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Arbitration clause in unstamped, insufficiently stamped agreements enforceable: SC

New Delhi, Dec 13, 2023

The Supreme Court Wednesday ruled the arbitration clause in an unstamped or insufficiently stamped agreement between parties is enforceable as such a defect is curable and does not render the contract invalid.

The verdict by a seven-judge constitution bench, having significant and far reaching consequences for corporate and other agreements containing arbitration clauses to resolve disputes between contracting parties, overruled a five-judge bench judgment delivered in April this year.

The court, in the case titled M/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd. And Ors, had by majority of 3:2 held that unstamped or insufficiently stamped agreements having arbitration clauses are not enforceable.

Setting aside the judgement, the bench headed by Chief Justice D Y Chandrachud delivered a unanimous verdict holding that non-stamping or insufficient stamping of an agreement has nothing to do with the validity of the document as it is a curable defect.

Writing the judgment for himself and five judges -- justices Sanjay Kishan Kaul, B R Gavai, Surya Kant, J B Pardiwala and Manoj Misra, the CJI said insufficiency of stamping does not make an agreement void or unenforceable but inadmissible in evidence.

"Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable.

"Non-stamping or inadequate stamping is a curable defect. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act," the bench said.

The top court said the court concerned must examine whether the arbitration agreement prima face exists and any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal.

The apex court said one of the main objectives behind the enactment of the Arbitration Act was to minimise the supervisory role of courts in the arbitral process by confining them only to the circumstances stipulated by the legislature.

"One of the reasons that business and commercial entities prefer arbitration is because it obviates cumbersome judicial processes, which can often prove expensive, complex, and interminable.

"Most legal jurisdictions have also recognised and adopted legal approaches that favor arbitration at both the domestic and international level. In the process, national courts have given effect to principles such as the separability presumption and jurisdictional competence of the arbitral tribunal," it said.

The top court said modern arbitration law does not completely restrict the role of national courts in the arbitration process, but gives priority to the arbitral tribunal to decide on disputes and issues pertaining to arbitration agreements as well as the substantive rights of the parties.

Justice Sanjiv Khanna wrote a separate but concurring judgment in which he said where an instrument has been admitted in evidence, it shall not be called into question at any stage on the ground that the instrument is not duly stamped.

"Consequently, where an instrument has been admitted in evidence, such instrument cannot be impounded as it cannot be called in question at any stage of the same suit or proceeding on the ground of insufficient stamping," Justice Khanna wrote in his separate 25-page judgement.

The top court had on October 12 reserved its verdict on reconsideration of the earlier order of its five-judge bench which had held that unstamped arbitration agreements are not enforceable in law.

The bench had heard submissions of various senior lawyers, including Darius Khambata and Shyam Divan, before reserving its judgment.

The apex court had on September 26 referred to a seven-judge bench the issue of reconsidering the correctness of a verdict delivered by a five-judge bench which had said unstamped arbitration agreements are not enforceable in law.

In its verdict, the five-judge bench had said, "An instrument, which is exigible to stamp duty, may contain an arbitration clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of section 2(h) of the Contract Act and is not enforceable under section 2(g) of the Contract Act."

"An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law," it had said.

[The Times of India]

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