Right to Preserve the Substratum of Subject-Matter of Dispute arising out of Inadequately Stamped Agreement

Introduction

Arbitration is widely chosen as a dispute resolution mechanism for its inherent benefits of party autonomy and speedy resolution. Section 5¹ of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) follows Article 5² of the UNCITRAL Model Law and formulates the legislative mandate of judicial non-interference in arbitration.

However, courts have, time and again, been posed with certain fundamental questions, predominantly at a pre-reference stage. A recent example has been whether an arbitration agreement is deemed to be valid and enforceable in the eventuality it is not adequately stamped in accordance with the provisions of the Stamp Act, 1899³ (the Stamp Act).

Discussion on the interplay between the Stamp Act and the Arbitration Act cannot be delved into without analysing the Supreme Court’s judgment in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.⁴ (N.N. Global I). The case was initially decided by a 3-Judge Bench of the Supreme Court of India which held that an arbitration agreement is separable from the main contract and the issue of adequate stamping does not have a bearing on the constitution of an Arbitral Tribunal. This reasoning was reversed by a 5-Judge Bench of the Supreme Court of India on 25-4-2023⁵ where it held that an arbitration agreement being intertwined with the unstamped contract is invalid and not enforceable under the Contract Act, 1872⁶ (N.N. Global II). Consequently, such an arbitration agreement would be impounded under Sections 33⁷ and 35⁸ of the Stamp Act to cure the defect prior to referring the parties to arbitration.

In view of the conflicting views passed in N.N. Global I case⁹ and N.N. Global II case¹⁰, and the issue being a highly debated topic, a 7-Judge Constitution Bench was formed by the Supreme Court of India in Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, In re (hereinafter curative petition case).¹¹ The 7-Judge Bench of the Supreme Court in the curative petition case¹² overruled N.N. Global II case¹³ and settled the debate by adopting a pragmatic and efficient approach while holding that the validity of an unstamped or insufficiently stamped agreement does not arise at the reference stage of arbitration. Further, under the principle of kompetenz-kompetenz, the Arbitral Tribunal has ample power to determine the existence and validity of the arbitration agreement.

Right to seek interim relief arising out of an inadequately stamped agreement

Pertinently, the decisions in N.N. Global I case¹⁴, N.N. Global II case¹⁵ and the curative petition case¹⁶ were largely restricted in ascertaining the impact of an insufficiently stamped agreement while a court is considering an application for appointment of arbitrator(s) under Section 11(6-A)¹⁷ of the Arbitration Act. The aforesaid decisions did not delve into great detail with regard to the stage of ascertaining the grant of interim relief under Section 9¹⁸ of the Arbitration Act. While the Supreme Court in N.N. Global II case¹⁹ noted that the reference was not concerned with the examination of the scope of Section 9 of the Arbitration Act, the decision in the curative petition case held the following:

195. …The discussion in the preceding segments also make it evident that courts are not required to deal with the issue of stamping at the stage of granting interim measures under Section 9.²⁰

The interplay of the Stamp Act and Section 9 of the Arbitration Act is dealt with in more detail by the Bombay High Court, in Universals Enterprises v. Deluxe Laboratories (P) Ltd.²¹ (Deluxe Laboratories) which considered the powers of a court while ascertaining grant of interim relief under Section 9 of the Arbitration Act in the context of a dispute arising out of an unstamped agreement. It was held that while a court is exercising its powers under Section 9 of the Arbitration Act, it is not required to analyse whether the underlying/arbitration agreement is in compliance with the Stamp Act.

The Bombay High Court has maintained a similar view in Gautam Landscapes (P) Ltd. v. Shailesh S. Shah²² (Gautam Landscapes) wherein it held that a court at such a preliminary stage is not required to examine whether the underlying/arbitration agreement is appropriately stamped while considering an application under Section 9 of the Arbitration Act.

The Bombay High Court in L&T Finance Ltd. v. Diamond Projects Ltd.²³ (L&T decision) reiterated the scope of adjudication to be adopted by a court when considering an application seeking interim relief under Section 9 of the Arbitration Act and whether compliance of the Stamp Act is required to be considered at such a stage. While considering a catena of judgments such as Deluxe Laboratories case²⁴ and Gautam Landscapes case²⁵ the Bombay High Court distinguished between the scope of examination under Sections 9 and 11²⁶ of the Arbitration Act.

It was stated that the powers to grant interim relief under Section 9 of the Arbitration Act are akin to powers under Order 39 Rules 1²⁷ and 2²⁸ of the Civil Procedure Code. At this stage, the courts ought not to analyse the validity of the contract and must restrict themselves in deciding if the party satisfies the threefold test of interim relief i.e. prima facie case, balance of convenience and irreparable loss.

The Bombay High Court in L&T decision²⁹ rightly held that the parties ought to be protected in seeking interim reliefs in order to preserve the substratum of the subject-matter of the dispute if the parties are able to successfully establish their case. While doing so, the Bombay High Court distinguished between Sections 9 and 11 of the Arbitration Act on the basis that applications seeking appointment of arbitrator(s) under Section 11 certainly require an examination of the existence of an arbitration agreement, which would require ascertaining the compliance of the Stamp Act,³⁰ whereas a court’s examination under Section 9 ought to be judged on the parameter of the ingredients for grant of interim relief only.

The Bombay High Court in this decision was conscious of the severity and possible consequences of a party’s rights under law, if faced with obstacles at a stage of seeking interim relief. It noted that a party which chooses the mode of arbitration for dispute resolution would suffer a setback if prior to invocation, a party would be refused an interim relief on the ground of insufficiency of stamp duty. On the other hand, if a party approaches a civil court for the resolution of its dispute, non-stamping would not be an obstacle. Such circumstances would certainly discourage parties from opting for arbitration as a mechanism for dispute resolution.

Conclusion and the way forward

Admissibility of applications under the Arbitration Act in connection to the unstamped or insufficiently stamped agreement has taken multiple turns during the last five years.

The debate on maintainability of an application under Section 9 of the Arbitration Act of an unstamped arbitration agreement has been correctly settled by the Bombay High Court by adopting a pragmatic approach. Through the L&T decision³¹, the Bombay High Court has kept in mind the urgency of a stage in seeking interim relief and secured the interests of justice for parties seeking interim relief in order to protect their rights and interests in law.

Notably, while the Bombay High Court in the aforesaid decisions has dealt with the interplay of the provisions of the Stamp Act and Section 9 of the Arbitration Act in great detail, the same has also been reconfirmed by the Supreme Court in the curative petition decision as detailed above.³²

The aforesaid decisions have also ensured the avoidance in causing unnecessary delay in securing urgent relief which in many cases would have caused irreparable loss or harm to a party, and possibly resulted in parties opting out of choosing arbitration as a mechanism for dispute resolution.