In a recent judgment[i] by a Constitution Bench of the Supreme Court of India, it was held by a 3:2 majority opinion that unstamped arbitration agreements are not valid in law. The judgment was delivered by a bench of Justices KM Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and CT Ravikumar and has significant implications for the enforceability of arbitration agreements in India.

Background: The Stamp Act and Arbitration Agreements

Under the Indian Stamp Act, 1899, every instrument that is chargeable with the duty must be stamped. An instrument that is not duly stamped is considered inadmissible in evidence and cannot be acted upon. This includes arbitration agreements, which are a crucial component of the arbitration process.

The question before the Supreme Court, in this case, was whether an arbitration agreement that is not stamped is valid in law and can be enforced by the courts.

Majority Opinion: Unstamped Arbitration Agreements Not Valid in Law

"Court is duly empowered to act under the Stamp Act if a document is not stamped...Arbitration agreement not validated by Stamp Act would stand non est in law," the majority opinion held.

The majority opinion, authored by Honourable Justices Joseph, Bose, and Ravikumar, held that unstamped arbitration agreements are not valid in law. The Honourable Court held that the Stamp Act empowers the court to examine whether an instrument is duly stamped, and if it is not, the instrument would be inadmissible in evidence. The same applies to arbitration agreements, which must be duly stamped to be enforceable.

Dissenting Opinions: Unstamped Arbitration Agreements Valid at Pre-Referral Stage

Honourable Justices Rastogi and Roy dissented from the majority opinion, opining that unstamped arbitration agreements are valid at the pre-referral stage. Justice Rastogi held that the existence of a certified copy of an arbitration agreement, whether stamped or unstamped, is enforceable for the appointment of an arbitrator. Justice Roy held that stamping and impounding arbitration agreements would frustrate the objective of the 1996 Act and that the current position did not provide clarity on this issue.

Implications for Enforcement of Arbitration Agreements

The judgment has significant implications for the enforceability of arbitration agreements in India. Parties to an arbitration agreement must ensure that the agreement is duly stamped to be enforceable. Failure to do so could render the agreement invalid in law, and the courts may refuse to enforce it.

Conclusion: Legislative Reform Needed

The issue of unstamped arbitration agreements is a complex and significant one, with differing opinions among legal experts and judges. The dissenting opinions, in this case, highlight the need for legislative reform to provide clarity on the issue. The Supreme Court's decision may prompt the legislature to revisit amendments to the Stamp Act to efface inconsistencies and ensure that India becomes a centre for arbitration.

In conclusion, the recent Supreme Court decision on the enforceability of unstamped arbitration agreements in India has significant implications for parties entering into such agreements. The decision highlights the need for legislative reform to provide clarity on this issue and ensure that India becomes a leading centre for arbitration.

This article has been authored by Mozammil Ahmad.

[i] M/S. N.N. Global Mercantile Private Limited vs M/S. Indo Unique Flame Ltd. & Ors. Civil Appeal No(s). 3802-3803 of 2020