The issue of enforceability of an arbitration clause in an unstamped agreement has be debated for a long time. Today, a seven-judge Constitution bench overruled the Supreme Court’s judgment in April, which held that an arbitration clause is void and not enforce law if the agreement is unstamped or insufficiently stamped. The top court has ensured alignment of the arbitral ecosystem with international practices.

A seven judge Constitutional bench of the Supreme Court on Wednesday held the arbitration clause in an unstamped or insufficiently stamped agreement between parties is enforceable and such a defect is curable and does not render the contract invalid.

The verdict is significant and has far reaching consequences in corporate and other agreements containing arbitration clauses to resolve disputes between contracting parties, overrules a five-judge bench judgment rendered in April this year. The court, in the case titled as M/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd. And Ors, had by majority of 3:2 held that unstamped or insufficient agreements, having arbitration or insufficient agreements, having arbitration clauses, are not enforceable.

The 3:2 verdict in April was overruled by the seven judge bench today headed by chief justice D Y Chandrachud delivered an unanimous decision and held that the non-stamping of an agreement has nothing to do with the validity of the document as it is a curable defect in the law, and therefore, non-stamping or improper stamping does not result in the instrument becoming invalid.

The bench, comprised justices Sanjay Kishan Kaul, Sanjiv Khanna, Bhushan R Gavai, Surya Kant, JB Pardiwala and Manoj Misra, clarified that objection as to stamping does not fall for determinations under sections 8 or 11 of the Arbitration Act when a court has to refer parties to an arbitral tribunal.

The Judgment

In its judgment, the court underscored that the Arbitration Act is a special law and that one of its objectives was to minimize the supervisory role of courts in the arbitral process. “Courts may only examine whether an arbitration agreement exists on the basis of a prima facie standard of review. The nature of objections to the jurisdiction of an arbitral tribunal on the basis that stamp duty has not been paid cannot be decided on a prima facie basis,” said the bench. It added any such scrutiny by courts at the threshold will defeat the legislative intent underlying the Arbitration Act.

Citing the relevant provisions of the Stamp Act, the court pointed out the statute characterizes non-payment of stamp duty as a curable defect. “The Stamp Act itself provides for the manner in which the defect may be cured and sets out the detailed procedure for it. It bears mentioning that there is no procedure by which a void agreement can be cured.”

It delivered its ruling on a curative petition moved against the April judgment. The issue was referred to the larger bench by the top court on September 26, citing the “limitless uncertainty in the area of arbitration” triggered by its previous ruling.

Judgment is pro arbitration

“The judgment passed today reinforces the object for which the Arbitration & Conciliation Act 1996 was enacted. The un-stamping or insufficient stamping of the underlying agreement containing an arbitration agreement does not make the agreement void or invalid, said the court. It’s a curable defect as observed by the court,” said Ajay Monga, Partner, SNG & Partners, Advocates & Solicitors.

The seven judge bench has held that the prima facie existence of the arbitration agreement is unrelated to the stamping of the instrument it is contained in. This is in-line with the intent of the legislature captured in Section 5 of the Arbitration Act which states that judicial interference is limited to as provided for under part 1 of the Act.

“The top court has ensured alignment of the arbitral ecosystem with international practices. Under Section 16, the tribunal is the sole authority to address issues with respect to the validity of the arbitration agreement, while the referring court’s role is limited to determining prima facie the existence of an arbitration agreement. All other matters are left for the tribunal to decide.

Internationally, practitioners in the field of international arbitration have harbored doubts about India becoming a hub for arbitrations. This judgment will significantly contribute to dispelling concerns within the global arbitration community, positioning India as a more arbitrationfriendly jurisdiction,” said Pratyush Miglani, Managing Partner, MVAC Advocates & Consultants.

The seven judge bench noticed that the judgment does not allow the law to be flouted because the arbitral tribunal continues to be bound by the provision of the Stamp Act, including those relating to its impounding and admissibility, and challenges to the position and jurisdiction of arbitrators.

“The judgment is an interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 is undoubtedly a pro-arbitration ruling. Specifically, by authoritatively holding that unstamped / insufficient stamped arbitration agreements are enforceable, it will be very difficult for recalcitrant parties to avoid arbitration and frustrate the arbitration process by bringing in Stamp Act objections in courts at the referral stage,” said Kartikey Mahajan, Partner, Khaitan and Co.

At the same time, the Supreme Court has also balanced its proarbitration approach against the objectives of the Stamp Act, which is a fiscal legislation, by holding that unstamped agreements are inadmissible as evidence but that this was a curable defect. The consequence of this balanced approach is that the parties will ultimately be required to stamp their agreements before a final determination of their case if they wish to rely on a particular agreement to argue their case.

“However, the lack of adequate stamping cannot be used to hold up an arbitration as a threshold issue. Put more simply, the parties can commence their arbitration and go through steps like appointment of the Tribunal while they simultaneously arrange to stamp their agreement,” says Mahajan.

Experts say that it is a pro arbitration decision which would curtail the powers of courts at the stage of Section 8/11 arbitration petitions to decide the issues pertaining to stamp duty but at the same time the arbitral tribunals will have to deal and decide such issues at the stage of Section 16. “The judgment will definitely help in disposing of Section 8/11 arbitration petitions which have been taking time since most of the respondents have been taking the objection regarding the stamp duty,” says Abhinay Sharma, Managing Partner, ASL Partners.