Unstamped arbitration agreements are enforceable but not admissible

In recent years, Section 35 of the Indian Stamp Act, 1899, which governs the admissibility of agreements lacking proper stamp duty, has been a subject of legal debate. While traditionally applied to general agreements for admission into evidence, conflicting judgments on the enforceability of deficiently stamped arbitration agreements arose in the past decade. The turning point occurred in April 2023 with the Supreme Court's decision in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited ("NN Global 2"), where the Court held that a deficiently stamped agreement is void, rendering it unenforceable and legally non-existent. This ruling disrupted the longstanding legal distinction between admissibility and enforceability, creating concerns about delays in arbitrator appointments and the initiation of arbitration proceedings. The decision also left ambiguity regarding the availability of pre-arbitration protective relief under Section 9 of the Arbitration and Conciliation Act, 1996, for parties to deficiently stamped agreements.

However, on December 13, 2023, a significant development unfolded as a seven-judge bench of the Supreme Court revisited NN Global 2 in the case titled "Re Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899." This bench overturned the NN Global 2 decision, providing clarity and restoring the prior distinction between admissibility and enforceability. The revision eased concerns among legal practitioners and businesses, affirming the importance of due diligence findings on deficiently stamped agreements without automatically deeming them void. This landmark decision reinstated a balanced approach to the interplay between the Arbitration and Conciliation Act and the Indian Stamp Act, offering a more nuanced perspective on the legal consequences of deficient stamping in the realm of arbitration agreements.

Issue Before The Supreme Court

Due to conflicting judgments within the Supreme Court on this matter, a three-judge bench took the initiative to refer a crucial legal question to be definitively settled by a five-judge constitutional bench. The question posed for conclusive determination is as follows: “Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”

The Judgement

On December 13, 2023, the seven-judge bench, led by Chief Justice DY Chandrachud, unanimously overturned the decision in the N.N. Global case. The court's conclusions are as follows:

1. Agreements that lack proper stamping or are inadequately stamped are deemed inadmissible in evidence under Section 35 of the Indian Stamp Act, 1899 ("Stamp Act"). However, such agreements are not rendered void, void ab initio (legally null from the start), or unenforceable.

2. Non-stamping or inadequate stamping is considered a curable defect.

3. Objections related to stamping will not be determined under Sections 8 (Power to refer parties to arbitration) or 11 (Appointment of arbitrators) of the Indian Arbitration and Conciliation Act, 1996 ("Indian Arbitration Act").

4. Any objections concerning the stamping of the agreement fall within the jurisdiction of the arbitral tribunal.

The court declared that the issue of stamping is a jurisdictional matter, and objections related to stamping fall within the purview of an arbitral tribunal. Consequently, when granting interim measures under Section 9 (Interim measures, etc., by Court) of the Indian Arbitration Act, the court should not delve into stamping issues. This decision was based on the principle of competence-competence, allowing the tribunal to rule on its own jurisdiction. The court clarified that its review of arbitration agreements is limited to a prima facie standard.

While applying a harmonious construction of the Indian Arbitration Act, the Indian Contract Act 1872, and the Stamp Act, the court emphasized that the Stamp Act should not be wielded by litigants as a technical weapon to unduly delay adjudication. However, the court clarified that its intention is not to disregard or undermine the Stamp Act, and in matters concerning stamping, the arbitral tribunal is obligated to adhere to the provisions of the Stamp Act, including those related to admissibility and impounding.

Conclusion

The decision not only reinstates but emphasizes the legal distinction between the admissibility of a document in evidence and its enforceability. An inadequately stamped document may be considered inadmissible, but it retains its enforceability.

Furthermore, the ruling reaffirms and articulates key arbitration principles such as severability, competence-competence, party autonomy, and the principle of minimal judicial interference.

By permitting the impounding of a deficiently stamped agreement at a later stage, the decision addresses challenges and delays in the appointment of an arbitrator before a Referral Court. However, parties should be vigilant in promptly addressing the inadequacy of stamping to minimize potential delays in arbitration proceedings.

Crucially, the decision clarifies that courts are not obligated to address the adequacy of stamping when granting pre-arbitration relief under Section 9 of the Arbitration Act. This clarification streamlines the legal process and underscores the autonomy of arbitral tribunals in adjudicating such matters.