Supreme Court Sheds Light on Validity of Unstamped Arbitration Agreements

Synopses: An unstamped arbitration agreement is not enforceable until the stamp duty and penalties have been paid, the Supreme Court stated in a landmark decision. A 5 judge Constitution Bench led by Justice K.M. Joseph pronounced this judgment with a 3:2 split.

In this landmark decisionN.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.[1], the Supreme Court has decided that unstamped arbitration agreements cannot be enforced until stamp duty and penalties have been paid. This decision, rendered by a 5-judge Constitution Bench headed by Justice K.M. Joseph, ended the lengthy discussion on what constitutes a legally enforceable arbitration agreement.

The Bench was requested to determine whether an arbitration clause in a contract that is supposed to be registered and stamped but hasn’t been still valid and enforceable.

An unstamped agreement cannot be considered to be a legally enforceable agreement within the meaning of Section 2(h) of the Contract Act, according to the majority view delivered by Justices Joseph, Bose, and Ravikumar. It furthermore is not enforceable in accordance with Section 2(g) of the Contract Act, which deals with void contracts.

Further, the Court emphasised that it must impound or take legal possession of any unstamped agreements in accordance with Section 33 of the Indian Stamp Act of 1899. Once an agreement is impounded, it must be paid stamp duty and penalties before it can be used as evidence or be acted upon.

However, dissenting Justices A. Rastogi and H. Roy emphasised that imposing stamp duty at the appointment stage could undermine the Arbitration Act’s main objective, which is to promote efficient and effective arbitration proceedings. As consequently, it was noted that stamp duty disputes should only be resolved through arbitration, as opposed to enabling court intervention.

Conclusion

This decision has significant implications for the arbitration process and the role of the court in resolving disputes. It reinforces the importance of complying with the stamp duty requirements for contracts and agreements containing arbitration clauses, which has often been a contentious issue. The ruling also recognises the principle that courts must use caution when examining arbitration agreements and refrain from engaging in unnecessary judicial interference.

Legal experts have welcomed this judgment as a significant breakthrough that would bring much-needed certainty and clarity to the arbitration process. The decision could have significant ramifications for the future of arbitration proceedings in India.

[1]2023 SCC Online SC 495, decided on 25-04-2023