Supreme Court’s stand on unstamped arbitration agreements

Against the background of a roller-coaster ride of conflicting rulings, the Supreme Court in its recent judgment in In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 and the Indian Stamp Act 1899 has delivered what is to be hoped is the final word on the enforceability of insufficient and unstamped arbitration agreements. A seven-judge bench headed by the Chief Justice of India unanimously held that an unstamped or an insufficiently stamped arbitration agreement is valid for proceeding to the appointment of an arbitrator.

The judgment has overruled the heavily criticised five-judge bench decision in NN Global Mercantile v Indo Unique Flame, which held that an unstamped or insufficiently stamped arbitration agreement was void and unenforceable. This rendered the arbitration clause contained in such agreements incapable of being acted on by courts to appoint arbitrators. It was criticised for being against the concept of party autonomy in arbitration and for being against the principles enacted in the Arbitration and Conciliation Act, 1996 (arbitration act), a complete code in itself. Another concern was the commercial interests of foreign investors, who often rely on their Indian counterparties to ensure that agreements are enforceable under domestic law.

The court recognised that the decision in NN Global was based on a commercially imprudent interpretation of the provisions of the Stamp Act, 1899. It held that an unstamped or insufficiently stamped document is not void but is only rendered inadmissible in evidence. The provisions of the stamp act set out a mechanism for curing such defects.

Relying on well-settled principles of minimal judicial interference by courts in arbitration proceedings, supported by the explicit prohibition in section 11(6A) of the arbitration act, the court held that any objection regarding stamping is not subject to adjudication by courts considering applications for the appointment of arbitrators. Such objections are to be dealt with by the arbitral tribunal, as stamping is a jurisdictional issue.

The court made it clear that, at the pre-appointment stage, provisions relating to the stamping of documents are not to be exploited as technicalities that trample on a party’s right to have an arbitral tribunal appointed in accordance with the arbitration agreement. In confirming the power of the tribunal to determine its own jurisdiction the judgment ensures that parties are not prevented at the outset of disputes from invoking arbitration.

This decision ensures that the defect in stamping may be cured without delaying the dispute resolution process. If the tribunal finds that the agreement is unstamped, it can send it to the appropriate authority for stamping while continuing with the other stages of the arbitration. The tribunal in its discretion may proceed to at least the stage of presenting evidence.

The court also addressed the question of the power of the courts to grant interim measures of protection under section 9 of the arbitration act in the case of unstamped or insufficiently stamped agreements. Notably, NN Global had declined to rule on whether in such circumstances courts could exercise such statutory powers. This left open the grounds for objection to a party applying for an interim measure of protection. The judgment held that in considering applications for interim measures of protection, courts shall not deal with issues relating to the stamping of arbitration agreements.

By giving effect to the basic principles of arbitration, such as minimum judicial interference by courts in arbitration proceedings and party autonomy, the judgment upholds the purpose of commercial negotiations and underscores a commitment to align India’s legal processes with international standards. It reinforces judicial determination to further the cause of India as an arbitration-friendly jurisdiction for commercial parties, in and outside the country.

It should be emphasised that challenges regarding insufficient or non-stamping of an agreement will not vanish with the judgment. They are to be decided at a later stage by the arbitral tribunal. Parties should thus exercise diligence while negotiating commercial contracts. These should comply with Indian laws to ensure they are enforceable and thus avoid objections raised before the arbitral tribunal.

Ila Kapoor is a partner and Surabhi Lal is a senior associate at Shardul Amarchand Mangaldas & Co.

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