Enforceability of Unstamped Arbitration Agreements: Another Twist in the Tale

Recently, a five-judge bench of the Supreme Court rendered its judgment in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited1(“N.N. Global 2“) and has put to rest the question on whether arbitration agreements included in unstamped/ insufficiently stamped instruments are valid and enforceable. The present case was brought before a constitution bench comprising of Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy and Justice C.T. Ravikumar as an appeal against the decision of a three-judge bench of the Supreme Court in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited2 (“N.N. Global 1“), dated January 11, 2021.

The Supreme Court in N.N. Global 2 overruled the decision rendered in N.N. Global 1 and held, by a 3:2 majority, that unstamped arbitration agreements are not valid in law.
Justices KM Joseph, Aniruddha Bose and C.T Ravikumar formed the majority, while Justices Ajay Rastogi and Hrishikesh Roy dissented and opined that unstamped arbitration agreements are valid at the pre-referral stage. The constitution bench in the present matter has addressed the interplay of the requirements of stamping vis-à-vis the enforceability of arbitration agreements.

Over the last few years, the question regarding validity of unstamped or insufficiently stamped arbitration agreements has been a contentious issue in India, and the subject of various judicial pronouncements. Conflicting decisions have been delivered by various High Courts regarding the enforceability of unstamped arbitration agreements, as well as by the Supreme Court.

The issue can be traced back to the pre N.N. Global 1 era during which the Hon’ble Supreme Court of India adopted a strict stance regarding the enforceability of arbitration agreements that lack sufficient stamping or are unstamped. A division bench of the Supreme Court, in SMS Tea Estates Private Limited v. Chandmari Tea Co. Private Limited3 (“SMS Tea“), held that if a document is found to be unstamped/ insufficiently stamped, then even the arbitration clause embedded in it cannot be acted upon. Similarly, in Garware Wall Ropes Limited. v. Coastal Marine Construction & Engineering Limited4 (“Garware“), the Supreme Court found that an arbitration agreement included in an unstamped contract could not be presented as evidence or invoked. In the case of Vidya Drolia v. Durga Trading Corporation5 (“Vidya Drolia“), the Hon’ble Supreme Court, represented by a three-judge bench, affirmed the decisions made in both SMS Tea and Garware.

In N.N. Global 1, the three-judge bench overruled the decision in Garware and held that even in cases wherein the arbitration agreement was unstamped or insufficiently stamped, reference to arbitration was permitted. The Court in N.N Global 1 relied heavily on the UNCITRAL Model Law and the doctrine of severability. It rejected the conclusions of SMS Tea and Garware, stating that the lack of stamp duty payment would not render the arbitration agreement null and void. The Court found Garware’s views to be erroneous and noted that non-payment or deficiency of stamp duty is a fixable error. The Court well aware that, in Vidya Drolia, a three-judge bench (bench of equal strength) of the Supreme Court had upheld Garware’s decisions, decided to refer the matter to a five-judge Constitutional Bench to settle the dispute.

With regard to N.N. Global 2, while the judgement has significant implications for parties entering into arbitration agreements in India, it is pertinent to note that the judgement was passed with a 3:2 majority. The majority held that the Stamp Act, 1899 (“Stamp Act“) is a fiscal measure to be implemented with full vigour, and its stringent provisions are meant to raise and protect revenue. The duty of a court must be to adopt an interpretation which results in the enforcement of the law, rather than allowing the law to be flouted with impunity. Further, it was observed that an unstamped instrument is compulsorily impoundable under the Stamp Act and, only upon the payment of the penalty, would the instrument be endorsed to become enforceable/actionable under law. The majority also held that an agreement which was unstamped was unenforceable in law and would not be a contract under Section 2(h) of the Contract Act, 1872. Hence, the majority bench opined that it may not be apposite to merely describe an unstamped arbitration agreement as a “curable defect”.

The minority, on the other hand, was of the view that examination of the stamping and impounding may not be done at the threshold, i.e., at the pre-referral stage under Section 11 of the Arbitration and Conciliation Act, 1996. As per the minority view, the copy or certified copy of an arbitration agreement (whether unstamped or insufficiently stamped) at the pre-reference stage, is an enforceable document for the appointment of an arbitrator. It also noted that deciding on the stamp duty at the threshold also stalls the process of adjudication, leading to procedural complexity and increased litigation.

While the judgement in N.N. Global 2 highlights the importance of ensuring that all agreements are duly stamped in accordance with the Stamp Act, it may also be counter-productive to India’s pro-arbitration stance. As stated in the minority opinion, the issue regarding unstamped arbitration agreements cannot be left unaddressed until a larger bench resolves the issue and provides clarifications. It is necessary to have legislative intervention, aligned with India’s pro-arbitration position, that eliminates discrepancies and brings clarity to this matter. If no such intervention takes place, there is a risk of more legal disputes arising due to ambiguity in the law on unstamped arbitration agreements.

1 (2023) SCC 495

2 (2021) 4 SCC 379

3 (2011) 14 SCC 66

4 (2011) 14 SCC 66

5 (2021) 2 SCC 1