Validity of arbitration agreements under the Stamp Act: An overview of the evolving judicial perspective

The Arbitration and Conciliation Act, 1996 (“Arbitration Act”) was enacted for a swift resolution of disputes in comparison to the conventional litigation mechanism and over the years, it has gained predominant preference as a dispute resolution mechanism. Section 7 of the Arbitration Act lays down the essentials of a valid arbitration agreement, stating that it must be in writing and must be signed by both parties; it must demonstrate a clear and unambiguous intention of the parties to adjudicate a dispute by way of arbitration. An arbitration agreement can also be in the form of letters, telex, telegrams or any other means of telecommunication that provide a record of the agreement.

The Arbitration Act encapsulates an extensive definition of the arbitration agreement that has been deliberately done in order to adhere to the overall objectives of the Arbitration Act, which are party autonomy and minimal judicial intervention. However, over the years, another aspect has come up for consideration, before the Court, that is, whether an arbitration agreement that is not stamped is valid in the eyes of the law.

The Indian Stamp Act, 1899 (“Stamp Act”) was enacted mainly as a revenue-oriented statute that aimed at stamping of instruments for securing the fiscal interest by imposing stamp duties on a wide spectrum of instruments while formalizing the commercial, legal and financial transactions. Thus, the underlying philosophy of the Arbitration Act is the expeditious settlement of disputes with minimum judicial intervention, while the Stamp Act aims at safeguarding the fiscal revenue of the State through the stringent measures.  

The Indian judiciary has diligently dealt with the issue of stamping arbitration agreements, and its judicial pronouncements from time to time are a testimony to the said evolving concept. The issue with respect to the validity of an unstamped arbitration agreement was dealt for the first time, by the Indian Judiciary in SMS Tea Estates Pvt. Ltd. v Chandmari Tea Co. Pvt. Ltd., (2011) 14 SCC 66, wherein, the Supreme Court held that, “If a contract containing an Arbitration Clause is not duly stamped, then, the same cannot be admitted by the court until the balance stamp duty has been paid.” It was also held by the Court that, even if the arbitration clause is a separate agreement within the contract, the same will not be admissible if it is unstamped/ insufficiently stamped, unless and until the remaining deficit stamp duty has been paid.

Subsequently, in Garware Wall Ropes Ltd. v Coastal Marine Constructions and Engineering Ltd (2019) 9 SCC 209, the apex court, reiterated the earlier position as was held in the case, SMS Tea Estates Pvt. Ltd. v Chandmari Tea Co. Pvt. Ltd., and opined that since the arbitration clause is a part of the same unstamped/ insufficiently stamped contract, it cannot be separated, as the main contract is unenforceable until adequately stamped. Therefore, the arbitration clause cannot be acted upon. In other words, the Supreme Court held in this case that if the main contract is illegal, then the arbitration clause inside such a contract can’t exist independently.

These two judgments created a lot of hue and cry in the Indian judiciary as they neglected the doctrine of separability, as per which an arbitration clause can be entirely a separate and distinct agreement from the main contract and have its own existence, independent of the main contract. Moreover, it’s the doctrine of separability that ensures that even if the validity of the main contract/ agreement is in question, the said arbitral clause in such a contract remains legally enforceable.

This fallacious position was in fact, again reiterated in Vidya Drolia v Durga Trading Corp (2021) 2 SCC 1, wherein the apex court, reaffirmed the principle settled in the Garware case, and held that, “for a contract to exist in the eyes of the law, it must be enforceable” and since the unstamped contract is rendered as not enforceable, any arbitration clause in that contract cannot be said to exist in the eyes of law. This strengthened the law settled in the Garware case, while again neglecting the principle of separability.

After considering all these judicial precedents, the issue with respect to the validity of an unstamped arbitration agreement vis-à-vis separability of the arbitration clause from the unstamped agreement was finally given a conclusive direction by the apex court in the landmark case, M/s NN Global Mercantile Pvt. Ltd vs M/s Indo Unique Flame Ltd & Ors. (2023 SCC OnLine SC 1666) (Global Mercantile Judgement). The 7-judge bench in NN Global Mercantile (2023) clarified that non-stamping does not render an arbitration agreement void or non-existent, reaffirming the doctrine of separability. However, stamping requirements under the Stamp Act remain applicable to the underlying instrument, and non-compliance continues to be a curable defect that may require procedural compliance before full enforcement.

The Supreme Court in its landmark ruling, i.e., in the Global Mercantile judgement largely relied upon the principles of severability and Kompetenz-Kompetenz; and held that, firstly, an arbitration agreement has independent existence and is not dependable on its substantive agreement; secondly, the entire purpose of alternative dispute resolution mechanism, which is minimal judicial intervention stands defeated if the judicial intervention is called for, at such an initial stage to decide the validity of such arbitration agreements, which subsequently can be adjudicated by the arbitral tribunal.

Besides, the seven judge Bench of the Supreme Court also overruled the earlier erroneous decision and reiterated that, unstamped/ insufficiently stamped instruments are inadmissible under Section 35 of the Stamp Act, but the same cannot be rendered as non-existent or void, as non-stamping/ insufficient Stamping is a curable defect that can be rectified upon payment of the deficit stamp duty, thereby becoming admissible upon rendering of such payments.

The Court further propounded that, in light of the present circumstances, an arbitration agreement is not included in the list of instruments chargeable to stamp duty under the Maharashtra Stamp Act. Hence, there is no legal obstacle any which way to enforce such an agreement, even though the payment of stamp duty is still pending on the substantive contract. However, the Court clarified that the rights and obligations in respect of any unstamped commercial agreement can’t be adjudicated unless the provisions of the Stamp Act is complied with, thus ensuring strict adherence in respect to the same.

The seven-judge Bench of the apex court in the Global Mercantile judgement reflected the pivotal evolution regarding the jurisprudence of arbitration in India. By detangling the concept of stamping of arbitration agreement from the ambit of existence and voidability, the apex court has paved the way against the validity of such agreements that are questioned at the threshold level on technical defects. This decision of the Supreme Court has reinforced that arbitration cannot be a hostage to fiscal formalities, and technical defects cannot be a mechanism to derail the arbitrations, thus reiterating the autonomy of the dispute resolution while upholding its viability and efficacy, along with mandatory procedural compliance. 

Besides, the apex court has also relied on the “doctrine of separability”, which aligns the Indian arbitration jurisprudence with the global framework while prioritizing arbitral efficacy and autonomy. To sum up, undoubtedly, the Supreme Court has harmonized the two conflicting statutes, thus ensuring that both serve the very purpose of their enactments and operate effectively without defeating their respective purpose, and thus ensuring speedy adjudication of disputes.                 

About the authors: Shantanu Malik is a Partner, Sidharth Sharma is a Senior Associate and Bushra Alam is an Associate at Hammurabi & Solomon Partners.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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