Unstamped Arbitration Agreements Upheld as Enforceable

The recent judgment by a 7-Judge Bench of the Supreme Court of India in the case of In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, Curative Petition (C) No. 44 of 2023 has brought profound clarity to a longstanding legal debate on the validity of unstamped arbitration agreements.

The case discusses the legality of unstamped or inadequately stamped arbitration agreements within the context of the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899. The dispute found its origin in the N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. where it was held that arbitration agreements, being distinct from the underlying commercial contracts, were not invalidated due to stamping issues. This decision, however, gave rise to further deliberations and this reconsideration was primarily conducted in light of the provisions of the Stamp Act and the objectives of the Arbitration Act.

The issue under consideration was whether arbitration agreements lacking proper stamping, or with insufficient stamping, would be deemed non-existent, unenforceable, or invalid when the underlying contract did not have the required stamping

Major Takeaways

Inadmissibility vs. Voidness

The Court clarified that the failure to stamp an instrument, including arbitration agreements, renders them inadmissible in evidence under Section 35 of the Stamp Act but does not render them void ab initio. In essence, non-stamping or inadequate stamping is deemed a curable defect, and the Stamp Act itself provides procedures for rectifying such defects.

Severability of Arbitration Agreements

The judgment affirmed the principle of severability of arbitration agreements from the underlying contracts. This principle ensures that even if the primary contract is found to be invalid, the arbitration agreement can survive and remain enforceable u/s 16(1) of the Arbitration Act.

Jurisdictional Issues

The Court clarified that stamping issues, including objections related to stamping, fall within the purview of the arbitral tribunal rather than the court. When it comes to determining the existence and validity of arbitration agreements, the referring court's role is limited to establishing their prima facie existence, leaving the detailed examination to the arbitral tribunal.

Priority of Arbitration Act

The judgment emphasized that the Arbitration Act takes precedence over the Stamp Act and the Indian Contract Act in matters concerning arbitration agreements. The Arbitration Act, being a specialized law, prevails over the general provisions of other acts in this context.

This decision underscores the paramount importance of an efficient alternative dispute resolution system and is a significant step towards creating a favourable environment for businesses to operate and resolve disputes effectively.