SC judgment on unstamped arbitral agreements may prolong arbitrations: Lawyers

The majority judgment noted that an agreement that is chargeable under the Indian Stamp Act, 1899 cannot be made enforceable in the courts of law if sufficient stamp duty has not been paid.

Lawyers have termed the Supreme Court’s judgment invalidating unstamped arbitration agreements as one which may prolong arbitral proceedings.

A section of lawyers also feels that the judgment, while indulging heavily on the technical interpretation of law, will clarify the stand of law.

On April 25, a Constitution Bench of the Supreme Court, by a majority of 3:2, held that an arbitration agreement, for which stamp duty is not paid, cannot be implemented. The court furthermore held that such an agreement would be considered non-existent in the eyes of law.

The majority judgment noted that an agreement that is chargeable under the Indian Stamp Act, 1899 cannot be made enforceable in the courts of law if sufficient stamp duty has not been paid.

Procedural complexity

The majority judgment further held that a court should examine the agreement at the stage before an arbitrator is even appointed, and if the agreement is found to be unstamped or insufficiently stamped, the instrument is to be impounded at this stage itself.

However, Justice Hrishikesh Roy, who dissented with the judgment of the majority, noted that the objective behind the arbitration act is to avoid procedural complexity and delay in litigation before courts. Scrutinising an agreement for stamp duty, even before an arbitration could commence, will frustrate the very purpose of the act of arbitration. The issue of stamp duty can be looked at by the arbitrator after the proceedings commence.

Justice Ajay Rastogi, who also dissented, opined that the issue of stamping of arbitral agreement is a preliminary/debatable issue, and can be decided by the arbitrator when the proceedings commence.

What are the implications of this judgment?

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.

Parties can choose to arbitrate in case a dispute arises in the future, by entering into an agreement by laying down the terms of arbitration. The agreement usually contains the place of arbitration and number of arbitrators to be in the panel, among many other considerations.

When parties in dispute choose to arbitrate, they have to appoint an arbitrator on mutual agreement. However, when parties cannot agree on an arbitrator, they can move the court to appoint an arbitrator. Under such circumstances, the courts will look at the arbitral agreement to understand the requirement of the parties.

Many agreements, to be made admissible in the court of law, have to be written on stamp papers of different values, depending on the value and nature of the transaction. This is dealt with in the Indian Stamps Act, 1899. If an agreement is not stamped sufficiently, courts can impound such agreement and ask the parties to rectify it.

However, since arbitration seeks to minimise the interference from the courts, a three-judge bench in 2021 inclined to overlook such technicalities and refer all disputes to an arbitrator, who will consider them at an appropriate stage.

By virtue of this judgment, if the courts come to a conclusion that the arbitral agreement is not stamped properly, it would stand impounded. When the agreement stands impounded, the commencement of arbitration itself may get delayed.

‘May potentially prolong arbitral proceedings’

Aslam Ahmed, Partner at Singhania & Co. LLP, notes that the ruling may potentially prolong the proceedings pertaining to appointment of arbitrator/tribunal. He said, “The recent trend in arbitration has been minimum judicial interference, and this has consistently meant that the court appointing an arbitrator has to simply look at the Arbitration Clause. If the clause is clear and unambiguous, then the arbitral tribunal must be constituted. All objections on legal questions and validity, or competence of tribunal, are left to be decided by the tribunal itself.”

Technical, but settles the position of law

Abhinay Sharma, Managing Partner, ASL Partners, said, “At the outset, it may seem that the judgment has indulged in a technical issue. However, it settles the law with regard to application of the Indian Stamp Act at a pre-reference stage.”

He further noted that the judgment will have a huge impact on matters related to appointment of arbitrators, which are pending before various high courts and the Supreme Court.

Taking stamp duty lightly should not be tolerated

According to Sameer Jain, Managing Partner at PSL Advocates and Solicitors, “The court has clarified a long-term debate which impacted many arbitration matters in the past. Completely impounding a document which holds relevance in an arbitral dispute based on stamp duty is presumed far-fetched by many, and as the minority opined, stamping is a curable defect.”

He added that taking stamp duty lightly in the court of law should not be tolerated, and the consequences of invalidity are rightly originated.

Merely clarifies what has already been held

Ekta Rai, Advocate at the Delhi High Court, said, “The present judgment merely clarifies and reaffirms what has already been held by the Supreme Court in its previous judgment on stamping of arbitral agreements.”

Rai noted that since the judgment is just a clarification, it may not have a large impact on arbitration proceedings in India.