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A seven-judge bench on Wednesday expressed its doubt on the correctness of a Supreme Court ruling in April that held an arbitration clause is void and not enforceable in law if the agreement is unstamped or insufficiently stamped, observing that stamping has nothing to do with validity of an agreement.
“The requirements under the Stamp Act have nothing to do with validity of a contract but it’s only on enforceability… An unstamped agreement is not invalid. The law is clear that a non-stamped or an insufficiently stamped agreement cannot be called in evidence…that’s all,” said the bench, headed by Chief Justice of India Dhananjaya Y Chandrachud. The bench also comprised justices Sanjay Kishan Kaul, Sanjiv Khanna, Bhushan R Gavai, Surya Kant, JB Pardiwala and Manoj Misra.
It added that provisions of the Contract Act will make it clear that any lacuna in stamping of an agreement does not render the document invalid but it can only impact its admissibility as evidence and consequently, its enforceability.
“It will be directly contrary to the statute (Contract Act) to hold otherwise. The statute makes it clear that non-stamping won’t make it invalid. The cloud on its admissibility can be lifted by paying a penalty or under the procedure prescribed under law,” the bench further remarked.
The larger bench is considering a curative petition to overrule the April 25 judgment by a five-judge bench. The April verdict, by 3:2 majority, relied on the 1899 Indian Stamps Act that required certain agreements to be compulsorily registrable or chargeable to stamp duty when it held that a court could go into the aspects of stamping and other compliances before the arbitrator is appointed. According to the majority view, a court is bound to examine the instrument at a pre-appointment stage, and if it is found to be unstamped or insufficiently stamped, the instrument is to be impounded at that stage, declaring the arbitration agreement to be void.
The ruling sparked serious concerns over causing further delays in the appointment of arbitrators by adding one more layer of scrutiny, besides being contrary to India’s pro-arbitration stance.
Experts welcomed the Supreme Court’s intervention. “First, an arbitration agreement is not an instrument included in the Schedule to the Stamp Act as being chargeable to stamp duty. Second, insufficient stamp duty or non-payment of stamp duty is a curable defect. Therefore, if two parties have recorded in writing their intention to solve disputes by way of arbitration, it should not be blockaded solely on grounds of an alleged defect, which too is curable in nature,” Divyam Agarwal, partner, J Sagar Associates (JSA), said.
Agarwal added that holding this to be the position would be detrimental to India’s push to project itself as a pro-arbitration jurisdiction, by presenting arbitration as being a faster and credible alternative to the traditional court-based justice delivery system.
On September 26, the top court preferred a seven-judge bench, citing the “limitless uncertainty in the area of arbitration” triggered by its April ruling. “Having regard to the larger ramifications and consequences of the view of the majority in the NM Global case, these proceedings should be placed before a seven-judge bench to reconsider the correctness of the view of the five-judge bench,” the order of reference to the seven-judge bench had stated.
Opening the arguments on behalf of the petitioners seeking review, senior counsel Arvind Datar on Wednesday contended that the majority in the NM Global Case erred in conflating the issue of an agreement being unenforceable with its being void.
“The parliamentary mandate under the Arbitration Act is clear that a court does not need to worry about the validity of an agreement but has to only see whether there is an arbitration agreement or not. The purpose of such a provision is to expedite arbitration. Judicial pit stops have to be very limited. The court need not go into the stamping of the agreement at all. It is contrary to the legislative mandate of the arbitration law as well as the Contract Act,” Datar argued.
During the proceedings, the top court also clarified that its review of the matter will confine to the stage and the correct forum for deciding the validity and enforceability of an arbitration agreement. “The real issue is the stage and the forum where the question of stamping of an arbitration agreement needs to be decided. We are not on whether such an agreement should or should not be stamped,” observed the seven-judge bench that will continue hearing the matter on Thursday.
The court ruling on April 24 had come while deciding a bundle of judgments since 2011, taking divergent views on the enforceability of arbitration clauses contained in unstamped or insufficiently stamped agreements.
The majority judgment cited the mandate of the Stamps Act to hold that “an instrument which is chargeable to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law”.
The two other judges on the bench, comprising the minority, flagged concerns that the view taken by the majority in the judgment has the propensity of frustrating the objective of the Arbitration and Conciliation Act, as a scrutiny on the stamp duty at the threshold can stall the process and will lead to procedural complexity and delay in litigation before courts.
Utkarsh Anand is Legal Editor at the Hindustan Times. He writes on law, judiciary and governance.