Unstamped Arbitration Agreements are enforceable says Supreme Court

Overview: A seven-judge Constitution Bench of the Supreme Court on Wednesday reversed the ruling given by a five-judge bench in April 2023, which stated that unstamped agreements are not legally enforceable.  

However, the Supreme Court on a significant development has stated that unstamped arbitration agreements are legally enforceable. The court also observed that agreements without the right stamping were not automatically void or unenforceable they just couldn't be used as evidence. It also said this is a fixable problem. Stamping refers to paying stamp duty on the value of an agreement as required by law.    

Case history 

The legal debate began in 2011 when the Indian Supreme Court ruled that arbitration agreements without a stamp duty is unenforceable. Further it was challenged in 2020 by N N Global Mercantile Pvt. Ltd. in a dispute with Indo Unique Flame Ltd. regarding a bank guarantee. N N Global argued the agreement was unstamped and hence invalid. In January 2021, a three-judge bench of the Supreme Court disagreed with this view and escalated the case to a five-judge Constitution Bench. 

On April 25, 2023, the Constitution Bench, with a 3:2 majority, declared that unstamped arbitration agreements were indeed void and could not be enforced in the eyes of law. They emphasized that an arbitration agreement is inseparable from its main contract, and the lack of stamp duty on the main contract renders the arbitration clause invalid as well. This verdict was significant as it potentially hindered arbitrator appointments and conflicted with India's generally supportive stance towards arbitration. Responding to a curative petition filed against this decision, the Supreme Court agreed to revisit the matter on September 26, given its broad implications. A seven-judge constitutional bench was formed, including 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 contended that a stamp duty deficiency in the main contract should not automatically invalidate the arbitration agreement. They argued for the separability of the arbitration clause from the contract's other terms. The respondents, however, opposed the court's involvement in this legal question, arguing that entertaining a curative petition in this scenario would breach court procedures. Nonetheless, the Supreme Court decided to proceed with the case, recognizing the significance of the legal issue at hand.   

This ruling provides clarity and certainty for businesses and parties entering into arbitration agreements. It ensures that agreements are not automatically invalidated due to non-stamping, but it also encourages compliance with the Stamp Act's requirements.