SC’s judgment on unstamped agreements is pro-arbitration: Gourab Banerji, senior advocate

Gourab Banerjee- Senior Advocate on SC ruling on arbitration

Arbitration expert and senior advocate Gourab Banerji has hailed the Supreme Court’s decision holding that unstamped arbitration agreements are enforceable and noted that it may reduce the pendency of cases at a pre-arbitration stage.

On December 13, a seven-judge bench of the Supreme Court unanimously held that unstamped arbitration agreements are legally enforceable. The court has held that it is for the arbitrator to look at the adequacy of stamp duty paid for an agreement.

The apex court overruled the judgment of a five-judge bench, which had in April 2023 held that unstamped arbitration agreements were not legally enforceable.

Banerji, was the amicus curiae (friend of the court) in the case before the five-judge bench and had appeared in the case before the seven judge bench.  He spoke to Moneycontrol about the significance of the case and the changes it will bring about in arbitrations in India.

What is the case about?

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.

Stamping refers to the act of paying stamp duty on the value of the agreement as per the Stamps Act, 1899. The quantum of stamp duty varies depending on the nature and geographical location of the agreement. While the central government fixes stamp duties on some agreements, state governments are empowered to fix stamp duties on some agreements executed within their borders.

Stamp duty is a big source of revenue for the government and not paying stamp duty or paying inadequate stamp duty invalidates the agreement. However, there are ways to rectify it without having to go through the process of executing a fresh agreement.

Banerji said, “The whole purpose of arbitration is to have an efficient resolution of commercial disputes, one of the issues in arbitration is that when parties cannot agree on an arbitrator they have to move the court.”

Stamp or no stamp?

According to the Arbitration and Conciliation Act 1996, when parties disagree on who they want to be an arbitrator for the dispute, they can move the high and Supreme Court to appoint them. The court’s job in such cases is to verify the legal validity of the agreement and appoint arbitrators. However, the courts in India could not come to a consistent view on whether they should also check the adequacy of the stamp duty paid for agreements featuring an arbitration clause.

Banerji noted one of the defences raised by parties to deter the commencement of arbitration is that the agreement which contains the arbitration clause is not sufficiently stamped and therefore the courts should not appoint an arbitrator to ensure the interest of the revenue.
He said, “There has been a divergence of views in the courts on the aspect of stamping. Even though the legislature tried to limit the scope of interference by the court at the initial stage of arbitration by introducing amendments to the law. However, the courts nevertheless decided to look into stamping. This was not arbitration friendly.”

The issue ultimately reached the Supreme Court.  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. However, there were judgments by other three judge benches contrary to this stand. Thus, the case was transferred to a larger bench to settle the matter.

Banerji said, “The five-judge bench was of the view that stamp duty is law, we cannot disregard the law so we must decide on the stamp duty before referring the case to an arbitrator.” Banerji as amicus curiae before the five-judge bench informed the court that the intention of the legislature was to minimise the intervention of the court before the arbitration.

The five-judge bench’s judgment was criticised heavily for not being arbitration friendly. Experts noted that it would prolong the court proceedings and deter the arbitrations from commencing. In September 2023, a seven-judge bench led by CJI DY Chandrachud decided to reconsider the judgment.

On December 13, the SC while noting that stamp duty is an important aspect passed the buck to the arbitrator to decide on the aspect of stamping. Banerji said, “The SC has struck a balance, the balance is, the court will appoint the arbitrator and the arbitrator will have to look at whether the agreement is properly stamped or not.”

Pro-arbitration judgment

Noting that the judgment is significant, Banerji said, “From a commercial point of view, it is a pro-arbitration judgement because the autonomy of the parties is preserved and arbitration gets off the ground quickly.”

He noted that while the courts have a role to play in arbitration, the arbitrator should have the first look at the dispute before the courts intervene in it. He said, “The idea is not to stall the process before it begins. The courts are being choked up by deciding these issues at the very inception.”

He opined that the courts should have a very minimal role before arbitral proceedings begin and said, “Courts should interfere (in arbitrations) at the appropriate stage and that is not at the first stage. If we don’t do this, the various courts will simply be overwhelmed by applications for appointment of arbitrators.”

According to Banerji, minimising the court’s interference in arbitrations is very important for India’s aspirations of ease of doing business and becoming an arbitration hub. He said, “We should look at this carefully because we are attempting to be a pro-arbitration centre. If the court at the very beginning enters the field and tries to regulate it will increase their burden.”