Validity of an Unstamped Arbitration Agreement | Judgement PronouncementValidity of Unstamped Arbitration Agreement
Today, a seven-judge Constitution Bench led by Chief Justice D.Y. Chandrachud unanimously upheld the validity of an unstamped arbitration agreement. The bench held that while an unstamped arbitration was inadmissible per the Stamp Act of 1899, it was not void ab initio, or from the get go.
This judgement overturns the 5-judge Bench decision in NN Global Mercantile v Indo Unique Flame (2023) and SMS Tea Estates v Chandmari Tea Co. Pvt Ltd., (2011). In NN Global, a five-judge Bench in a 3:2 majority held that an unstamped arbitration agreement was void and unenforceable. The decision was immediately criticised for causing unnecessary delays in the arbitration process.
Under the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), if parties cannot agree on an arbitrator they may approach High Courts or the Supreme Court to appoint one for them. At this stage, the Court can only confirm the ‘existence’ of an arbitration agreement and cannot get involved in the case any further. This restriction was imposed through the 2015 Amendment to the Arbitration Act so that arbitration disputes could be speedily disposed of.
However, the Supreme Court has gone back and forth on what constitutes a valid arbitration agreement to prove its ‘existence’. Specifically, if the parties haven’t paid stamp duty on the contents of the agreement, is it still valid?
In 2011 a Supreme Court Division Bench decided the case of SMS Tea Estate Pvt. Ltd. v Chandmari Tea Company Pvt. Ltd. The Bench held that an unstamped arbitration agreement cannot be enforced. This position was restated in Garware Wall Ropes Ltd. v Coastal Marina Constructions and Engineering. Ltd (2019), where the SC held that contracts (including agreements) are only enforceable if they are duly stamped.
Following a dispute over the invocation of a bank guarantee in a contract for coal transportation between Indo Unique Flame Ltd. and N.N. Global Mercantile Pvt. Ltd., the latter approached the Supreme Court and claimed the agreement was unstamped and unenforceable. In January 2021, a 3-Judge Bench disagreed with the decisions in SMS Tea Estates and Garware. However, despite overruling the two decisions the Bench also referred the case to a 5-Judge Constitution Bench to settle the debate once and for all.
The reference in the case is maintainable
Before dictating the operative part of the judgement, CJI Chandrachud clarified that the reference of the constitutional question to a seven-judge bench was maintainable. This clarification comes in response to the arguments advanced by Senior Advocates Shyam Divan and Nikhil Nayyar who had asserted that the Court had no jurisdiction to hear this case. Their reason—a reconsideration of the decision in NN Global was being done through a curative petition filed under a different case (the curative case is called Bhaskar Raju v Dharmaratnakara.)
Divan had contended that the Court’s curative jurisdiction was limited; therefore, this reconsideration could not be heard under the present case. This concern had prompted the Court to rename the case “In re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act, 1899.” The Bench had also limited the scope of proceedings to answering the constitutional question about the validity of an unstamped arbitration agreement.
Today, the Bench clarified that irrespective of the curative petition, there was a Special Leave Petition in the case, therefore, the reference was valid. The Bench, therefore, decided to keep the curative petition open on facts.
Unstamping an arbitration agreement is a “curable defect”
The Chief stated that the effect of not paying or insufficiently paying stamp duty renders an arbitration agreement inadmissible as evidence under the Stamp Act but does not render it void. Not stamping or insufficient stamping, the Bench said, was a curable defect.
Further, the Chief said that the Arbitration Act, 1996, enabled the arbitral tribunal to determine its jurisdiction via the principle of Kompetenz-kompetenz enshrined under Section 16 of the Act. Therefore arbitral tribunals had the competence to determine the validity of an arbitration agreement on the question of stamping and not the Court. Obligating the Courts to decide on the issue of stamping, the Bench said, defeated the purpose of the Arbitration Act.
In this regard, the Bench accepted the arguments of the petitioners. Senior Advocates Arvind Datar, Nikhil Sakhardande, Jayanth Mehta, Gourab Banerjee and Darius Khambata had contended that Courts under Section 11 of the Arbitration Act, could only determine if prima facie, an arbitration agreement exists. They could not venture into the validity of an agreement based on stamping.
With these observations, the Bench concluded that the decisions in NN Global and SMS Tea Estates are overruled.
Justice Sanjiv Khanna has authored a concurring opinion in the case.