Are unstamped arbitration agreements valid in law? Supreme Court refers issue to seven-judge bench

The Supreme Court on Tuesday referred the issues decided by a five-judge Constitution Bench judgment in the case of NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & Ors to a seven-judge bench for reconsideration. [Bhaskar Raju and Brothers and Anr v. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & other Charities and Ors]

The five-judge Constitution Bench in NN Global had on April 25 held by a 3:2 opinion that unstamped arbitration agreements are not valid in law.

Senior Advocate Arvind Datar contended that if that is the case, no applications under Section 9 of the Arbitration and Conciliation Act for interim measures could be moved at all.

A Bench of Chief Justice of India DY Chandrachud with Justices Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai and Surya Kant remarked that the issue was an important one, and thus ordered,

"Having regard to larger ramifications of NN Global Mercantile vs Indo Unique Flame, we are of the view that proceedings be placed before a seven-judge bench to reconsider the correctness of the view by a five-judge bench. The case shall be listed on October 11 before a seven-judge bench."

When Senior Advocate Shyam Divan raised concerns regarding the limited jurisdiction of curative pleas, the Court said,

"Arbitrators across the country are facing the situation where they are being told - 'see the agreement is unstamped and now open the case...' So this uncertainty has to end."

To facilitate the proceedings, advocates Debesh Panda and Pritha Srikumar have been appointed as nodal counsel. All relevant compilations and documents related to the case are to be submitted by October 6, 2023.

CJI Chandrachud indicated that the seven-judge bench would be convened soon after the conclusion of another seven-judge bench case.

"I am sitting in a seven judge bench composition next week. We will hear MP MLA case bribery one and finish it in a day and then immediately take this case up," he said.

The Supreme Court had in July issued notice and allowed an open-court hearing of the curative petition dealing with the question of whether an arbitration agreement in an insufficiently stamped lease deed can be invoked. 

The matter stems from a review petition filed against a Karnataka High Court order, which had been dismissed by the top court in July 2021.

The High Court had, in December 2014, considered a lease deed with an arbitration agreement between the instant parties as valid and appointed an arbitrator. A three-judge Supreme Court Bench, in February 2020, had set aside the same.

The case arose after a charitable trust (respondents) had entered into a lease agreement with the appellants to develop a multi-purpose community hall and office complex, as well as for the renovation of some properties on their land.

The agreement, which was for 38 years, was signed in 1996 and contained a clause for a security deposit of ₹55 lakh.

In 2008, a suit was filed by the trust against the appellants, pointing out that only ₹25 lakh had been deposited, while a samadhi in the property had been desecrated. Further, the appellants were accused of trying to file a fresh sale deed in connivance with some of the trust's members.

The Bengaluru City Civil Court passed an interim order of status quo. Two years after the suit proceedings commenced, the appellants invoked the arbitration clause before the Karnataka High Court in 2013.

Notably, after the orders of a single-judge, the Judicial Registrar noted that the document in question was a lease deed and not an agreement to lease. Therefore, the Registrar directed the appellants to pay a deficit stamp duty and penalty of ₹1,01,56,388.

However, the High Court subsequently ignored the Registrar's findings and appointed an arbitrator. The Supreme Court in its curative jurisdiction will now consider whether the same was justified.

The case assumes some significance in view of a recent Constitution Bench judgment. The Supreme Court had, on April 25, held by a 3:2 majority, that unstamped arbitration agreements are not valid in law.

That judgment was delivered by a bench of Justices KM Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy, and CT Ravikumar.

Justice Joseph had penned the majority opinion, joined by Justice Bose. Justice Ravikumar had written an opinion concurring with the majority view.

Justices Rastogi and Roy had dissented, opining that unstamped arbitration agreements are valid at the pre-referral stage.

Justice Rastogi had stated in his judgment that the majority opinion would open the doors for judicial intervention in arbitration cases at the threshold. Notably, Justice Roy had written had also urged for legislative amendments to resolve the issue.

Soon after, the Union Law Ministry constituted an expert committee to recommend reforms in the Arbitration and Conciliation Act and examine the functioning of arbitration law in the country.