Whether unstamped/insufficiently stamped arbitration agreements are unenforceable

M/S. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram Other Charities & Ors. vs Bhaskar Raju And Brothers & Anr., decided on 26^th September, 2023

-Supreme Court

Summary:

In the recent developments, the Supreme Court, in a bench led by Hon’ble Chief Justice of India DY Chandrachud and comprising Justices Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, and Surya Kant, referred the issue of whether unstamped/insufficiently stamped arbitration agreements are unenforceable to a seven-judge bench of the Supreme Court. This referral was made while hearing a curative petition against the 2020 ruling of the Supreme Court. The ruling held that an arbitration clause in an insufficiently stamped agreement cannot be acted upon by the court.

Background:

The case originated from a dispute over a parcel of land claimed by both parties. The Apex Court, in its judgment dated 14th February 2020, held that an arbitration clause in an agreement, is required to be duly stamped and if not sufficiently stamped, cannot be enforced by the court. This ruling was challenged through a curative petition.

Key Issues Raised:

1. Enforceability of Arbitration Agreements: The primary concern revolved around the enforceability of arbitration agreements within insufficiently stamped contracts. The court questioned whether arbitration clauses in agreements, not duly stamped, can be legally binding and enforced in the court of law.

2. Interpretation of Stamp Duty Laws: The case necessitated a meticulous interpretation of stamp duty laws, specifically exploring the consequences of insufficient stamping on the legality and enforceability of contracts, including arbitration clauses.

3. Validity of Previous Judgments: The court had to grapple with the validity of its previous judgment in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors. The majority decision in NN Global stated that an instrument not properly stamped cannot be considered a legally enforceable contract.

Issues Discussed and Analysed:

1. Contract Enforceability: The fundamental question revolved around whether an arbitration agreement, embedded within an agreement lacking proper stamping, could still be considered legally binding and enforceable. The court had to weigh the implications of contracts where stamp duty requirements were not met.

2. Impact on Business Transactions: The case’s outcome holds significant implications for business transactions and contract law in India. It directly influences how businesses structure their agreements, emphasizing the importance of adhering to stamp duty regulations to ensure the validity of contracts, including arbitration clauses.

3. Legal Precedents: The court revisited and analysed past judgments, particularly the NN Global case, to assess the consistency and applicability of legal principles. This included a nuanced examination of the interpretation of Section 2(h) of the Contract Act concerning enforceable contracts.

4. Maintainability of Curative Petitions: The court also briefly discussed the maintainability of curative petitions, indicating the importance of ensuring that such petitions meet the necessary legal criteria for consideration before the Supreme Court.

Latest Developments:

While hearing the curative petition, the validity of the judgment delivered by a 5-judge bench in April this year in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors arose for consideration. In NN Global, the majority had decided that an instrument not stamped cannot be a contract enforceable in law within the meaning of S. 2(h) of the Contract Act.

The Chief Justice assured that the bench will hear arguments on the maintainability of the matter at a later stage before the seven-judge bench. Emphasizing the importance of the issue, he stated, “We have to adjudicate on the correctness of the judgment in NN Global. It is too important an issue. We will not allow this hearing to be deflected.”