In a recent Judgment in the matter of N.N.Global Mercantile Private Limited Vs Indo Unique flame Limited & others, the 5 Judges bench of Supreme Court of India held that an unstamped or insufficiently stamped instrument if contains the arbitration clause, it is not enforceable under S. 2(g) of the Contract Act, due to the bar provided under the stamp Act prohibiting courts from taking unstamped or insufficiently stamped instruments as an evidence. It further held that an unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot therefore exist in law. It further held that if the original of the instrument is produced before the court and it is unstamped or insufficiently stamped, the court, acting under section 11 of the arbitration and conciliation act 1996 is duty bound do act under section 33 of the stamp Act. That means the court exercising jurisdiction under section 11 has to impound the instrument and send it to the appropriate authority for stamping. The court will exercise its power under section 11 and deal with the said application only after payment of duty and penalty for the above said instrument.

The most important requirement of a pro-arbitration regime is speedy disposal of arbitration cases, less intervention by the courts, which includes at the stage of appointment of arbitrators. Since large number of Arbitrations in India are Adhoc arbitrations every day hundreds of applications under Section 11 are filed before the High Courts and in the Supreme Court of India. In our country, the law mandates the completion of the complete arbitration process in 18 months but unfortunately we spend 1 to 2 years in getting the arbitrator appointed through a court, which is a frustrating situation for the arbitrating parties. This judgment is seen as a set back by the arbitration community because it further enhances the scope of examination by the court at the stage of appointment of arbitrators and impounding of instrument prior to deciding about the appointment of the arbitrator. Such an enhanced scope will delay the appointment process in a big way. Moreover, the curing of the defect of stamping after impounding may take a few years in our government system. In our country where courts are overly burdened with large pendency of cases such enhanced examination will be a huge pain for arbitrating parties. Because of this judgment, parties are going to spend years in the appointment stage itself. We are not telling that parties need not pay stamp duty, what we say is that these aspects should be looked into by the arbitral tribunal while commencing the arbitration and not by the Court at the stage of appointment of arbitrator. This Judgement has ignored the doctrine of separability and nullified Section 11(6A) of the Act and the details are provided in the following paragraphs.

The arbitration clause in a main contract is considered to be a separate agreement even though it is a part of the main agreement due to the concept of separability of an arbitration agreement. In such a situation arbitration agreement cannot be considered to be an agreement which is not enforceable. Three Judge Bench of the Supreme Court of India in N.N.Global Mercantile Private Limited Vs Indo Unique Flame Limited and Others (2021) 4 SCC 379, found that the arbitration agreement was a distinct and an independent contract. It also further held that on the doctrine of separability, it would not be rendered invalid, unenforceable or non- existing, even if the substantive contract, in which it is contained, was inadmissible in evidence or could not be acted upon, in view of not being stamped. The said three Judges bench doubted the correctness of the view expressed in the Judgments SMS Tea estates Private Limited Vs Chandmari Tea Company Private Limited (2011) 14 SCC 66 , Garware Wall Ropes Limited Vs Coastral Marine Constructions and Engineering Limited (2019) 9 SCC 209 and Vidya Drolia Vs Durga Trading Corporation (2021) 2 SCC 1 and others and hence the reference was made to five judges constitutional bench. It is important to note that the concept of separability is one of the unique aspects of an arbitration agreement and hence the view of the three judges bench is Globally recognised view. The above said concept is also in built in our 1996 Act and hence the Section 16(1) (b) of the Arbitration and Conciliation Act,1996 declares that despite the tribunal finding that the contract was null and void, it would not invalidate the arbitration clause. The evolution of the Principle that an arbitration agreement is seqarate and distinct agreement from the contact would indicate that it would have no play in the context of duty of a court, within the meaning of sections 33 and 35 of the stamp Act, to act in consonance therewith. The said doctrine of separability of arbitration agreement, preserves the efficacy of the Arbitration clause in a contract so that the extinguishing of the contractual obligations by termination or nonperformance or alleged performance, deprive the parties of their rights and the power of the Arbitrator to adjudicate on disputes, which otherwise fall within the ambit of the Arbitration clause. The underlying principle behind treating the arbitration agreement as a separate agreement is to create a mechanism, which survives the contract so that disputes, falling within the arbitration agreement, are resolved. Thus the rescission of the main contract would not result in the death of the arbitration clause. But unfortunately the Constitution bench failed to give the required weightage to doctrine of separability which is a clear setback for the development of India as a proarbitration regime.

The second point is relating to the objective for inserting of section 11 (6A) in the Arbitration and Conciliation act,1996 by way of an amendment. The Constitution bench of Supreme Court of India while examining the powers of the court under Section 11, in the pre 2015 amendment regime in SBP & Co Vs Patel Engineering Limited and another (2005) 8 SCC 618 held that all the preliminary and threshold issues pertaining to jurisdiction of the arbitrator/ arbitral tribunal should be examined by the court under section 11 of the act, 1996. This judgment delayed the appointment of arbitrator process in a big way and parties had to spend a lot of time in the appointment stage itself. Hence this position of law was sought to be change it by the Law Commission in its 246th report, while proposing S.11 (6A), which states as follows.

“In so far as the nature of intervention is concerned, it is recommended that in the event the court/ judicial authority is prima facie satisfied against the argument challenging the arbitration agreement, it shall appoint the arbitrator and/ or refer the parties to arbitration as the case may be. The amendment envisages that the judicial authority shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the issue of existence of the arbitration agreement to be finally determined by the Arbitral tribunal.”

The expectation of the Law Commission from the insertion of Sub section 6A to section 11 in the act 1996 which was accepted by the legislature by way of the 2015 Amendment act was that the Court while examining an application under section 11, shall confine to examine only to the existence of an arbitration agreement. But the said objective is also defeated by the above said Judgment of the Constitution Bench. Now in most of the Section 11 applications appointment process itself will consume 2-3 years. Hence, the only way out is, parties in India, should get away with Court appointing arbitrators and consequential adhoc arbitrations and resort to Institutional Arbitrations.

An Unstamped Arbitration Agreement not Enforceable in Law - Setback for the Pro Arbitration Regime?

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S. RAVI SHANKAR