Indian Supreme Court relieves stamp duty headaches on arbitrator appointments

24 January 2024

A seven-judge bench of the Indian Supreme Court has ruled that arguments that an agreement is not sufficiently stamped do not impede the appointment of a tribunal in India-seated arbitration proceedings. The decision overrules a controversial ruling by a five-judge bench of the same Court in April 2023 (which we reported on in a previous briefing), which had threatened to block up arbitral appointments under the Indian Arbitration Act and create headaches for arbitral institutions.

The Indian Supreme Court in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, has ruled that arbitration agreements are not automatically invalid or void ab initio if the contracts containing such agreements are unstamped or improperly stamped.

The decision relates to an argument commonly raised in arbitrations involving contracts governed by Indian law – namely, that the tribunal cannot assume jurisdiction over a dispute where the arbitration agreement is contained in a contract which has not been duly stamped under the Indian Stamp Act or other applicable Indian stamping legislation. In particular, such arguments have been used as a basis to delay the appointment of tribunals by the Indian courts in arbitrations conducted under the Indian Arbitration Act.

In a 2023 ruling, the Supreme Court in NN Global Mercantile Limited v. Indo Unique Flame Limited and Ors (Civil Appeal No(s). 3802-3803 of 2020), the Supreme Court had held that an arbitration agreement would not "exist in law" or be capable of being acted upon if the instrument containing the arbitration agreement was not duly stamped. This decision had threatened to result in heavy delays to arbitral appointments while the Indian courts considered the merits of stamp duty objections.

It is to be welcomed that the decision in NN Global has been swiftly reversed. In Re: Interplay, the Supreme Court considered that based on a harmonious construction of the Indian Arbitration Act, the Indian Stamp Act and the Indian Contract Act, the Arbitration Act will have primacy in relation to arbitration agreements. Recognising that one of the objectives of the Arbitration Act was to minimise the supervisory role of courts in the arbitral process, the Court concluded that obliging the Court to decide stamping issues at the appointment stage would defeat the legislative intent of the Arbitration Act.

The ruling also reaffirmed the core doctrines of competence-competence (i.e. the tribunal's power to rule on its own jurisdiction) and separability (i.e. the separate nature of the arbitration agreement from the underlying contract) in Indian arbitration. In its decision, the Court conducted a comparative analysis of the treatment of these principles in the UK, the USA, Singapore and under the New York Convention, as well as their evolution in India. Based on these principles, the Court concluded that any objections as to stamping fall within the ambit of the tribunal's decision-making authority.

The Court also had due regard to Section 11(6A) of the Indian Arbitration Act – introduced in the 2015 round of amendments to India's arbitration legislation – which confines the court's jurisdiction in making arbitral appointments to the "examination of the existence of an arbitration agreement." The Court considered that the use of the term "examination" is limited to a prima facie determination and that objections to the jurisdiction of an arbitral tribunal are of a nature that cannot be decided on a prima facie basis.

The Court was also clearly mindful of the practical consequences of its decision. It observed (as is well-known) that the Indian courts are burdened with "innumerable cases on their docket" and that this has an inevitable consequence of delaying the speed at which each case progresses. As such, the Court reasoned, if stamp duty objections fall for arbitral tribunals to decide, it is in fact more likely that the process of the payment of stamp duty and any corresponding penalties are completed more quickly than if the matter is adjudicated in court.

Comment

The Indian Supreme Court's decision in In Re: Interplay is a welcome correction of the law. Disputing parties and arbitral institutions operating in India should be reassured to know that arguments as to the adequacy of stamp duty will not be entertained as a basis to delay the appointment of an arbitral tribunal by the Indian courts. More broadly, foreign investors involved in India-related disputes can take comfort from the Indian judiciary's reaffirmation of the general principle that arbitration is intended to bring about the quick, efficient and effective resolution of disputes with minimal interference from the courts.

This is not to say that arguments on stamp duty compliance will no longer be relevant in arbitral proceedings involving documents governed by Indian law. Indeed, the Indian Supreme Court has made it clear that arbitral tribunals are expected to determine arguments on the sufficiency of stamp duty, along with any attendant consequences on their jurisdiction or the admissibility of the contractual documents in question. Parties are therefore advised to ensure compliance with Indian-law stamp duty requirements at the outset to avoid arguments based on stamp duty being raised in arbitral proceedings.

Content relating to India is based on our experience as international counsel representing clients in their business activities in India. We are not permitted to advise on the laws of India, and should such advice be required we would work alongside a domestic law firm.