(Supreme Court in Curative Petition (C) No. 44 of 2023 with Arbitration Petition No. 25 of 2023)
Citation: (2023) INSC 1066
FACTS
Indo Unique Flame Ltd. secured an occupational offer from Karnataka Power Corporation Ltd. (KPCL) in September 2015, and initiated a sub-contract with NN Global, which included a clause 9 for security deposit and a clause 10 for arbitration. In December 2017, KPCL executed the bank guarantee created by Indo Unique and so, Indo Unique executed the bank guarantee created by NN Global, but the payment of bank guarantee was denied by them and they even brought a legal action before the Nagpur Comm. Court.
Indo Flame responded by filing an appeal to have the matter sent to arbitration in accordance with Sec 8 Arbitration Act (here after referred to as ‘A&C act’). NN Global objected the application, arguing that the bank guarantee was a distinct contract apart from an arbitration clause and therefore, it was a false invocation.
In the month of January of 2018, the Comm. Court rejected Indo Flame’s application stating that the arbitration clause overlooks the bank guarantee. In the month of July of 2020, Indo Flame filed a WP before the Bombay HC, arguing that the matter should have been brought before an arbitral tribunal rather than a court, NN Global then contended that since the agreement on arbitration was not stamped, it was not possible to use Clause 10 of the subcontract to bring the issue to arbitration.
In the month of September of 2020, the HC reversed the Comm. Court’s decision stating that the arbitration application was sustainable.
NN Global responded to the HC’s ruling by filing a SLP. The bench overturned the HC’s ruling on January 11, 2021, but pointed out that the perspective in SMS Tea Estates and Garware was flawed. Consequently, they referred to a bigger bench of five judges to resolve the matter of whether an arbitration agreement without a stamp is valid.
In the month of April of 2023, a bench by a margin of 3:2, ruled that an arbitration agreement without a stamp was null and invalid, resulting in serious criticism.
After the Hon’ble Supreme Court dismissed a review petition in July 2021, a curative petition was submitted in the case.
In the month of September of 2023, a five-judge bench headed by CJI in the case of Dharmaratnakara Rai v Bhaskar Raju were hearing a curative petition. In Dharmaratnakara, a three-judge panel ruled that the court could not act upon an unstamped agreement including an arbitration clause. In addition, the panel considering the curative petition noted that NN Global’s judgment should be re-examined and forwarded the matter to a seven-judge bench.
On 11 October 2023, a seven-judge bench began hearing the case.
ISSUE RAISED
Whether an arbitration agreement without a stamp is null and invalid?
CONTENTION
- On Behalf of Petitioners:
- Mr. Arvind Datar, learned sr. counsel: Arbitration Act restricts the referral court’s power to examine arbitration agreements, not stamping under Sec 33 Stamp Act (here after referred to as ‘STP act’). The majority in NN Global-II nullified this, stating that mandating courts to follow Sec 33 would exceed the examination remit. The arbitral tribunal has jurisdiction over stamping issues, and the non-obstante clause limits judicial intervention. Stamping does not render an instrument void, but makes it inadmissible until cured.
- Mr. Nikhil Sakhardande, learned sr. counsel: Stamping deficiency is a curable defect that ceases once state revenue interest is secured. The validity of an arbitration agreement is not affected by the temporary non-payment of stamp duty. The A&C act’s Section 5 on limited judicial invasion is hampered by requiring courts to look into stamping difficulties.
- Mr. Darius J Khambata, learned sr. counsel: The doctrine of separability states that an arbitration agreement is a separate entity from the underlying contract, and it remains valid despite non-stamping or inadequate stamping. However, the majority in NN Global-II incorrectly held that non-stamping invalidated the arbitration agreement. The principle of competence-competence was ignored, and the referral court should leave stamping issues to the arbitral tribunal’s decision. Sec 33 of STP act allows for authority to determine stamping issues through parties’ consent.
- Mr. Gourab Banerjee, learned sr. counsel: The Stamp Act aims to protect public revenue and prevent commercial interference. Non-stamped instruments exist in fact and law. The stamping probe under the Arbitration Act contradicts the legislative goals. Adjudicating stamp duty is time-consuming, and mandating courts under Sec 11 A&C act to adjudicate would hinder expeditious appointment of arbitrators.
- Mr. Jayant Mehta, learned sr. counsel: The majority view in NN Global-II (supra) does not address Section 9 of the A&C act, making it difficult to seek interim protection in domestic and international arbitrations in India. The Stamp Act does not bar the entertainability of a lis.
- On Behalf of Respondents:
- Mr. Shyam Divan, learned sr. counsel: Due to insufficient factors, the curative petition cannot be maintained and cannot be referred to a seven-judge bench. The court must examine both the existence and validity of an arbitration agreement under Sec 11(6A) A&C act. Courts needs to confiscate unstamped instruments in accordance with Sec 33 STP act, and Sec 5 A&C act does not restrict its use.
- Mr. Nikhil Nayyar, learned sr. counsel: Section 11(6A) examines arbitration agreement validity, including sufficiency of stamping, and was not intended to override SMS Tea Estates’ (supra) effect.
- Mr. Nakul Dewan, learned sr. counsel: The principle of separability contained in Section 16 of A&C act allows arbitration agreements to be treated as distinct for validity or enforceability. The court is not authorised for substantive adjudication of parties’ rights and obligations. Improper stamping of an arbitration agreement shall not hinder the appointment of an arbitrator during the referral phase, as per Sec 11(6A) A&C act.
RATIONALE
The unanimous ruling was passed by the bench of seven-judges, The Chief Justice of India (CJI) DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice BR Gavai, Justice Suryakant, Justice JB Pardiwala and Justice Manoj Mishra. Six-judges on the bench including the CJI delivered the lead judgement, whereas Justice Khanna authored a separate but concurring opinion.
The Hon’ble Supreme Court held overruling its five-judges bench decision in NN Global Mercantile Private Limited v. Indo Unique Flame Limited and others-II case: –
1. Sec 35 STP act states that agreements that are either without a stamp or inadequately stamped are not acceptable in evidence. Such agreements are not made null, void ab initio, or inoperative.
2. Non-stamped or insufficiently stamped agreements can be cured or rectified;
3. An objection about stamping is not subject to resolution under sec 8 or 11 A&C act. The relevant Court is required to investigate the arbitration agreement’s existence on its initial appearance.
4. The scope of the arbitral tribunal includes the objections in relation to the stamping of the agreement. The court used the competence-competence theory, which addresses the tribunal’s authority to rule on its jurisdiction, for arriving at this principle.
5. The decisions made in SMS Tea Estates and NN Global-II are reversed. In that sense, the information found in Garware Wall Ropes paragraphs 22 and 29 is likewise superseded.
DEFECTS OF LAW
The legality of arbitration agreements included in insufficiently or not stamped documents was unclear under the prevailing legal system. The requirement for stamping and other regulations generated ambiguity and might potentially cause the arbitration procedure to be delayed.
The objective of limited judicial participation in arbitration may be compromised by the judiciary’s involvement in evaluating the legitimacy of arbitration agreements, particularly with regard to stamping issues. This may result in complicated legal action before the arbitration procedure even start.
This procedural obstacle may cause a major delay in the arbitration process, which is meant to be a more rapid alternative to regular court proceedings for the settlement of disputes.
Inconsistent interpretations and implementations of the legislation emerged from the absence of clear standards for the handling of arbitration agreements within the context of the Stamp Act.
Due to this disagreement, parties were faced with a difficult legal decision over whether to follow the Stamp Act or pursue arbitration, which might have a negative impact on the arbitration’s effectiveness.
INFERENCES
Though, it is a positive development that the current findings have overruled the position held in NN Global-II, restoring the aim of the Arbitration Act to facilitate prompt and effective remedies and to encourage arbitration as a form of conflict settlement. Furthermore, because the ruling aligns with the perspective of international courts that have maintained the separability theory, it would enhance India’s standing as a pro-arbitration or arbitration-friendly environment.
But the Indian legal system might face serious difficulties when judges reverse their own decisions or when various benches have opposing views. These discrepancies have the potential to confuse the parties and attorneys, weakening the stability and predictability necessary for the efficient administration of justice. Sustaining efficiency and confidence in our legal system depends on the interpretation of laws and legal principles in a clear and consistent manner. Uncertainties regarding the validity of legal decisions and the impartiality of the proceedings may arise from inconsistent or reversed rulings. Ensuring the fair settlement of conflicts for all parties concerned and maintaining the integrity of our judicial system require us, as stakeholders in the legal framework, to work toward consistency and uniformity.
YASHASVI GUPTA
Scholar, B.B.A. LL B (Hons )6th Semester, Institute of Legal Studies,
Shri Ramswaroop Memorial University, Lucknow-Deva Road, U.P.