SC’s order on unstamped agreements will have positive impact on dispute resolution: Experts

SC's ruling on unstamped arbitration agreements

Arbitration lawyers say that the decision of the seven-judge bench of the Supreme Court on holding that unstamped arbitration agreements are legally enforceable will have a positive impact on dispute resolution going forward.

Tejas Karia, Partner and Head-Arbitration at Shardul Amarchand Mangaldas and Co said “This is a welcome decision as it clarified the anomaly by quickly overruling N N Global (five-judge bench’s judgement) decision and holding that unstamped or insufficiently stamped arbitration agreements are not void or unenforceable.” He noted that the judgement will enhance the image of the Supreme Court globally for being progressive and pro-arbitration.

According to Karia, the decision will have a positive impact on quicker and more efficient resolution of disputes by arbitration. The decision will provide the much-needed impetus to the Indian arbitration framework.

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. The court has held that holding an arbitration agreement to be unenforceable based on stamping at the initial stage of the arbitral proceedings is against the rationale of the law.

Arbitration is a mechanism to resolve disputes between parties without going to court. A neutral person is appointed to adjudicate the dispute and the judgement 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 a court of law.

Resonates with global principles on arbitration:

The issue of stamp duty is usually raised before the appointment of arbitrators. When the warring parties cannot agree upon an arbitrator to adjudicate their dispute, they approach the Supreme Court or high courts. The role of the courts is limited to checking the legality of the arbitration agreements. The five-judge bench had, however, ruled that the courts must also look into the adequacy of stamp duty paid, this was reversed by the seven-judge bench.

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.

Charanya Lakshmikumaran, Partner at law firm, Lakshmikumaran and Sridharan, noted that deciding on the adequacy of stamp duty at the initial stage of arbitration leads to unnecessary costs and delays. She said, “The Supreme Court’s ruling that arbitration clauses in unstamped agreements are enforceable resonates with the internationally recognised principles.”

Relief to arbitration professionals:

The decision of the five-judge bench was heavily criticised by all the stakeholders in the arbitration ecosystem. Lawyers including Harish Salve said the judgement may prolong arbitration proceedings and also act against the very intention of arbitration law. However, since the judgement has now been overruled, Pratyush Miglani, Managing Partner at law firm MVAC noted that it brings relief to arbitration professionals.

He said, “The decision by the seven-judge bench of the Supreme Court is a commendable step, rectifying the aftermath of the previous five-judge constitution bench judgment that wreaked havoc in the arbitration ecosystem of India.” Miglani noted that the seven-judge bench judgement has brought a sense of relief to arbitrators and arbitration law practitioners as the five-judge bench judgement led to delays in arbitrations.