New Delhi: The Supreme Court unanimously ruled on Wednesday that unstamped arbitration agreements were legally enforceable. The seven-judge Constitution Bench said that deeming such agreements unenforceable merely due to a lack of stamping at the start of arbitral proceedings goes against the rationale of the law.
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.
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.
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Published: 13 Dec 2023, 12:54 PM IST