SC says unstamped agreements enforceable, overrules its April judgment

A seven-judge Constitutional bench of the Supreme Court on Wednesday unanimously ruled that unstamped arbitration agreements were legally enforceable and such a defect does not render the contract invalid, overruling its April judgement.

This means arbitration agreements will not be stalled on the issue of not stamping the underlying contract. This (non-payment of stamp duty) is a curable defect, the bench comprising Chief Justice of India(CJI) D Y Chandrachud, and Justice Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, Surya Kant, JB Pardiwala, Manoj Misra said.

"Parties to arbitration agreement conferred jurisdiction on arbitral tribunal, When parties pen their signatures to arbitration agreement they are regarded to independently sign the arbitration agreement. In the process, the separability provision gives rise to the doctrine of competence. The negative aspect of the doctrine of competence is that it limits courts interference at the referral stage and the arbitral tribunal is given a chance to rule on their own jurisdiction," the court said.

Stamping means when a stamp duty is paid on the value of the agreement as per the Stamps Act. The question was whether an agreement that contains an arbitration clause but is not stamped will be enforceable.

The court clarified that though unstamped arbitration agreements are enforceable, they are inadmissible in evidence. The bench said that an objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act and the concerned court must examine if an arbitration agreement prima facie (on the face of it) exists.

“Any objection in relation to the stamping of the agreement falls within the ambit of the arbitral tribunal. The corollary of doctrine of competence is that the court may only see if an arbitration agreement exists. Whether stamp duty is paid or not would need detailed merit of evidence. Interpretation accorded to Stamp Act does not allow law to be flouted and it ensures that Arbitration Act does not detract from Stamp Act," the court said.

The Supreme Court’s five-judge bench in April in the NN Global Mercantile case had held that unstamped arbitration agreements are not enforceable. This ruling was in September referred to a seven-judge bench for reconsideration.

After the April judgment, the Union Law Ministry constituted an expert committee to recommend reforms to the Arbitration and Conciliation Act. While the questions of law were resolved by the seven-judge bench on Wednesday, the court said the curative petition before it is yet to be decided on facts.

"We have kept the curative(petition) open on facts. We have resolved questions of law. We have said section 35 of the Stamp Act is unambiguous," the bench said.

Experts said the NN Global judgment had far-reaching ramifications, as unstamped or deficiently stamped arbitration agreements were declared to be void. “This concern among others, has been addressed,” said Ajay Bhargava, Partner, Khaitan & Co.

Ateev Mathur, Partner, SNG & Partners, Advocates & Solicitors says the verdict gives complete clarity. “It would result in a smooth arbitration process without judicial intervention on issues of stamping at the stage of Section 8 or Section 11. Arbitrations would now not be stalled on the issue of non-stamping of the underlying contract,” he said.

This issue has been a bone of contention in several arbitration matters since the judgment in the case of SMS Tea Estates in 2011, followed by Garware Wall Ropes in 2019.

Court held:

Non-payment of stamp duty a curable defect
 

Unstamped arbitration agreements not void ab initio
 

Arbitral Tribunal to decide stamping issue of arbitration agreement 
 

Unstamped agreements inadmissible in evidence

Impact:

Less judicial intervention in Arbitartion process
 

Arbitration agreements will not be stalled on the issue of not stamping