Recently, Andhra Pradesh High Court delivered its judgement in the case of VR Commodities Pvt. Ltd. v. Norvic Shipping Asia Pte. Ltd.[1] (“VR Commodities”). The judgement is the latest development in the jurisprudence of validity of arbitration agreements – an issue that has been pending before the Hon’ble Supreme Court ever since the decision in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd.[2] (“Garware”), the latest precedent by the Supreme Court on this issue was referred to a constitutional bench. The question is simple – will non-payment of stamp duty in a commercial contract invalidate the arbitration clause? The answer to this question was given in affirmative in Garware and the position has since been solidified in Vidya Drolia v. Durga Trading Corporation[3] (“Vidya Drolia”). Both of these have followed the earlier judgement of SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd.[4] (“SMS Tea Estates”) It was only in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.[5] (“NN Global Mercantile”) that Supreme Court deviated themselves from this settled position. The present article unpacks the controversy and explore why Supreme Court wishes to depart themselves from this position. The article further looks at the different avenue being taken by the Supreme Court and examine whether it is in line with the spirit of alternative dispute resolution methods and goals.
In a Nutshell
The question was first considered in SMS Tea Estates case, where a seven-judge bench ruled that the designated judge will decide the existence of the arbitration agreement and its validity henceforth. In that case, the Court had to rule upon the validity of an unregistered and unstamped document. Provisions of Registration Act allowed an unregistered document to be received as evidence of a collateral transaction, however there was no such provision in the Stamp Act. Rather, Section 35 of the Stamp Act prohibits any Court from having an unstamped document in evidence or acting upon an unstamped document. Herein lies the conundrum which SMS Tea Estates gave answer to. Since this requirement was not fulfilled, it leaves no scope of enquiry for the Courts and ultimately, they are bound to impound the document unless the deficit stamp duty and penalty is paid.
At that time, the judicial intervention in the arbitration proceedings was at its peak. The stance began to change after 2014. In August 2014, the Law Commission of India submitted its report[6] on Arbitration and Conciliation Act and recommended several changes to its scheme – making it at par with its global counterparts. Hence, the aforementioned judgement and pre-arbitral judicial intervention were heavily discussed. Section 11 (6-A) was recommended, which was accepted in the Ordinance and ultimately in the 2015 amendment. It is pertinent to mention here the Law Commission has specifically observed that ‘If the Judicial Authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally decided by the arbitration tribunal’.
After the 2015 amendment, the question was raised again before the Supreme Court in Garware. The Court examined the objects and reasons of the new amendment along with the observations given in the Law Commission Report. Apart from confirming that the ratio in SMS Tea Estates case is unaffected by the amendment in 2015, the Court further clarified that by the virtue of being unstamped, the commercial contract is not enforceable in law and thus, arbitration agreement will not hold its validity. They specifically mentioned that an arbitration agreement may ‘exist’ but may not ‘exist in law’. This reasoning has further been upheld in the Vijay Drolia case.
However, the bench in NN Global Mercantile disagreed. They held that the arbitration agreement is a separate agreement altogether and is not chargeable to subjected to non-payment of stamp duty on the commercial contract. Thus, owning to its separate existence, the arbitration clause would not be invalidated or rendered unenforceable. Finding the conflicting opinions, the Court referred the matter to a larger bench
Unpacking the Controversy
After this nutshell review of the current position, a clear view of how the controversy developed comes to the picture. To resolve this conundrum, one first needs to look at the August 2014 report. The report itself was marked by several eminent personalities as a milestone since it was the first time both legislature and judicial institutions recognized the importance of alternative dispute resolution avenues. Furthermore, there was a conscious attempt to make India’s ADR regime an effective spoke in the grand wheel of dispute resolution systems around the world. The most effective step that was taken was to decrease the judicial intervention in arbitration proceedings. The Law Commission connected the Doctrine of Kompetenz-Kompetenz and Doctrine of Separability. Doctrine of Kompetenz-Kompetenz means that the arbitration tribunal is competent enough to rule on its own jurisdiction. The Doctrine of Separability means that the arbitration clause is considered separate from the commercial contract. Thus, if the commercial contract is declared invalid, the validity of arbitration clause will still remain valid. The ultimate conclusion by the Law Commission is if the question of validity of arbitration agreement arises, it can be solved by the tribunal itself. The recent decision by Andhra Pradesh High Court in VR Commodities case has taken this view while upholding the validity and enforceability of the arbitration agreement. However, the implementation of Stamp Duty Act prevents the Court for taking it into consideration.
Garware was not oblivious to the fact that the arbitration agreement cannot be said to be non-existent just by the virtue of being in an unstamped document and it very specifically mentioned that the agreement will not ‘exist in law’. The Stamp Act themselves are fiscal legislations aimed at increasing State’s revenue. So, what Garware did was to balance these two considerations of validity of arbitration agreement and State’s revenue aim and offered a makeshift solution to the legislative conundrum.[7] That is precisely why they offered to impound the document only up till the deficit stamp duty and penalty, if any, is paid thereof. The Law Commission Report and the steps taken for 2015 amendment both make it clear that the legislature wishes to put a check on judicial intervention at all stages of arbitration proceedings. This particular controversy became a loophole which can be exploited and judiciary can be compelled to intervene. What therefore is needed is a legislative intervention. The controversy can be put to rest by a judicial decision, but ultimately judiciary’s hands are tied by how legislature draws up the policy. If in future judiciary makes the decision to uphold the existence, validity and enforceability of arbitration agreements regardless or not if it is in a stamped or unstamped document, the jurisprudence will be in line with the principle of minimal judicial intervention, but its implementation will only be through judicial overreach, which should be avoided in the spirit of separation of powers.
Conclusion
At the face of it, it seems that all the judgements post 2015 agree on one thing, there exists an arbitration agreement, albeit not legally enforceable, within the unstamped documents. As discussed before, the Stamp Act is merely intended to increase State’s revenue and thus is a mere technical requirement to make an already provide an already existing agreement existence in law. These procedural requirements, which are often seen in the judicial route, have been sought to been removed from the ADR regime. It is clear that the legislature intends removal of this particular requirement as well. Garware holds firm in its decision when they offered a specified time limit upon payment of stamp duty to make the agreement enforceable in law. But at the same time, VR commodities has followed the Law Commission Report and what, due to its goal of minimizing judicial intervention, will be preferred in ADR regime as well. What is desperately needed is a policy intervention on part of the legislature clarifying that Stamp Duty Act won’t have a bearing on existence of the arbitration agreement in law. Furthermore, the validity of arbitration agreement need not be judged at the level of judicial proceedings, but rather before Arbitral Tribunal, who, by the virtue of Doctrine of Kompetenz-Kompetenz has the power to do so.
[1] 2022 SCC OnLine AP 1001
[2] (2019) 9 SCC 209
[3] (2019) 20 SCC 406
[4] (2011) 14 SCC 66
[5] 2021 SCC OnLine SC 13
[6] Law Commission of India, ‘Report No. 246 – Amendments to the Arbitration and Conciliation Act 1996’, August 2014, < https://lawcommissionofindia.nic.in/reports/report246.pdf >
[7] Anu Shrivastava, ‘Garware Wall Ropes and Indo Unique : The Road Ahead in Treatment of Arbitration Clauses Contained in Unstamped Instruments’, 3 IALR (2021) 66
*Abhinav Shrivastava is a Co-Founding Partner of GSL Chambers. Aman Gugnani is an intern at GSL Chambers.
