Validity of an unstamped arbitration agreement: Everything that’s happened at the Supreme Court so far
As a seven-judge bench deliberates the validity of an unstamped arbitration agreement, we detail what the case is about
On 12 October 2023, a seven-judge bench of the Supreme Court reserved judgement in the case to decide the validity of an unstamped arbitration agreement. This bench was reconsidering the five-judge bench decision in NN Global Mercantile v Indo Unique Flame delivered on 25 April 2023.
As we await the top Court’s decision, we explain what this case is about, how it reached a seven-judge constitution bench, and what the main arguments were.
The Court’s view on the enforceability of an unstamped arbitration agreement over the years
The key question in this case has been considered by the Supreme Court in a series of cases since 2011. A three-judge division bench of the Supreme Court in SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. (2011) held that an unstamped arbitration agreement could not be enforced. They reasoned that unless sufficient stamp duty is paid, an agreement could not be valid.
In 2015, Section 11(6A) was introduced in the Arbitration Act. This provision states that while appointing an arbitrator, the Court should confine its examination to the “existence of an arbitration agreement.” Seemingly, this provision suggests that the Court cannot delve into the validity of an agreement under the Act.
However, in 2019 in Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019), another three-judge division bench of the Supreme Court held that contracts (including agreements) are only enforceable if they are duly stamped. The Court held a similar view a year later, in Dharmaratnakara Rai Bahadur v Bhaskar Raju (2020)
The present case (NN Global) arose in 2020. N.N. Global Mercantile Pvt. Ltd., approached the Supreme Court following a dispute over the invocation of a bank guarantee in a contract with Indo Unique Flame Ltd. N.N. Global claimed that the agreement was unstamped and hence, unenforceable. In January 2021, a three-Judge Bench disagreed with the decisions in SMS Tea Estates and Garware. The Bench also referred the case to a five-Judge Constitution Bench to settle the debate once and for all.
The NN Global controversy
On 25 April 2023, a five-judge Constitution Bench of the Supreme Court comprising Justices K.M. Joseph, Aniruddha Bose, C.T. Ravikumar, Ajay Rastogi and Hrishikesh Roy in a 3:2 majority held that an unstamped arbitration agreement was void and unenforceable. The majority also held that an arbitration agreement could not be separated from the main contract. Therefore, if stamp duty was not paid on the main contract, the arbitration clause was also rendered invalid.
The decision met with immediate criticism. Many claimed that the judgement created practical difficulties and delays in the arbitration process, especially for urgent matters. Considering that arbitration was an alternate dispute resolution mechanism, designed to create speedy, effective mechanisms to resolve disputes that do not require judicial intervention, this result seemed counterproductive.
Reconsideration by a seven-judge bench
On 26 September 2023, a five-judge bench of the Supreme Court agreed to reconsider the decision in NN Global in view of its “larger ramifications and consequences.” The bench comprised CJI D.Y. Chandrachud and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, and Surya Kant. Curiously, the lead petition in the case was a curative petition against the 2020 decision in Dharmaratnakara.NN Global was only a tagged matter.
During this preliminary hearing, Senior Advocate Shyam Divan appearing for the respondents in the curative petition argued that the case could not be reopened on facts as the Court’s curative jurisdiction was very narrow. The bench reassured him that they would bear his concerns in mind and listed the case to be heard by a seven-judge bench on 11 October 2023.
Arguments before the seven-judge bench
A seven-judge bench comprising CJI Chandrchud and Justices Kaul, Khanna, Gavai, Kant with J.B. Pardiwala and Manoj Misra heard arguments about the NN Global judgement over 11-12 October 2023. The bench also renamed the case “In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899.”
Senior Advocates Arvind Datar, Nikhil Sakhardande, Jayanth Mehta, Gourab Banerjee and Darius Khambata petitioned that the majority decision in NN Global was incorrect. They highlighted that the Court could not decide the validity of an arbitration agreement as its powers under Section 11(6A) of the Arbitration Act were limited. The Court could only determine the existence of an arbitration agreement and nothing more.
Further, they contended that not stamping or insufficiently stamping an agreement was a “curable defect” and could not be used as a yardstick to render an arbitration agreement invalid. While an unstamped arbitration was certainly unenforceable per the Stamp Act, 1899 it was not “void” per the law of contracts.
Lastly, the petitioners contended that an arbitration clause stood independently of the main contract. Therefore, an invalid contract did not automatically invalidate the arbitration clause as well.
On the other side of the argument, Senior Advocates Shyam Divan and Nikhil Nayyar who appeared for the respondents, asserted that the Court had no jurisdiction to answer any legal questions in the present case. Divan contended that prima facie, this was a curative petition. By entertaining a petition to reconsider the judgement of one case (NN Global) through a curative petition in another (Dharmaratnakara), the Court was breaching the rules of the Court’s curative jurisdiction.
The bench however reasoned that they had to hear the case as it involved a significant legal question. They assured Divan that they would restrict themselves to answering this question and would not reopen the facts.
Divan and Nayyar then argued that the five-judge bench was right to declare that an unstamped arbitration was void. Under Contract law, they argued, an unenforceable agreement, such as an unstamped arbitration agreement, was void. Further, they also claimed that an arbitration clause could not be severed from the main contract.
After two days of arguments, the bench reserved judgement in the case. The Court’s decision will clarify once and for all if an unstamped arbitration is valid.