Unstamped arbitration agreement not legally valid: Constitution Bench of Supreme Court holds by 3:2 majority

A Constitution Bench of the Supreme Court on Tuesday held by a 3:2 opinion that unstamped arbitration agreements are not valid in law [NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors].The judgment on this significant point of law was delivered by a bench of Justices KM Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and CT Ravikumar.Justice Joseph penned the majority opinion, joined by Justice Bose. Justice Ravikumar wrote an opinion concurring with the majority view. Justices Rastogi and Roy dissented, opining that unstamped arbitration agreements are valid at the pre-referral stage. "If the original of the instrument is produced and it is unstamped, the Court, acting under Section 139, is duty-bound to act under Section 33 of the Stamp Act...provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act," the majority opinion held..Summing up his dissenting opinion, Justice Rastogi stated,-The examination of the arbitration agreement at the stage of Section 11(pre-referral stage) should be done cautiously in a way that it does not breach the legislative intent behind the provisions by opening the door wide open for judicial intervention-the existence of a copy/certified copy of an arbitration agreement whether unstamped/insufficiently stamped at the pre-referral stage is an enforceable document for the purposes of appointment of an Arbitrator under Section 11(6A) of the Act, 1996 where the judicial intervention shall be minimal confined only to the prima facie examination of “existence of an arbitration agreement” alone-All the preliminary/debatable issues including insufficiently stamped/unduly stamped or validity of the arbitration agreement etc. are referrable to the Arbitrator/Arbitral Tribunal under Section 16 of the Act.In his dissenting opinion, Justice Roy held,"The objective behind the enactment of the Arbitration Act,1996wasto,inter alia, avoid procedural complexity and the delay in litigationbeforeCourts. Impounding and stamping at the Section 11 stage wouldfrustratethe very purpose of the amended Arbitration Act,1996 as the enforcement ofarbitration agreements would be stalled on an issue, which is capableofbeing resolved at a later stage. To defer stamping to the stageof the arbitrator would in my view achieve the objective of both the ArbitrationAct,1996 and the Stamp Act,1899."He went on to hold that the position outlined by the present bench could not provide clarity on this issue, even that a larger bench reference was not common. However, the issue was too important to await a clarificatory verdict from a larger bench, he stressed."Therefore, I would appeal to the legislative wing of the State to revisit the Amendments which may be necessary in the Stamp Act,1899 in its application to the Arbitration Act,1996 ... efface the inconsistencies in both ... If we look at the legislative intent of the Arbitration Act,1996 and what our country is hoping to be as the destination of choice for Arbitration, I’m of the considered opinion that it would be appropriate to interpret the statutory interplay in a constructive manner without defeating the legislative intent and thwarting the speedy referral to arbitration," he concluded.Justice Roy opined that the Court in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd had wrongly held that an arbitration agreement contained in an unstamped contract cannot be taken in evidence and invoked..The Supreme Court had reserved its verdict in the case in January this year. The reference to a five-judge Bench was necessitated given the decision of the top court in NN Global Mercantile Pvt Ltd v. M/s Indo Unique Flame Ltd, in which it had held,"The arbitration agreement would not be rendered invalid, un-enforceable or non-existent, even if the substantive contract is not admissible in evidence, or cannot be acted upon on account of non-payment of Stamp Duty."In doing so, the three-judge Bench of Justices DY Chandrachud, Indu Malhotra and Indira Banerjee had doubted the correctness of the Division Bench decision in Vidya Drolia & Ors v. Durga Trading Corporation.Specifically, the following question was referred to a larger bench:“Whether the statutory bar contained in Section 35 of the Indian 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, un-enforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”.The parties in the original matter had entered into a sub-contract that had contained an arbitration clause. The respondent had later invoked the bank guarantee furnished by the petitioner, leading to a suit.The respondent then filed an application under Section 8 of the Arbitration and Conciliation Act and sought resolution of the dispute through arbitration, which a commercial court had rejected. The Bombay High Court had subsequently held that the application was maintainable, leading to the present appeal before the top court.Senior Advocate Gourab Banerji was Amicus Curiae in the matter..Read more about the arguments in the case here.[Read judgment]