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Update

Supreme Court on the enforceability of an unstamped or insufficiently stamped arbitration agreement

05 May 2023

The Supreme Court has expounded upon the legal validity of an unstamped or insufficiently stamped arbitration agreement at the stage of reference of disputes under Section 11 of the Arbitration and Conciliation Act, 1996. This update briefly discusses the varying judicial opinions that led to this issue being referred to a Constitution Bench of the Supreme Court and analyses the key points of the Supreme Court's clarificatory ruling.
Partner: Mohit Rohatgi, Associate: Samriddhi Shukla

Introduction

A five-judge bench of the Supreme Court of India, in its judgement dated 25 April 2023, in M/s N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors. (N.N. Global 2023), has held that an arbitration agreement in an unstamped or insufficiently stamped agreement is unenforceable and non-existent in law until such agreement is validated by paying requisite stamp duty in accordance with the procedure laid down under the Indian Stamp Act, 1899 (Stamp Act).

Background

The need for reference of this question to a five-judge bench arose due to a fracture of opinions in several previous decisions of the Supreme Court in relation to the implications of an unstamped or insufficiently stamped agreement including, more specifically, on the validity and existence of the arbitration agreement contained in such an agreement.

This issue first came up for consideration before a two-judge bench of the Supreme Court in SMS Tea Estate v Chandmari Tea Company (2011) (SMS Tea), wherein it was held that when an unstamped or insufficiently stamped agreement is presented before the court in an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), the court must first impound the agreement and only upon the payment of requisite stamp duty, it may proceed with the appointment of an arbitral tribunal.

Thereafter, Section 11(6A) was inserted in the Arbitration Act through an amendment in 2015. Section 11(6A) sought to limit the scope of examination of a court at the pre-arbitration reference stage only to the ‘existence of an arbitration agreement’. Another two-judge bench of the Supreme Court in Garware Wall Ropes v Coastal Marine Constructions & Engineering Ltd. (2019) (Garware) endorsed the view taken in SMS Tea and held that the findings in SMS Tea will continue to be applicable even post-insertion of Section 11(6A) as an arbitration agreement that is not enforceable does not ‘exist’ in law.

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