Decisions in M Hakeem and NN Global: Time for yet another amendment to arbitration law?

In the Oscar-winning movie Django Unchained, which is set in 1858, Calvin Candie (Leonardo DiCaprio) insists that Dr King Schultz (Christoph Waltz) shakes his hand so that their agreement is sealed and formalized. In the 21^st century, we have come a long way from insisting on such formalities.

With technological advancement, agreements are made and performed online, without the parties meeting each other face-to-face or putting their original signatures in ink on a physical piece of paper. Unfortunately, arbitration law, seen from the perspective of the Supreme Court's judgment in M/s NN Global Mercantile Private Limited v. Ms Indo Unique Flame Ltd & Ors, is still stuck the era depicted in Django Unchained.

The Arbitration & Conciliation Act, 1996 was enacted to ensure that arbitration law is responsive to contemporary requirements. The Act replaced the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961, which were stated to be outdated in view of the economic reforms undertaken by India. Even though the Act has been amended five times to overcome various statutory lacunae, in practical terms, arbitration law in India is far from ideal.

In view of the recent decisions of the Supreme Court in Project Director, National Highways Authority of India v. M Hakeem and Anr and NN Global, there is an urgent need for another legislative intervention to ensure the fulfilment of the primary objectives of arbitration as mentioned above.

NHAI v. M Hakeem

In Hakeem, a two-judge Bench of the Supreme Court held that Section 34 of the Act cannot be held to include within it a power to modify the award. The power of a civil court under Section 34 of the Act was held to be different from that of an appellate court. The Court drew a comparison with the Arbitration Act, 1940, which allowed the courts to modify arbitral awards.

Hakeem followed McDermott International Inc v. Burn Standard Co Ltd, which had held that Section 34 of the Act envisages a supervisory role of courts for the review of the arbitral award only to ensure fairness and limited situations like fraud or bias by the arbitrators, violation of the principles of natural justice, etc.

NN Global

In NN Global, the majority opinion of Justices KM Joseph and Aniruddha Bose held that an unstamped agreement or insufficiently stamped agreement would be void as being not enforceable within the meaning of Section 2 (h) of the Indian Contract Act, 1872 and it can only be ‘validated’ by the process contemplated in Section 33 and other provisions of the Stamp Act, 1899. Justice CT Ravikumar concurred with the view through in a separate opinion.

The majority opinion affirms SMS Tea Estates (P) Ltd v. Chandmari Tea Co (P) Ltd, which had held that if the document is found to be not duly stamped, Section 35 of the Stamp Act bars the said document from being acted upon. It also upheld th view in Vidya Drolia vs. Durga Trading Corporation, which had approved the decision in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engg Ltd, while observing that existence and validity are intertwined, and an arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements.

A Bench of three judges in M/s NN Global Mercantile Pvt Ltd v. M/s Indo Unique Flame Ltd & Ors (2021) doubted the correctness of the view taken in Vidya Drolia and had referred the issue to a Constitution Bench of five judges. By a 3:2 verdict the majority held unstamped/inadequately stamped agreements containing arbitration clauses to be non-existent in law. Thus, if the original of the instrument is produced and it is unstamped, the Court, acting under Section 11 of the Arbitration Act, is duty-bound to act under the relevant provisions of the Stamp Act. Only after a certificate has been issued under Section 42 (2) of the Stamp Act, the court will be free to process the application as per law.

Practical impact

From a textual standpoint, it would be difficult to not agree with the decisions above. Indeed, Section 34 consistently uses the word “set aside” and does not vest a civil court with any powers to grant any other relief. Likewise, as long as an arbitration clause is considered to be an independent agreement between the parties, de hors the main agreement, it would definitely fall within the purview of the Stamp Act, irrespective of the quantum of the stamp duty payable.

However, on both the issues, unsurmountable practical difficulties arise due to the manner in which business is conducted in current times. For example, if a court does not have the power to modify or alter an award under Section 34, it means that the parties are stuck in the same time zone over and over. There is no certainty that once an arbitral award has been set aside, that another fresh award would not be set aside on some other ground. In the end, a claimant would need to reinvent the wheel to adjudicate disputes, at heavy costs and time loss. Such a mechanism also allows an unsuccessful party to plug in the gaps that might have been left in the earlier round, thus, giving it an unfair advantage.

Likewise, insisting on payment of stamp duty on every arbitration clause, irrespective of whether the main agreement requires stamping or not, and where neither of the parties dispute the agreement, creates a barrier to the time-bound adjudication of disputes. Nationwide, the amount of stamp duty payable for stamping of an arbitration clause is negligible in comparison to the actual value of the transaction between the parties.

Many times, due to the urgent nature of transactions or practical difficulties, the parties may genuinely overlook the issue of stamping. A requirement that the claimant should have an agreement stamped, pay the penalty, and get it certified from the concerned authority - before actually starting the process of appointment of arbitrators - does not justify the objectives of arbitration law.

The requirement that an unstamped agreement cannot be considered by a court or an arbitrator also leads to a situation where already pending arbitration claims get stalled due to non-stamping of the original document. Interestingly, the Supreme Court has yet not decided as to whether an unstamped agreement can be considered for the purposes of Section 9 of the Act.

Suggestions

The issues relating to (a) stamping of an arbitration clause and (b) powers of a court under Section 34 can easily be resolved by simple amendments to the Act.

(a) Amendment to Section 7 of the Act

Section 7 of the Act defines an “arbitration agreement.” A provisio can be inserted in Section 7, as follows:

“Provided that notwithstanding anything contained in any law, an arbitration agreement shall be exempt from payment of stamp duty.

Provided further that no existing arbitration agreement shall be treated as non-existent, unenforceable, or invalid, on account of non-payment of stamp duty.”

The above proviso would not only save the existing arbitration agreement from being unenforceable on account of non-payment of stamp duty, but would also maintain uniformity across the country on the issue of stamping. Several states have their own Stamp Act or have prescribed different duties for various documents. An amendment to a Central Act would be applicable throughout leaving no exception.

It could be argued that such an amendment would not be fiscally prudent since the Stamp Act is expected to generate revenue for the government. However, in current times, the fiscal implications of making India a global arbitration hub, having disputes resolved expeditiously without insisting on stamping of a document, and ensuring that the business community reposes full faith in arbitration far outweighs any profit that may be made by the exchequer on account of stamping of an arbitration clause. 

(b) Amendment to Section 34 of the Act:

Section 34 employs the phrase “setting aside arbitral award” in its heading and in the sub-sections. This is line with the UNICTRAL Model Law. The purpose was to minimize court interference. However, practical experience should guide us to recognize that many arbitral awards do require re-consideration under Section 34.

Even though the legislature and the courts have narrowed down the grounds to challenge an award, the number of awards which require court interference in India is proportionally large as compared to other jurisdictions. Even in Hakeem, the Supreme Court upheld an order whereby the award had been modified. In several instances, the Supreme Court has invoked its power under Article 142 of the Constitution of India to avoid sending the parties to point zero. There is a need to accept that merely setting aside an award is not the ideal way to ensure sanctity of arbitral proceedings. The UK Arbitration Act allows the court to confirm, vary or set aside the award in whole or in part.

Thus, Section 34 of the Act needs to be amended to the extent that the words “setting aside” be replaced with “vary, modify or setting aside, in whole or in part” so that a civil court has enough power to avoid putting the parties back to the stage of re-initiation of arbitral proceedings, wherever an award, fully or partly, fails on the grounds mentioned in Section 34.

Amit Gupta is an Oxford and Columbia University graduate practicing in Delhi.

Harishankar Mahapatra is a graduate from NLU Delhi and University of Miami, practicing in Delhi.