By Shatakshi Arya
Abstract
The article explores the re-evaluation of arbitration terms in unstamped agreements, emphasizing the tension between the administration of justice and procedural maneuvers employed to stall legal proceedings. It outlines the historical context, legislative amendments, and judicial interpretations surrounding arbitration agreements, notably discussing the recent Supreme Court ruling in N.N. Global-2. It highlights the divergent opinions within the bench and proposes strategies to streamline arbitrator appointments and harmonize laws to favour arbitration. Ultimately, it argues for legislative action to eliminate procedural obstacles and strengthen India’s position as a preferred destination for commercial arbitration.
Introduction
Centuries ago, Francis Bacon cautioned against individuals who “involve courts in disputes over jurisdiction, acting not as true friends of the court but as parasites of the court.” Stalling the arbitrators’ selection process and challenging the legality of the mutually agreed-upon arbitration agreement, if included in an unstamped document, are frequent strategies employed by parties seeking to drag out legal proceedings and postpone the administration of justice.
This contradicts the fundamental tenet of arbitration, which is to offer an alternate method of resolving disputes and a counterbalance to the needless expenses and delays associated with litigation. A 5-member panel of the Supreme Court in M/S N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd., unfortunately affirmed this legal position and reversed the prior forward-looking decision in N.N. Global-1, also referred to as the “2021 judgment,” which was delivered in the same case by a 3-member panel.
In summary, the Arbitration and Conciliation Act, 1996 (“ACA, 1996”) permits a court, under Section 11, to inquire into the legal and factual existence of an arbitration agreement prior to referring parties to arbitration. By a majority vote of 3:2, the court reiterated the unenforceable character of arbitral clauses incorporated in unstamped instruments.
This article seeks to initially clarify the context behind the decision, followed by a thorough analysis of both the majority and minority opinions of the Supreme Court in the 2023 ruling. Finally, it delves into potential strategies for streamlining the process of appointing arbitrators in India.
The Context: An Epic of Arbitration and Randomness
Under Section 11 of the ACA, 1996, the Supreme Court, the High Court, or any other person or institution designated by such a Court may appoint arbitrators in the event that the contracting parties are unable to agree upon the appointment procedure or to abide by any agreements that have been reached.
Regarding this specific provision, the Supreme Court has repeatedly held that the Court’s jurisdiction should be broadened under Section 11 to consider both the presence and legality of the agreement before directing parties to arbitration. A similar matter addressing this concern was discussed in SMS Tea Estates (P) Ltd. v. Chandmeri Tea Co. Ltd. (2011), in which the Constitution Bench of the Supreme Court ruled that the Court couldn’t enforce an arbitration clause in a document until the required stamp duty, as mandated by the Indian Stamp Act, 1899, was paid on it.
In order to “redress the institutional and systematic malaise” impeding the expansion of arbitration in India, the 246th Law Commission Report suggested adding Section 11(6A) to the Act, that would limit the scope of judicial participation prior to arbitration to a preliminary assessment of the arbitration agreement’s “existence and validity.”
The report gave judicial hold-ups in arbitrator appointments as justification for this modification. The Arbitration and Conciliation (Amendment) Act, 2015, introduced a version of Section 11(6A) that limited the scope of investigation to the presence of the arbitration agreement, as highlighted by the minority verdict in N.N. Global-2 (§ 247, · 347).
Although the Report discussed the general body of jurisprudence surrounding this matter, it made no mention of the ruling in SMS Tea. As a result, arbitral clauses in unstamped instruments remained unenforceable, the Supreme Court found in Vidya Drolia v. Durga Trading Corporation (2021)as the revision failed to address the Court’s reasoning.
“Taking a step ahead”: Analysing the Court’s decision
The issue was revisited by the Supreme Court in the case of N.N. Global-1, where a three-judge bench that disapproved of the previous bench’s decision in Vidya Drolia submitted the case to the five-judge court. Notably, the 2021 ruling limited the judiciary’s pre-arbitral participation and acknowledged the legislative intent behind the incorporation of the kompetenz-kompetenz doctrine, which is a tribunal’s competence to rule its own jurisdiction, into Indian arbitration law, empowering arbitrators to establish their own jurisdiction. The Supreme Court interpreted the amendment in accordance with the latest advancements in international arbitration, integrating into Indian law the principle of the severability, that talks about the separate nature of the arbitration agreement from the underlying unstamped agreement. This allowed a court to act upon the “severed” agreement pursuant to Section 11. The implied reasoning behind N.N. Global-1 was that although while the Stamp Act required the stamping of “arbitral awards,” it did not specifically mention arbitration agreements, therefore an arbitration agreement, once separated, would not require stamping.
The reasoning presented in the three-judge bench verdict in N.N. Global-2 is invalidated by the majority judgment, which was written by Justices Joseph Kurian and Aniruddha Bose, and the concurring opinion, which was written by Justice CT Ravikumar. This is because an arbitration agreement, whether or not it is severable, is an agreement in and of itself that must be stamped in accordance with Section 3 of the Stamp Act and Article 5(c) of the Act’s schedule, which requires the stamping of all agreements, even “if not otherwise provided for.”
The majority concluded that the arbitration agreement must be stamped in order for it to be legally binding. They also held that a court may investigate the existence and legality of the arbitration agreement prior to the appointment of arbitrators under Section 11 of the ACA, 1996. This logic makes an unstamped arbitration agreement void since unstamped instruments are prohibited from being admitted into evidence under Section 35 of the Indian Stamp Act.
There are two reasons to disagree with the majority decision, even though the legislation were analyzed in a technically competent manner. First of all, because it takes time to fulfill this financial obligation, it effectively allows the litigating parties to stall proceedings and negatively impacts the effectiveness of the arbitration process. As the parties would have to compare the costs and benefits of covering the stamp shortfall and the proceedings’ outcome, filing for arbitration may be discouraged in jurisdictions where the stamp duty is imposed on an ad-valorem basis.
Second, it fails to recognize the distinction between the ACA, 1996’s Section 2(1)(e) and Section 11. The latter provision allows for the possibility of a principal Civil Court of ordinary jurisdiction or High Courts with the “jurisdiction to examine the questions basing the subject-matter of the arbitration in a case if the same has been the subject matter of a suit,” in contrast to the former provision, which, based on the wording of the law, it suggests that only a preliminary inquiry into the agreement is allowed. Consequently, Section 2(1)(e) broadens the Court’s jurisdiction as it enables the examination of evidence and determination of the key issues that a tribunal will address.
The Need to Harmonize the Law in Favour of Arbitration
The 2021 judgment’s reasoning, which distinguished between an arbitration tribunal’s Section 16 examination of the arbitration agreement’s “validity” and a court’s Section 11(6A) investigation of the arbitration agreement’s “existence,” is restated in the dissenting opinions, which were separately written by Justices Ajay Rastogi and Hrishikesh Roy. Stamping is a reparable flaw that can be later investigated by the arbitration panel, as was noted in United India Insurance Company Limited v. Hyundai Engineering & Construction Company Limited.
International standards would be adhered to by such an interpretation. A brief trip across several jurisdictions shows how ingrained the kompetenz-kompetenz idea has become as a widely accepted theory to reduce the amount of judicial involvement. In the case of Harbour Assuriance v. Kansa Gen. International Insurance, the UK Court of Appeal determined that the invalidity of the first contract has no impact on the enforceability of the later,unless the arbitration agreement itself is being contested. If the contract’s validity is questioned, the arbitration agreement is seen as a distinct “procedural contract” that has been consolidated into one for convenience rather than as a “component of a material-legal contract.”
Furthermore, the doctrine of severability is enshrined in the Article 16(1) of UNCITRAL Model Law on International Commercial Arbitration, which states that an arbitral tribunal’s decision to declare a contract void does not automatically render the arbitration provision contained in that contract void. This concept of separability is codified in ACA, 1996, Section 16(1), and it must be adhered to.
In his dissenting opinion, Justice Hrishikesh Roy asks the legislature to read the legislation constructively in order to promote prompt referrals to arbitration (§ 403). In order to prevent protracted legal disputes over stamp duty, the author suggests adding arbitration agreements to the list of exemptions to the Stamp Act (included under Article 5 of the Statute’s Schedule). The needless expenses the State incurs in such frivolous matters out of its coffers may also be avoided by forgoing such a duty.
Conclusion
In conclusion, the Supreme Court’s ruling in N.N. Global-2 represents a setback for the effectiveness of India’s arbitration regime because it introduces additional procedural obstacles to the enforcement of the parties’ intentions, like, the requirement to cover stamp duty for the arbitration agreement and conducting preliminary inquiries into its validity and legality before arbitration.To promote the development of India’s reputation as the preferred location for commercial arbitration, it is essential that legislative action be taken to eliminate the disparities between the Stamp Act and the ACA 1996.
{The author is a 4th year student at Dr. Ram Manohar Lohiya National Law University, Lucknow}