Author: Vivekanandh S M*
| Jurisdictions: | Topics: |
Introduction
In what came as a surprise, a five-judge bench of the Supreme Court of India ruled three-to-two that an arbitration agreement, which is part of an unstamped commercial agreement, cannot be acted upon, even for the limited purpose of appointment of an arbitrator under Section 11 of Arbitration and Conciliation Act, 1996 (“Arbitration Act, 1996”). This judgment, NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (Civil Appeal No.3802-3803 of 2020), makes it harder to even refer to a dispute between consenting parties for arbitration proceedings in India. It comes at a remarkable time when the government and various institutions have made concerted policy efforts to promote alternative dispute resolution mechanisms as a viable medium to settle commercial disputes. This blog post will present a critique of the judgment and its effects.
As a prologue, the NN Global decision results from a reference from a bench of three judges. The legal issue was whether an arbitration agreement would become unenforceable, invalid, or non-existent if the applicable stamp duty on the substantive contract—of which the arbitration agreement is a part—had not been paid.[1]
On the one hand, judgment in SMS Tea Estates[2] held that at the pre-reference stage in an application under Section 11, the Court could adjudicate on threshold issues, such as whether the claim was time-barred, a stale claim, or whether there had been accord and satisfaction, which would preclude the necessity of reference to arbitration. On the other, in Duro Felguera[3] the Court held that there must be minimal judicial intervention and the courts must confine only to examination on the factual “existence’ of the agreement and nothing more. Duro Felguera was subsequently affirmed by a three-judge bench in Mayawati Trading Pvt. Ltd.[4]
Due to these conflicting judgments on this subject, a three-judge bench considered it fit to refer the case to a larger five-judge bench to provide a conclusive decision. After considering the arguments advanced by both sides, the five-judge bench delivered its opinion in four different judgments, of which Justice Ajay Rastogi and Justice Hrishikesh Roy separately provided their dissenting opinion. In summary, the majority consisting of three judges ruled as follows:
- An unstamped agreement—exigible for stamp duty and containing an arbitration clause—is not a contract enforceable in law. Therefore, the arbitration agreement cannot be acted upon even for the limited purpose of appointing an arbitrator.
- Until the underlying agreement is validated with payment of stamp duty, the arbitration agreement will be considered non-existent in law.
- Even an insufficiency in payment of stamp duty will render the arbitration agreement invalid, such that the latter cannot be acted upon until the deficiency is rectified.
Through a regressive interpretation, the majority judgment in this judgment reduces a curable defect to a jurisdictional issue that can potentially stymie arbitral proceedings at the initiation stage.
Admissibility vs. Jurisdiction
The issues arising from Section 11 of the Arbitration Act, which authorizes the Court to appoint an arbitrator on an application by a party, are not new in the Indian arbitral jurisprudence. There have been extreme instances in which the Supreme Court has interpreted the jurisdiction under Section 11 as a judicial exercise of power and arrogated to itself the adjudicatory powers that are otherwise vested with the arbitral tribunal to adjudicate on the merits of the disputes sought to be referred. See SBP & Co. v. Patel Engineering (2005) 8 SCC 618. This stands in tension with the legislative intent behind the scheme of the Arbitration Act of 1996, which specifically circumscribe the powers of the Court from interfering in arbitral proceedings. However, the legislature provided the required coherence on the subject through an amendment[5] that inserted Section 11(6A) into the Arbitration Act. This amendment provided that while considering an application under Section 11 for the appointment of the arbitrator, the Court shall confine its examination to the existence of an arbitration agreement alone. The underlying intent behind the amendment is to ensure that the courts do not interfere with the autonomy of parties to adjudicate their disputes before an alternative forum. More specifically, the amendment brought down what was interpreted by the courts to be a jurisdictional issue under Section 11 of the Act to an issue of admissibility, thereby clearly limiting the powers of the Court only to examining whether an arbitration agreement exists and nothing more. Copious arguments that are too long to reproduce here were made by the Law Commission in its 246th Report, based on which the said amendment was first made.
The fine distinction between a jurisdictional issue and an issue of admissibility has not yet been explored in the Indian arbitration jurisprudence in depth. To make the distinction clear, this extract will be helpful:
Jurisdictional challenges relate to the competence or the authority of the tribunal. In other words, jurisdictional challenges are those that ordinarily relate to whether a claim could be brought to arbitration or not, whereas admissibility challenges the validity of the claim itself, i.e., whether a claim should be heard by the arbitrators at all or not. Thus, while an admissibility challenge goes to the merit of the dispute, a jurisdictional challenge would pertain to whether the tribunal has the mandate to hear and determine the legal dispute.[6]
The distinction between jurisdiction and admissibility can be particularly confusing. In simple terms, jurisdictional issues concern the ability of the tribunal to entertain the issue in the first place, which in most cases cannot be cured. By contrast, admissibility issues pertain to the case’s merits and would therefore fall within the domain of the tribunal to adjudicate.
If the issue pertains to a procedural requirement, such as the payment of stamp duty for the underlying instrument, it would undoubtedly fall within the issue of admissibility. There is no question regarding the arbitral tribunal’s jurisdiction to determine the issues referred to by the parties in this case. In addition, the insufficiency or non-payment of stamp duty can only put into doubt the validity of the arbitration agreement and certainly cannot question its existence, as it relates to the parties’ autonomy to enter into the agreement. Therefore, the Court cannot inquire into the issue in the first place, especially at a pre-reference stage. In the present case, however, the Court has arrogated to itself powers that do not exist through interpretation. Ironically, the majority judgment, while not agreeing to the argument that non-payment of stamp duty is a curable defect, states in its conclusion that once the stamp duty is paid as per the procedure contemplated under the applicable statute, the contract becomes enforceable, and the Court can appoint an arbitrator. By implication, there is no absolute bar against the instrument being acted upon, since the defect is curable at a later stage. Rather than imposing a temporary bar on the tribunal’s consideration, the majority opinion effectively redirects the focus to a jurisdictional issue, amounting to a self-contradiction.
Curiously enough, the amicus curiae appointed by the Court did draw this distinction. In the majority opinion of NN Global judgment, however, the fine distinction between the jurisdictional and admissibility issues is muddled with an outcome that introduces unnecessary procedural formalities that delays the formation of an arbitral tribunal. Justice Rastogi notes this in his dissenting opinion, which states that the arbitral tribunal can effectively adjudicate such issues after its formation (Paragraph 90).
Arbitration Agreement – Separability – Validity
The majority opinion in NN Global proceeds upon an erroneous presumption that an arbitrator cannot be appointed until the stamp duty is paid. It also presumes that the arbitral tribunal is statutorily incapable of implementing the provisions of the Stamp Act after it is formed. Neither of these is true. If the interests of the state in protecting its fiscal interests by obtaining stamp duty is of such great importance, it would have sufficed to delegate the said powers to an arbitral tribunal itself, instead of delaying the formation of the arbitral tribunal in the first place. It is a regressive interpretation that unnecessarily introduces a layer of procedural requirements even before the tribunal is constituted.
In simple terms, the only issue that arose for determination was whether or not the arbitration agreement independently survives the alleged defect on payment of stamp duty in the main agreement between the parties. A simple application of the principle of separability would indicate that the arbitration agreement can be acted upon, at least for the limited purpose of appointing the arbitral tribunal. However, while lauding the principle of Kompetenz-Kompetenz, the majority judgment has deflated the implementation of the principle upon an erroneous conclusion that arbitration agreement cannot exist independently in the context of payment of stamp duty—an egregious exemption from the application of a principle that forms the very basis of arbitrations across the world. The primary objective behind the limited powers of examination conferred upon the Courts under Section 11 is to ensure that non-consenting parties are not forced into the arbitral proceedings. The Court cannot make a roving inquiry into the validity of the arbitration agreement.
The purpose of the separability doctrine is to protect the arbitration clause even if the underlying contract’s validity is called into question. The intent is to ensure that the parties can proceed toward implementing the dispute resolution mechanism to which they consented. From a practical standpoint, a business will not see this payment of requisite stamp duty as a statutory requirement. Instead, it will only be seen as a hindrance that holds the start of the arbitral process ransom on technical grounds. This observation has been succinctly captured by Justice Hrishikesh Roy’s dissenting opinion (Paragraph 81.5) as follows:
The separability doctrine protects the arbitration clause even if the validity of the main contract is attacked. Therefore, if an arbitration agreement remains unaffected even if the main contract is null/void on issues of fraud or misrepresentation, it should not logically render an arbitration agreement, void on a technicality/formality, like stamping. The underlying rationale behind the principle of separability would then be made nugatory. The idea that an arbitration agreement is separate and independent with its own validity requirements, is to ensure that there is no hindrance to the enforceability of an arbitration agreement. This doctrine is also important to reduce circumstances in which the arbitral process may be halted/delayed.
Conclusion
This judgment comes across as a jolt to the concerted policy efforts by the government to make India a hub for arbitration. More importantly, given the interconnectedness of business transactions between multiple jurisdictions across the world, a common set of minimum doctrinal standards must be developed for arbitration proceedings. The principle of Kompetenz-Kompetenz, which provides separate existence to the arbitration clause from the commercial contract of which it is a part, is a fundamental and inalienable part of arbitration jurisprudence around the world. It is egregious to carve out an exemption from this principle for a mere procedural lapse, which the arbitral tribunal can otherwise do. Most importantly, this puts into question the parties’ autonomy to resolve their disputes through arbitration.
The majority opinion in NN Global has substantially set back India’s arbitral reform through the legislature’s introduction of Section 11(6A). This fact must be viewed in the context that most arbitrations conducted in India are ad hoc, and the institutionalization of arbitrations is still some distance away. This invariably puts many agreements in the crosshairs of legal hurdles before the national courts. The legislature clearly recognized that the consenting parties’ ability to proceed within the dispute resolution mechanism should be a single-step process without any interference from the Court on the merits of the disputes. The implications of this judgment by the majority are exacerbated by the fact that the decision is made by a bench of five judges, which cannot be overturned by anything less than a bench of seven judges. While a five-judge bench itself is a rarity, a seven-judge bench is even more so. The aftereffects of this judgment must be watched closely, and the legislature must act swiftly to make clear its position on this issue.
* Vivekanandh is an Indian-qualified lawyer who specializes in Arbitration, Commercial Disputes Resolution, and Insolvency Law Disputes. He regularly appears before the Supreme Court of India, various High Courts, statutory Tribunals, and Arbitral Tribunals.
[1] NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Ors. (2021), 4 SCC 379.
[2] SMS Tea Estates Pvt. Ltd. V. Chandmari Tea Company Pvt. Ltd. (2011), 14 SCC 66.
[3] Duro Felguera v. Gangavaram Port Ltd. (2017), 9 SCC 729.
[4] Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019), 8 SCC 714.
[5] Arbitration and Conciliation (Amendment) Act, 2015.
[6] Gourab Banerji, Doctrine of Kompetenz-Kompetenz – Determining the Jurisdictional Challenge, IN ARBITRATOR’S HANDBOOK 136, 129-148 (Shashank Garg ed., 2022).