Unstamped arbitration agreements are enforceable, Supreme Court Judgement

The decision reversed a ruling by a five-judge bench in April, which said that unstamped or improperly stamped agreements were not legally enforceable.

The court said on Wednesday that agreements without the right stamping were not automatically void or unenforceable – they just couldn’t be used as evidence. It also said this was a fixable problem. Stamping refers to paying stamp duty on the value of an agreement as required by law

“This Court has been called upon to resolve an issue which arose in the context of three statutes – the Arbitration and Conciliation Act 1996, the Indian Stamp Act 1899, and the Indian Contract Act 1872. The Stamp Act imposes duty on “instruments”. An instrument which is unstamped or insufficiently stamped is inadmissible in evidence and cannot be acted upon in terms of its provisions. Arbitration agreements are often embedded in underlying instruments or substantive contracts. When an application is made for the appointment of an arbitrator, an objection is raised on the ground that the arbitration agreement is inadmissible because it is in an instrument which is unstamped or inadequately stamped. The primary issue that arises is whether such arbitration agreements would be non-existent, unenforceable, or invalid if the underlying contract is not stamped.”

Experts welcome the ruling

Sairam Subramanian, partner at Saraf and Partners, said, “The Supreme Court has resolved a roadblock to the future of Indian arbitration. The issue had been [hampering] the evolution of the arbitration landscape in India.”

According to Charanya Lakshmikumaran, partner at Lakshmikumaran & Sridharan Attorneys, adjudication on stamp duty aspect at the referral stage led to unnecessary costs and delays as the court conducted a mini-trial on the sufficiency of stamp duty, derailing the arbitral process. The Supreme Court’s ruling aligns with the legislative goal of making India an arbitration hub and expediting the arbitral process, especially in the appointment of arbitrators, he added.

“The SC endorsement of the validity and enforceability of unstamped arbitration agreements brings relief around countless commercial agreements and contracts, including those exchanged through letters and emails,” said Nitin Potdar, M&A Partner at J Sagar Associates, Mumbai.

Case history

The issue dates back to 2011, when the Supreme Court held that unstamped arbitration agreements could not be enforced. In 2020 the matter was brought to the Supreme Court again by N N Global Mercantile Pvt. Ltd., which had a dispute with Indo Unique Flame Ltd over a bank guarantee. N N Global claimed the agreement was unstamped and thus unenforceable. In January 2021, a three-judge bench disagreed with previous rulings and referred the case to a five-judge Constitution Bench.

On 25 April 2023, the Constitution Bench ruled with a 3:2 majority that unstamped arbitration agreements were void and unenforceable. They said an arbitration agreement could not be separated from the main contract, and if stamp duty was not paid on the main contract, the arbitration clause was also invalid. The ruling raised concerns about potential delays in arbitrator appointments and clashed with India’s pro-arbitration stance.

On 26 September the Supreme Court, in response to a curative petition challenging the previous judgment, agreed to reconsider the matter due to its “larger ramifications and consequences”. The court formed a seven-judge constitutional bench comprising Chief Justice DY Chandrachud, Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice B R Gavai, Justice Surya Kant, Justice JB Pardiwala, and Justice Manoj Misra.

The petitioners argued that an improperly stamped agreement should not make an arbitration agreement automatically invalid. They said an arbitration clause was separate from the main contract, and the overall contract’s invalidity shouldn’t affect it.

The respondents argued that the court shouldn’t handle legal questions in this case, and that allowing a curative petition would violate court rules. But the court decided to hear the case, citing the importance of the legal question involved.