A seven-judge Constitution Bench on December 13 held that arbitration agreements embedded in unstamped or insufficiently-stamped substantive commercial contracts or instruments are not invalid, unenforceable or even non-existent.
The judgment gives a significant shot in the arm for India’s ambition to become an international arbitration hub to quickly resolve commercial disputes. Earlier, arbitrations on such disputes had struck a roadblock owing to non-payment of the required stamp duty for or insufficient stamping of contracts by the parties.
“Arbitration aims to provide speedy, efficient, and binding resolution of disputes that have arisen between the parties in regard to their substantive obligations,” the Supreme Court noted.
Delivering the lead opinion in a curative petition overruling an earlier five-judge Bench verdict of the Supreme Court in the N.N. Global case, Chief Justice of India D.Y. Chandrachud held that “non-stamping or inadequate stamping is a curable defect”.
The Chief Justice clarified that arbitration agreements would not be non-existent, unenforceable, or invalid if the underlying contract was not stamped.
The Chief Justice said the non-payment or insufficient stamping of contracts under the Stamp Act would not affect arbitration proceedings under the Arbitration Act. Such contracts were only inadmissible in evidence under the Stamp Act.
‘Self-contained code’
“Arbitration Act is a self-contained code… Accordingly, matters governed by the Arbitration Act such as the arbitration agreement, appointment of arbitrators and competence of the arbitral tribunal to rule on its jurisdiction have to be assessed in the manner specified under the law… Therefore, provisions of other statutes [Stamp Act] cannot interfere with the working of the Arbitration Act, unless specified otherwise,” the Chief Justice wrote.
Justice Sanjiv Khanna, on the Bench, gave a separate and concurrent opinion that such arbitration clauses in an underlying unstamped contract would not be void ab initio.
The court said an arbitration agreement is presumed to have a separate existence from the contract. The validity of an arbitration agreement has to be examined under the Arbitration Act alone.
The “separability presumption” insulated the arbitration agreement from the defects of the underlying contract, the court said.
“The validity of the arbitration agreement, in the face of the invalidity of the underlying contract, allows the arbitral tribunal to assume jurisdiction and decide on its own jurisdiction by determining the existence and validity of the arbitration agreement. In the process, the separability presumption gives effect to the doctrine of competence-competence [arbitral tribunal can determine its own jurisdiction],” the Constitution Bench held.
