A seven-judge bench of the Supreme Court on December 13 unanimously held that unstamped arbitration agreements are legally enforceable.
The court has held that holding an arbitration agreement to be unenforceable based on stamping at the initial stage of the arbitral proceedings is a against the rationale of the law.
This is a significant decision from the apex court as it has overruled the judgment of a five-judge bench which had in April 2023 held that unstamped arbitration agreements were not legally enforceable.
Arbitration is a mechanism to resolve disputes between parties without going to court. A neutral person is appointed to adjudicate the dispute and the judgment of an arbitrator is legally enforceable. For parties to resolve their dispute through arbitration, they must necessarily have an agreement expressing their intention to arbitrate, as arbitration is consensual.
Stamping refers to the act of paying stamp duty on the value of the agreement as per the Stamps Act. The five-judge bench ruled that if an agreement that contains an arbitration clause is not stamped as per the law, it cannot be legally enforced in the court of law. This has now been reversed by the seven-judge bench.
How did it come to the seven-judge bench?
In April 2023, the five-judge constitution bench led by Justice KM Joseph held that unstamped arbitration agreements were not legally enforceable.
Lawyers including Harish Salve said the judgment may prolong arbitration proceedings and also act against the very intention of arbitration law.
The law requires that the stamp duty for a document be paid for it to become enforceable legally. The case was referred to the constitution bench after two three-judge benches came to different conclusions.
In 2020, a bench led by Chief Justice of India NV Ramana had held that stamping of an arbitration agreement was mandatory for it to be referred to an arbitrator.
In 2021, a bench led by Justice Chandrachud, who took over as the CJI in late 2022, said an arbitration agreement would not be rendered invalid, unenforceable or non-existent, on account of non-payment of stamp duty. The bench, too, referred the case to a larger bench to settle the matter.
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