Breaking| 7-Judge Bench of Supreme Court rules: Arbitration clauses in unstamped agreements are enforceable

The Supreme Court, in a ruling by a seven-judge bench, has held that arbitration clauses in unstamped agreements are enforceable. This decision marks a departure from the precedent set by a previous five-judge bench judgment in M/s. N.N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. And Ors, where it was held that unstamped arbitration agreements were not enforceable under the law. The Court has overturned the earlier judgment and established a new legal perspective on the enforceability of unstamped arbitration agreements.

On April 25, 2023, the Supreme Court of India's Constitution Bench of five judges delivered a split verdict, with a 3:2 majority ruling that an arbitration agreement and an instrument containing such an agreement, subject to stamp duty but unstamped or insufficiently stamped, cannot be enforced. This decision is based on the premise that such a document does not qualify as a legally enforceable contract under Section 2(h) read with Section 2(g) of the Indian Contract Act, 1872.

The precedent set by a 3-judge bench in N.N. Global Mercantile Case had previously upheld the doctrine of separability, asserting that the arbitration agreement remains valid independently of the underlying contract's enforceability due to stamp duty issues. However, a conflicting view emerged in Vidya Drolia v. Durga Trading Corporation, leading to the matter being referred to the Constitution Bench for comprehensive deliberation.

In today's verdict, CJI Chandrachud noted the following:

• Agreements which are not stamped or inadequately stamped are not void ab initio or unenforceable; rather, they are deemed inadmissible in evidence.
• Non-stamping or inadequate stamping is a curable defect.
• An objection related to stamping is not subject to determination under Sections 8 or 11 of the Arbitration Act. The relevant court must assess the prima facie existence of an arbitration agreement.
• Any objection concerning the stamping of the agreement falls within the jurisdiction of the arbitral tribunal.
• The rulings in NN Global is overruled