Is unstamped arbitration agreement in a contract void and unenforceable due before a judicial forum

This issue was decided by a seven-judge bench of the Supreme Court of India (SCI) when a five-judge bench of the SCI referred the issue to the seven-judge bench of the SCI to reassess consequences…

Background:

This issue was decided by a seven-judge bench of the Supreme Court of India (SCI) when a five-judge bench of the SCI referred the issue to the seven-judge bench of the SCI to reassess consequences of the decision in N N Global 2¹ wherein a five-judge bench of the SCI held that an unstamped or insufficiently stamped instrument containing an arbitration agreement is void and unenforceable. Such instruments cannot be admitted in evidence and the arbitration agreement can acted upon only if the instrument is duly stamped.

The SCI did not delve with the factual issues and limited itself to the legal issues to be determined.

The admissibility of an arbitration agreement as evidence was decided in the context of the interplay between S. 35 of the Indian Stamp Act,1899 and S. 11. (6) (A) and section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).

S. 35 of the Indian Stamp Act 1899 states that instruments chargeable with duty will not be admitted in evidence unless such instrument is duly stamped. S. 11 (4), S. 11 (5) and S. 11 6 (A) of the Arbitration Act deals with powers of the court to appoint an arbitrator and scope of enquiry to be conducted by the court regarding the arbitration agreement at the time of appointment of an arbitrator. S. 8 of the Arbitration Act deals with power of court to refer parties to arbitration.

The moot issue was whether the power of the referral court under S. 8 and S. 11 of the Arbitration Act extends to examining the instrument containing the arbitration agreement is adequately stamped. N N Global 2 (Supra) held that agreements which are not stamped or inadequately stamped is void and unenforceable. This potentially would have led to situations where the referral court would not be able to refer parties to arbitration where the instrument containing the arbitration clause was not adequately stamped.

Decision of the SCI

1. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.
2. Non-stamping or inadequate stamping is a curable defect.
3. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
4. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal;
5. The decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) are overruled to that extent.

Conclusion

The decision of the Supreme Court of India overruling NN Global 2 and SMS Tea Estates is the correct approach as inadequacy in stamping of an instrument is a curable defect and should not disentitle a party from approaching a court for a relief.

Going ahead, it is prudent for parties to have the underlying instrument containing the arbitration clause adequately stamped as per local law. This should preferable be done when the agreement is executed.

Footnote

1. 2023 (7) SCC 1

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