Unstamped Agreements Ruling: How It Could Benefit India's Arbitration Landscape

Uncertainty on stamping of an arbitration agreement had been plaguing the Indian arbitration landscape for quite a while.

Various interpretations of this quandary had marred the issue to such an extent that the top court had to refer it to a bench of seven judges in order to come out with an authoritative ruling.

Now, in a unanimous ruling, the court has held that an unstamped arbitration agreement or an insufficiently stamped one can be enforced under law and will not be rendered a nullity.

The issue of stamping is a curable defect and courts don't need to get into the objections pertaining to stamping, at the stage when the matter is being referred to arbitration or when the arbitrators are being appointed, the Supreme Court has said.

The court further said that at the pre-reference stage, courts must limit their examination only to the ‘existence’ of an arbitration agreement.

This issue of stamping can be dealt with by the arbitral tribunal itself, the apex court said.

This implies that for the arbitral tribunal to be able to admit the underlying document and decide the dispute between the parties, it will have to ensure that appropriate stamp duty has been paid on such document. If not, the document will have to be impounded for payment of deficit stamp duty, Yogendra Aldak, partner at Lakshmikumaran and Sridharan, told NDTV Profit.

While delivering the judgement, the court also highlighted the importance of the principle of ‘competence-competence’ in Indian arbitration law. Generally, the principle says that an arbitral tribunal has the power to determine its own jurisdiction.

This principle insulates the arbitration agreement from the defects of the underlying contract, and thereby ensures the sustenance of the tribunal’s jurisdiction over the substantive rights and obligations of the parties.

This principle is followed in all jurisdictions where arbitration law has significantly evolved and is fundamental to the smooth operation of the arbitral process, said Sanjeev Kapoor, partner at Khaitan and Co.

It is also deeply entrenched with the concept of party autonomy, where the parties’ desire to have their disputes adjudicated by a chosen third person is honoured and the arbitration process is not thwarted at the threshold by frequent resort to courts, Kapoor said.

By validating the premise of ‘competence-competence’, the top court has made a significant attempt at ensuring that arbitration is a “one-stop forum” for resolution of all disputes, including enforceability of agreements and their admissibility under the Stamp Act, Aldak said.

The issue reached the Supreme Court in 2020, when a bench led by then Chief Justice of India, NV Ramana, held that it was mandatory to stamp an arbitration agreement in order for it to be referred to an arbitrator.

Thereafter, in 2021, a bench of Justices DY Chandrachud, Indu Malhotra, and Indira Banerjee held that just because a commercial contract is unstamped, it doesn’t mean that the arbitration clause in it will become invalid.

However, the case was referred to a five-judge bench as the court was of the view that the issue required to be authoritatively settled by a constitutional bench.

Then, in April this year, the constitution bench ruled that an unstamped arbitration agreement would be considered non-existent in law. This ruling came to be known as the ‘NN Global’ judgement.

However, this verdict was a fractured one, with three judges ruling in its favour and two against it.

Noting that arbitrators across the country were facing uncertainties in the backdrop of the five-judge bench judgement and that the issue was of significant importance, the top court found it reasonable to refer the matter to a bench of seven judges, so that this matter could be resolved once and for all.

From a commercial standpoint, the NN Global decision would have resulted in the arbitral process becoming slow, uncertain and cumbersome and would have decelerated the recent push by the government and judiciary in making India the hub of arbitration, Kapoor said.

In this context, the recent seven-judge bench decision is welcome and will be a relief to parties who wish to progress in an expeditious, swift and efficient manner with the arbitral process, according to Kapoor.