Citing the current “limitless uncertainty in the area of arbitration”, the Supreme Court on Tuesday preferred a seven-judge bench to review its ruling in April that held an arbitration clause is not enforceable in law if the agreement is unstamped or insufficiently stamped.
The April judgment is expected to create further delays in appointment of arbitrators by adding one more layer of scrutiny, besides being contrary to India’s pro-arbitration stance.
“Having regard to the larger ramifications and consequences of the view of the majority in the NM Global case, these proceedings should be placed before a seven-judge bench to reconsider the correctness of the view of the five-judge bench,” said a constitution bench led by Chief Justice of India Dhananjaya Y Chandrachud.
The constitution bench of five judges, which also comprised justices Sanjay Kishan Kaul, Sanjiv Khanna, Bhushan R Gavai and Surya Kant, was hearing a curative petition demanding a reconsideration of the April 25 verdict.
The April verdict, by 3:2 majority, relied on the 1899 Indian Stamps Act requiring certain agreements to be compulsorily registrable or chargeable to stamp duty while holding that a court could go into the aspects of stamping and other compliances before the arbitrator is appointed. According to the majority view, a court is bound to examine the instrument at a pre-appointment stage, and if it is found to be unstamped or insufficiently stamped, the instrument is to be impounded at that stage.
Experts welcomed the court’s reference to a larger bench.
The April verdict made a huge impact on arbitration, said Sushmita Gandhi, partner at IndusLaw. “Given the impact it had and continues to have on arbitral proceedings prior and post the judgment, and that it was also at odds with the present arbitration regime, leading to uncertainties and delays, a reference to a larger bench was perhaps a matter of time,” she added.
The April judgment was indeed one step backward for the current pro-arbitration regime in India and opened up a Pandora’s Box, said Manmeet Singh, senior partner at Saraf and Partners, a law firm.
“Looking into a curable defect such as stamp duty at the time of appointment of an arbitrator not just delays the commencement of proceedings but also opens the door for judicial interference in arbitration by going into the nature of the larger agreement, that too at the very threshold. Thus, by agreeing to hear the curative petition, the Hon’ble Supreme Court has also seen merit in re-examining the issue,” Singh added.
During the proceedings on Tuesday, the constitution bench called it a “very important” matter to be decided to bring clarity to the arbitration regime in the country.
“Arbitrators across the country are confronted with situations where they are being told that the agreements are unstamped and so, reopen the case. There is currently limitless uncertainty in the area of arbitration. This uncertainty has to end,” observed the bench.
Senior advocate Shyam Divan, appearing for one of the parties, objected to his case getting revived. The court must let go of specific facts of his client since the issues in his case were not alive any further, Datar said.
But the bench said it would need a live case to review the April verdict. “We want this case to be decided. We don’t want it to be deflected. The legitimacy of arbitration regime is far more important for the country than technical objections,” added the court, fixing October 11 as the next date of hearing. The bench clarified that it would conclude the arguments in the case on the next date of the hearing.
The court appointed advocates Pritha Srikumar and Debesh Panda as nodal counsels in the matter to prepare a common compilation of documents and submissions, and collaborate with lawyers to facilitate the proceedings.
The ruling on April 24 had come while deciding a bundle of judgments since 2011, taking divergent views on the enforceability of arbitration clauses contained in unstamped or insufficiently stamped agreements.
The majority judgment cited the mandate of the Stamps Act to hold that “an instrument which is chargeable to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law”.
It added that an arbitration agreement within the meaning of the 1996 Arbitration and Conciliation Act attracts stamp duty and if it is not stamped or insufficiently stamped, it cannot be acted upon in view of Section 35 of the Stamps Act which defines conditions for a valid instrument. Section 35 of the Stamp Act lays down that no instrument chargeable with duty shall be admitted in evidence for any purpose or shall be acted upon unless such instrument is duly stamped.
It further noted that an unstamped or insufficiently stamped instrument must be validated by payment of requisite duty before it could be adduced as evidence in an arbitration matter. According to the majority, a court is bound to examine the instrument at a pre-appointment stage and if it is found to be unstamped or insufficiently stamped, the instrument is to be impounded at this stage.
The two other judges on the bench, comprising the minority, flagged concerns that the view taken by the majority in the judgment has the propensity of frustrating the objective of the Arbitration and Conciliation Act, as a scrutiny on the stamp duty at the threshold can stall the process and will lead to procedural complexity and delay in litigation before courts.
They held that the copy or certified copy of arbitration agreement, whether unstamped or insufficiently stamped, at the pre-reference stage, is an enforceable document for the appointment of arbitrator. Once the arbitrator or an arbitral tribunal is appointed, the minority view said, validity of the agreement can be gone into for a proper decision at a later stage without impeding the process.