In a groundbreaking decision, the Supreme Court of India has set a new precedent in arbitration law, significantly impacting the enforceability of arbitration clauses in contracts. This ruling, delivered by a seven-judge bench led by Chief Justice of India DY Chandrachud, addresses the contentious issue of whether arbitration clauses in unstamped or inadequately stamped agreements are enforceable.
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The Court’s decision overrules the previous judgment in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors, where a 3:2 majority had held that unstamped arbitration agreements are not enforceable. The bench, comprising Justices Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, Surya Kant, JB Pardiwala, and Manoj Misra, clarified the legal position regarding the admissibility and enforceability of such agreements.
Chief Justice Chandrachud, in his judgment, stated,
“Agreements which are not stamped or inadequately stamped are not void ab initio or unenforceable, they are inadmissible in evidence.”
He further emphasized that non-stamping or inadequate stamping is a curable defect. This clarification implies that while an unstamped agreement cannot be used as evidence until the defect is cured, it does not render the agreement or the arbitration clause within it void.
The Court also clarified the role of courts in arbitration, stating that an objection to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. Instead, the concerned court must examine if an arbitration agreement prima facie exists. Justice Chandrachud pointed out that one of the objectives of the Arbitration and Conciliation Act is to minimize the supervisory role of courts in arbitration contracts. He noted,
“Obligating the Court to decide the issue of stamping under S 8 and 11 will defeat the purpose of the legislation.”
The background of this ruling traces back to a curative petition filed against the Supreme Court’s 2020 ruling in Bhaskar Raju and Brothers and Anr V. s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Ors. In this earlier case, the Court had observed that an arbitration clause in an agreement, which is required to be duly stamped but is not, cannot be acted upon by the Court.
Justice Sanjiv Khanna, in a concurring opinion, reinforced the position that unstamped agreements are not rendered void or void ab initio. This decision underscores the principle of separability in arbitration law, where the arbitration agreement is treated as distinct from the substantive contract.
The Supreme Court’s ruling is a significant step in reinforcing the autonomy of the arbitration process in India. It ensures that technicalities related to stamping do not obstruct the arbitration process, thereby promoting efficient dispute resolution. This decision is expected to have a far-reaching impact on the enforcement of arbitration clauses and the broader landscape of contract law in India.