Constitution bench decision will impact progress of arbitration


After delivering a pro-arbitration judgment in the case of NN Global Mercantile Pvt Ltd v M/s Indo Unique Flame Ltd and Ors, the Supreme Court referred the case to a constitution bench of the court to resolve conflicting decisions of equal standing. The constitution bench has reserved its decision in the case, which deals with the validity and enforceability of the arbitration clause in an unregistered and unstamped contract.

The petitioners and the respondents entered into a sub-contract containing an arbitration clause. A dispute subsequently arose between the parties and the respondents invoked the bank guarantee furnished by the petitioners. Litigation followed this step.

The respondents then applied under section 8 of the Arbitration and Conciliation Act, 1996, to refer the dispute to arbitration. The key issue in this matter was whether the absence of a stamp or a valid registration on the sub-contract rendered the arbitration clause in the contract invalid.

In its much-praised judgment, the Supreme Court approved the reference to arbitration, even when the document containing the arbitration clause was unstamped or insufficiently stamped. This judgment was in line with a series of pro-arbitration cases decided by the court that aimed to provide the country with an advanced and progressive arbitration regime similar to those in leading international arbitration hubs across the world.

However, this vision for a robust and clear-cut arbitration system has not been shared by all benches of the Supreme Court. The decision in NN Global Mercantile overruled that in SMS Tea Estates Pvt Ltd v M/s Chandmari Tea Co Pvt Ltd. That case was followed by Garware Wall Ropes Ltd v Coastal Marine Constructions and Engineering Ltd, which in turn was affirmed by Vidya Drolia and Ors v Durga Trading Corporation.

Following NN Global Mercantile, the Supreme Court, in Intercontinental Hotels Group v Waterline Hotels Pvt, made an effort to provide clarity on the issue of enforceability of an arbitration clause in an unstamped agreement.

However, the judgment in Intercontinental Hotels merely added an additional layer of ambiguity by contemplating a distinction between completely unstamped agreements and those that are insufficiently stamped. There are now lines of conflicting judgments on this issue, creating uncertainty over the status of an arbitration clause in an unstamped contract.

In the present reference to the constitution bench to decide on the question of law in NN Global Mercantile, no parties appeared and extensive argument was submitted by the amicus curiae appointed by the court.

The primary submission was that the determination of the status of an unstamped or insufficiently stamped arbitration agreement must be left to the arbitrator. The amicus further argued that on the exercise of jurisdiction under section 11(6) of the Arbitration and Conciliation Act, 1996, the court should confine itself to the examination of whether an arbitration agreement exists.

The ambit of section 16, which deals with the competence of an arbitral tribunal to rule on its own jurisdiction, is wide enough to allow the arbitrator to make a determination on the stamping of an instrument.

The amicus further submitted that under section 16, in addition to jurisdiction, the arbitrator is allowed to decide on objections concerning the existence and validity of the arbitration agreement. Under section 11(6), which deals with the appointment of arbitrators by courts, consideration by the court is confined to the examination of the existence of an arbitration agreement.

The decision of the constitution bench is impatiently awaited because it holds out the prospect that the court will finally lay to rest the present issue by a final and conclusive decision.

Practitioners and advisers hope that the decision will end the ambiguity over the validity of arbitration clauses in an unstamped or insufficiently stamped agreement. Many will also hope that the court will support the progress of arbitration in India that will deliver a framework matching the country’s economic and social ambitions.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.