ARBITRATION CLAUSE IN UNSTAMPED AGREEMENT ENFORCEABLE?

ARBITRATION CLAUSE IN UNSTAMPED AGREEMENT ENFORCEABLE?

Author- Mohammed Fardeen Yusuf, a Student at Andaman Law College

In recent days the SC on 26th September 2023, an issue about whether the arbitration agreements made without a stamp will stand enforceable. This issue was referred to a seven-judge bench which was further led by 5 judge bench with CJI DY Chandrachud making the statement mentioning the petition against the same ruling that was given in 2020 which stated that concerning an arbitration clause with an insufficient stamp will not be entertained by the court.

The other judges were Justice Sanjay Kishan Kaul, Justice Sanjiv Khanna, Justice B R Gavai and Justice Surya Kant. As the petition was being heard which further cross-checked the validity of the judgment was 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, a Bench consisting of  Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar had given the judgement by a 3:2 majority. The majority made the same contention pertaining to an instrument that is not stamped and cannot be said to be a contract enforceable in law within the meaning of sec 2(h) of the Contract Act. In the recent proceedings, the bench remarked that it was "too important an issue" and had "caused limitless uncertainty" in the area of Arbitration law and had to be considered by a larger bench. This was because older agreements were now being opened owing to being unstamped. The bench held–

"Having regard to the larger ramifications and the view of the majority in NN Global, we consider that the proceedings should be placed before a seven-judge bench. The proceedings shall be listed for hearing on 11 October 2023."

The nodal counsels who were appointed were Mr Debesh Panda and Ms Pritha Srikumar in this case. Senior Advocate Arvind Datar, appearing for the petitioner challenging the 2020 ruling, argued that the courts were not to get into the validity of arbitration agreements at all. Per contra, Senior Advocate Shyam Divan, respondent in the matter stated that his case pertained to a 1997 agreement and nothing survived in the matter. He stated that the respondents had filed an application for recall for a notice issued in a curative petition and that they were challenging the maintainability. Divan therefore urged the bench to not reopen the factual issues in the matter and not to consider the legal issue in the present reference. 

If an arbitration agreement (either contained as a provision in a contract or on a standalone basis) is found to be unstamped, it is not enforceable and liable to be impounded immediately and returned only upon payment of the requisite stamp duty and penalty. As noted in the case of NN Global, The SC noted that only those agreements that are enforceable by law are contracts as per the scheme of the Indian Contract Act, 1872 (“Contract Act”). It then proceeded to interpret Section 35 of the Stamp Act, which makes any unstamped or insufficiently stamped document inadmissible in evidence. The court also noted how the provision is strictly worded and does not provide any collateral purpose exemption to such documents, unlike a registerable document which is not registered.

It may thus be advisable for stakeholders in India to revisit their respective contracts and ensure that the correct stamp duty is paid, to avoid any judicial delays at the stage of initiation of arbitration proceedings. Considering the pro-arbitration stance of the government in recent years, and its attempts to make India an arbitration hub, it is possible that the legislature would bring in amendments to the Stamp Act and/ or the Act, to clarify and streamline their interplay and avoid the potential delays that can accrue due to this decision of the Court.