Several judicial rulings have addressed contrary judgements on “whether arbitration clause in an unregistered or unstamped agreement would be regarded as valid or invalid?” Many High Courts and even the Supreme Court rendered contradictory judgments. Accordingly, the matter was referred to the constitutional bench in the case of NN Global Mercantile Private Limited v Indo Unique Flame Limited.   

The Constitutional Bench has now addressed this issue wherein it has held that an unstamped agreement in not admissible. In this article, we will analyze the rational of this Constitutional Bench Judgement which has far reaching consequences.

A subcontract was entered between the Petitioner and Respondent containing an arbitration clause. However, on account of some disagreements, the Respondent invoked the Bank Guarantee provided by the Petitioner. Following that, a lawsuit was brought about before the Bombay High Court with regards to the aforementioned invocation and the Respondent filed an application under Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act) sought for the referral of conflicts to arbitration. As the sub-contract was unregistered and unstamped, the High Court was unable to enforce the Arbitration Agreement. The High Court noted that the matter can be brought up by a Section 11 application or before the Arbitral Tribunal.

The three member bench of the Supreme Court while dealing with this case held that the rulings of (a) SMS Tea Estates case; and (b) Garware Wall Ropes case are incorrect i.e.  failure to pay  stamp duty on a commercial transaction would not constitute an arbitration agreement as invalid. However, given the fact that, a coordinate bench of three judges in Vidya Drolia Case upheld Garware and SMS Tea Estates, the three – Judge bench of the Supreme Court referred the said matter to Constitution Bench.

The Supreme Court ruled by 3:2 majority while considering correctness of reams of judgements since 2011, having different findings on the enforceability of arbitration clauses contained in unregistered and unstamped agreements.

• The bench dealt with the scope and nature of Section 11 (i.e. Appointment of Arbitrators) and Section 16 (i.e. Competence of Arbitral Tribunal to rule on its Jurisdiction) of the Arbitration Act.

• Bench further opined on Section 16, while referring to ‘Kompetenz – Kompetenze’ which is a legal doctrine, whereby a legal body, such as a court or arbitral tribunal is empowered and has competence to rule on its own jurisdiction (including validity of the arbitration agreement).

• The majority upheld the view taken in SMS Tea Estates and Garware Wall Ropes that an unstamped contract containing an arbitration agreement and the steps to be taken by the Court represent the right position in law.

• The majority further concurred that “an instrument which is exigible to stamp duty, may contain arbitration clause and which is not stamped, cannot be said to be a contract which is enforceable in law within the meaning of section 2(h) of the Contract Act and is not enforceable under section 2(g) of the Contract Act.

However, minority bench members flagged concerns that such a judgement of majority would stall the very objective of Arbitration Act as non-stamping or insufficient stamping may delay the process of appointment of Arbitrators thereby leading to delay in adjudication of disputes.

While the judgment provides much clarity on the long prevailing issue of admissibility of unstamped documents for adjudication of arbitral disputes, the judgement may not bode well for India's pro-arbitration posture and is likely to cause additional delays in the appointment of arbitrators by introducing yet another level of examination. The disputing party in future may use this as tool to delay the process of constitution of arbitral tribunal citing issue of insufficiency of stamps which issue will then have to be adjudicated by the Courts as a preliminary issue thereby delaying the entire process. It would be quite interesting to see whether the legislature would bring in amendments to the Arbitration Act to avoid potential effect of delaying the arbitral process that will accrue post this decision. The Judgment has further necessitated the requirement of payment of adequate stamp duties on the documents executed between the parties. However, unless the same is referred to a further larger bench, this is a new law.

Bhushan Shah is a Partner, Akash Jain is a Senior Associate and Kanak Kadam is an Associate.