Important Judgments of Supreme Court on Arbitration in 2023
1. RE: INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT 1899? Click to Read the judgment
A Constitution bench consisting of seven judges overturned the Supreme Court's April judgment, which asserted that an arbitration clause becomes void and legally unenforceable if the corresponding agreement lacks proper stamping or is inadequately stamped. The majority decision in April, with a 3:2 ratio, allowed courts to scrutinize stamping and other compliance aspects before appointing an arbitrator, causing concerns about delays and conflicting with India's pro-arbitration stance.
The bench set aside the earlier verdict, stating that agreements lacking or inadequately stamped are not automatically void or unenforceable if a prima facie arbitration agreement exists between the parties. While acknowledging that unstamped or insufficiently stamped agreements are inadmissible under the Stamp Act, the unanimous judgment emphasized that this is a curable defect in the law, and non-stamping or improper stamping does not invalidate the instrument.
This ruling will bolster India's position as an international arbitration hub, resolving confusion caused by the earlier judgment. The court underscored the Arbitration Act's special nature, aiming to minimize the court's supervisory role in the arbitral process, emphasizing that objections based on stamp duty should not be decided on a prima facie basis to align with legislative intent.
Referring to the Stamp Act, the court pointed out that non-payment of stamp duty is a curable defect with a prescribed procedure. The judgment clarified that the arbitral tribunal remains bound by Stamp Act provisions, ensuring adherence to impounding, admissibility, and challenges to arbitrators' position and jurisdiction. This ruling stems from a curative petition against the April judgment, addressing the uncertainty in arbitration created by the previous ruling.
The Earlier judgment emerged from a series of divergent views on the enforceability of arbitration clauses in unstamped or insufficiently stamped agreements since 2011. The 3:2 majority in April relied on the 1899 Indian Stamps Act, necessitating compulsory registration or stamp duty for certain agreements. The majority view mandated pre-appointment scrutiny, impounding unstamped or insufficiently stamped instruments, and declaring arbitration agreements void. The minority expressed concerns about the potential hindrance to the Arbitration and Conciliation Act's objectives and procedural complexities caused by upfront stamp duty scrutiny.
In the curative plea's judgment the bench expressing doubt about the correctness of the April ruling. The court clarified that stamping's validity does not affect the agreement but may impact its admissibility and enforceability. The scope of reviewing the matter was confined to the correct stage and forum for determining the arbitration agreement's validity and enforceability.
(i) Whether the dictum as laid down in ICOMM Tele Limited (supra) can be made applicable to the case in hand more particularly when Clause 55 of the General Conditions of Contract provides for a pre-deposit of 7% of the total claim for the purpose of invoking the arbitration clause?
(ii) Whether there is any direct conflict between the decisions of this Court in S.K. Jain (supra) and ICOMM Tele Limited (supra)?
(iii) Whether this Court while deciding a petition filed under Section 11(6) of the Act 1996 for appointment of a sole arbitrator can hold that the condition of pre-deposit stipulated in the arbitration clause as provided in the Contract is violative of the Article 14 of the Constitution of India being manifestly arbitrary?
(iv) Whether the arbitration Clause No. 55 of the Contract empowering the Principal Secretary/Secretary (Irrigation), State of Uttarakhand to appoint an arbitrator of his choice is in conflict with the decision of this Court in the case of Perkins Eastman (supra)?
While answering Issue No.1 and 2, the Supreme Court held We are of the view that Clauses 3 and 4 respectively as above relating to security deposit for performance and refund of the same has no nexus at all with the pre-deposit amount of 7% as stipulated in Clause 55 of the GCC. Such vague and ambiguous condition of 7% pre-deposit of the total claim makes the same more vulnerable to arbitrariness thereby violating Article 14 of the Constitution. Even otherwise, as explained in ICOMM Tele Limited (supra) if the claim of the petitioner herein is ultimately found to be frivolous the arbitral tribunal can always award costs in accordance with Section 31A of the Act 1996.
Answering Issue No.3 the Apex Court held that The concept of “party autonomy” as pressed into service by the respondent cannot be stretched to an extent where it violates the fundamental rights under the Constitution. For an arbitration clause to be legally binding it has to be in consonance with the “operation of law” which includes the Grundnorm i.e. the Constitution. It is the rule of law which is supreme and forms parts of the basic structure. The argument canvassed on behalf of the respondent that the petitioner having consented to the pre-deposit clause at the time of execution of the agreement, cannot turn around and tell the court in a Section 11(6) petition that the same is arbitrary and falling foul of Article 14 of the Constitution is without any merit. 85. It is a settled position of law that there can be no consent against the law and there can be no waiver of fundamental rights.
Answering the fourth Issue, the court held that the Law Commission discussed the aforesaid aspect under the heading “Neutrality of Arbitrators”, yet the focus of discussion was on impartiality and independence of the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In the international sphere, the “appearance of neutrality” is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term “neutrality” used is relatable to impartiality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term “neutrality of arbitrators” is commonly used in this context as well.
Finally the Supreme Court ruled that “In view of the aforesaid discussion, we have reached to the conclusion that we should ignore the two conditions contained in Clause 55 of the GCC, one 88 relating to 7% deposit of the total amount claimed and the second one relating to the stipulation empowering the Principal Secretary (Irrigation) Government of Uttarakhand to appoint a sole arbitrator and proceed to appoint an independent arbitrator.
3. N.N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd (Click here to Read the Judgment)
Whether an arbitration agreement contained in an unstamped agreement can be acted upon?
The Supreme Court has decreed that an unstamped instrument lacking the requisite stamp duty is not legally enforceable. If such an instrument, housing an arbitration clause, is presented in a Section 11 petition under the Arbitration and Conciliation (A&C) Act, the Court is obligated to impound it. The Court can only proceed with the petition after impounding the instrument, ensuring the payment of stamp duty, and obtaining the endorsement under Section 42 of the Stamp Act. Without proper stamping, the arbitration agreement within the unstamped instrument holds no legal validity.
Citing Sections 2(h) and 2(g) of the Contract Act, along with Sections 33 and 35 of the Stamp Act, the Court has determined that an unstamped agreement lacks legal enforceability and cannot serve as evidence in court or before a public authority. Until appropriately stamped in accordance with the Stamp Act, an agreement lacking the necessary stamp or with insufficient stamping is deemed void and non-existent in legal terms.
4. B&T AG v. Ministry of Defence (Click here to Read the judgment)
Whether negotiations between the parties would postpone for cause of action for the purpose of limitation?
The Supreme Court has established that the three-year limitation period for filing a Section 11 application commences from the date when the cause of action first arose. Any subsequent negotiations between the parties will not defer the initiation of the cause of action for the purpose of calculating the limitation period.
In cases where parties are involved in significant negotiations aimed at amicably resolving the dispute, the Court is tasked with identifying the "breaking point" when such efforts would have been abandoned. Nevertheless, for the calculation of the limitation period, the entire history of negotiations must be presented and documented to enable the Court to ascertain the specific "breaking point."
5. TATA Sons Pvt Ltd v. Siva Industries & Holdings Ltd (Click here to Read the judgment)
Whether the period of 12 months under Section 29A of the A&C Act is also applicable to International Commercial Arbitration?
The Supreme Court has clarified that the 12-month time limit stipulated in Section 29A for rendering an award applies exclusively to domestic arbitrations and does not extend to International Commercial Arbitrations. The Court additionally emphasized that, according to the proviso to Section 29A(1), the 12-month period for delivering an award from the date of completion of pleadings is not obligatory and can be seen as a directory provision rather than a mandatory requirement.