In numerous agreements, you must have noticed a dispute resolution clause which states, “In the event of any dispute, parties would be free to refer such dispute to arbitration under the Arbitration and Conciliation Act, 1996”. The objective of such a clause is to lay down a contractual provision that establishes the intention of the contracting parties to resolve disputes through arbitration rather than litigation and specifies the venue and language of arbitration and the process for appointment of arbitrators.
However, have you ever wondered what happens if the underlying contract which contains an arbitration clause is not stamped? Would the arbitration agreement still be enforceable in such an instance?
In the case of N.N. Global Mercantile Private Limited v/s Indo Unique Flame Limited and Ors.[1], the question with respect to the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded arose before the Hon’ble Supreme Court of India. It was observed by a 3-judge bench of the Apex Court that the unstamped instrument would not be admissible in evidence, or be acted upon, till the requisite stamp duty is paid and such unstamped instrument would amount only to a deficiency, which can be cured on the payment of the requisite stamp duty as provided for in the Indian Stamp Act, 1899.
The bench remarked that an arbitration agreement is considered independent and distinct from the underlying contract. On the basis of the doctrine of separability, the arbitration agreement would survive independent of the substantive contract and the arbitration agreement would not be rendered invalid, unenforceable, or non-existent, even if the substantive contract is not admissible in evidence or cannot be acted upon on account of non-payment of stamp duty. It was concluded that there is no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantive contract.
Additionally, the bench also referred the case to a constitution bench of 5 judges to authoritatively decide the final legal stance on this question.
The 5-judge bench of the Hon’ble Supreme Court on 25 April 2023 by majority declared its verdict and observed that the case was wrongly decided by the 3-judge bench and thereby, overruled the earlier judgement. It held that an instrument, which is exigible to stamp duty, and is not stamped, can neither be said to be a contract nor is enforceable in law in terms of the provisions of the Indian Contract Act, 1872[2]. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. This includes any arbitration agreements made in the principal contract. Therefore, if an agreement is not stamped or insufficiently stamped, then it is not valid and enforceable. In order to hold the arbitration agreement valid and enforceable, such agreement must pass the pedestal of the Indian Stamp Act, 1899.
In light of the recent judgment, it is imperative to look at all your contracts/agreements now, so as to avoid any technical objection by the other side, after invocation of the arbitration clause.