of a contract to give effect to the true intention of the parties and ensure the sanctity of the arbitral proceedings. The Bench also noted that the burden of proving the existence of an Arbitration Agreement generally lies on the party seeking to rely on such an agreement.
   
• Minimum Judicial Intervention and Kompetenz-Kompetenz: In jurisdictions such as India, which accept the doctrine of Kompetenz-Kompetenz, only prima facie proof of the existence of an arbitration agreement must be adduced before the referral court. The determination of the existence and validity of an Arbitration Agreement based on evidence ought to be left to the Arbitral Tribunal. Further, it was noted by the Court that when the referral court renders a prima facie opinion, neither the arbitral tribunal nor the court enforcing the arbitral award will be bound by such a view. The Court also remarked that doing so will protect the jurisdictional competence of the arbitral tribunals to decide on issues pertaining to the existence and validity of an Arbitration Agreement.
   
• Earlier decisions overruled: The Court overruled its earlier decisions in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.⁶, Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.⁷, and N.N. Global 2. The Court, while concurring with the minority view in N.N. Global 2, reiterated that the position after the 2015 Amendments mandates that the referral courts are only required to prima facie determine the existence or validity of an Arbitration Agreement. To supplement this position, the Court also drew upon the semantical differences in the scope of review available to a court under Section 11 and that available to an arbitral tribunal under Section 16⁸ of the Arbitration Act. It held that Section 11 uses the term ‘examine’ to imply an inspection or scrutiny but not a ‘laborious or contested inquiry’ into the existence of an arbitration agreement by courts. The Court then held that on the other hand, Section 16 empowers the arbitral tribunal to ‘rule’ on its jurisdiction, including on issues pertaining to the existence and validity of an arbitration agreement that refers to adjudicating disputes following a detailed enquiry involving assessment of evidence. It also observed that the findings in Vidya Drolia v. Durga Trading Corporation⁹, concerning the legal synonymity between ‘validity’ and ‘existence’ were not rendered in the context of stamping and thus, will not be applicable in this case.

In conclusion, this landmark verdict not only untangles a persistent legal puzzle but also charts the course for a more definitive, harmonized, and streamlined arbitration panorama in India. The Arbitration Act strives to champion a swift and effective alternative dispute resolution platform for all parties, be they commercial entities or otherwise. However, the sanctity of this purpose faces a looming threat due to the controversial construal of the Stamp Act in N.N Global 2. The act of impounding an agreement housing an arbitration clause during the appointment of an arbitrator under Section 11 (or Section 8) of the Arbitration Act threatens to cast a shadow over the timely initiation of arbitration proceedings. Consequently, this decision positively enhances the ease of arbitration in the country, marking a significant stride towards India’s aspirations to become a hub for international arbitration.

By - Prachi Pandey