Introduction

Section 35 of the Indian Stamp Act, 1899 (the “Stamp Act”) stipulates that a deficiently stamped agreement is inadmissible in evidence until the deficient stamp duty is paid. The provisions of the Stamp Act are clearly stated and have been understood and routinely applied by Indian courts to general agreements sought to be brought into evidence. Over the past decade, however, Indian courts have handed down a series of conflicting judgments on the issue of the enforceability of a deficiently stamped arbitration agreement.

The issue became even more complicated in April 2023 with a decision of a five-judge bench of the Supreme Court in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited (“NN Global 2”), which held that an deficiently stamped agreement is void, unenforceable and cannot exist in law. NN Global 2 unsettled a long settled legal distinction between admissibility of a document in evidence and its enforceability. The former was impacted by inadequate stamping but not the latter.

Further, the Supreme Court held that such an agreement must be impounded by a court called upon to appoint an arbitrator (“Referral Court”).

NN Global 2 was met with criticism particularly since there would be inordinate delays in the appointment of arbitrators and the commencement of arbitration proceedings, if stamping of agreements was made a pre-condition to these actions. Further, the Supreme Court, in NN Global 2, created uncertainty and confusion by not clarifying whether a party to a deficiently stamped agreement could obtain pre-arbitration protective relief from courts under Section 9 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”).

NN Global 2 also impacted the manner in which legal practitioners summarized their due diligence findings of deficiently stamped agreements. Prior to NN Global 2, the inadmissibility of such agreements in evidence would be highlighted to parties, but transaction counsel would refrain from interpreting them as void on this ground alone. Transacting parties would customarily proceed to address the inadmissibility issue by incorporating conditions to closing and/or indemnities into their deal documents. NN Global 2’s extreme view that unstamped agreements are void turned such discussion points into serious issues.

On December 13, 2023, a seven-judge bench of the Supreme Court revisited NN Global 2 in Re Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 (“7-judge Decision”). The 7-judge Decision overruled NN Global 2, and in doing so, the Supreme Court concluded as follows:

  • deficiently stamped agreements, though inadmissible as evidence, are not void or unenforceable;
  • non-stamping or inadequate stamping is a curable defect;
  • the issue of adequacy of stamping is not be determined by a court at the stage of appointment of an arbitrator or reference to arbitration; and
  • objections relating to adequacy of stamping fall within the scope of the principle of kompetenz-kompetenz and should be decided by the arbitrator.

The 7-Judge Decision

The 7-judge Decision has provided much-needed clarity on the issue of enforceability of deficiently stamped agreements. The key findings of the decision are discussed below:

Inadmissibility and voidness

As an initial matter, the 7-judge Decision draws a distinction between admissibility of an agreement as evidence in legal proceedings, on the one hand, and its validity or enforceability, on the other. It clarifies that an agreement may be valid, but inadmissible in evidence and vice versa. The Supreme Court gave an example of a non-compete agreement that is void under Section 27 of the Indian Contract Act, 1872, but its voidness will not impact its admissibility in evidence if a party attempts to enforce it against the other party.

After carrying out a detailed analysis of Section 35 of the Stamp Act, the Supreme Court concludes that the payment of stamp duty is a curable defect and the non-stamping or insufficient stamping of an agreement does not result in the agreement being rendered void or invalid, but only inadmissible in evidence, until the deficient stamp duty is paid.

Legislative intent

The 7-judge Decision traces the legislative intent behind enactment of the Stamp Act and the Arbitration Act. It observes that the Stamp Act is a mandatory fiscal legislation, intended to generate revenue for the government. On the other hand, the Arbitration Act aims to encourage the speedy, efficient and binding resolution of disputes with minimum supervisory role of courts. After reviewing the legislative intent, the Supreme Court holds that the Arbitration Act will have primacy over the Stamp Act in the context of arbitration agreements for two reasons: (i) the Arbitration Act is a special law applicable to a specific category of agreements, i.e., arbitration agreements, while the Stamp Act is a general law applicable to all instruments; (ii) the legislature was aware of the provisions of the Stamp Act when the Arbitration Act was enacted.

The 7-judge Decision also considers the statement of objects and reasons of the Arbitration and Conciliation (Amendment) Act, 2015, which stipulated that, at the stage of appointment of an arbitrator, a court should examine the existence of a prima facie arbitration agreement and “not other issues”. The Supreme Court observes that “other issues” would include impounding of a deficiently stamped agreement by a Referral Court.

Finally, the 7-judge Decision stresses on the importance of the non-obstante clause in Section 5 of the Arbitration Act to conclude that the provisions of the Arbitration Act would take precedence over any other law. Accordingly, the Supreme Court holds that a Referral Court is not required to examine the validity of the arbitration agreement. It is limited to making a prima facie determination of the existence of an arbitration agreement at the stage of reference to arbitration or appointment of an arbitrator, or even at the stage of granting interim relief under Section 9 of the Arbitration Act.

Principle of severability

The 7-judge Decision recognizes that the severability principle serves two distinct purposes. First, it treats an agreement to arbitrate disputes as separate from its underlying contract. Second, it permits challenges to the arbitration agreement as distinct from challenges to the underlying contract. In the 7-judge Decision, the Supreme Court analyzed the treatment of this principle across other jurisdictions as well and concluded that:

  • The principle of severability contained in Section 16 of the Arbitration Act captures the general rule on the substantive independence of an arbitration agreement;
  • Parties to an arbitration agreement mutually intend to confer jurisdiction on the arbitrator to determine questions of both jurisdiction and substantive disputes;
  • When parties sign a contract containing an arbitration agreement, they are, in effect, signing an arbitration agreement independent of the underlying contract;
  • Even if the underlying contract is invalid, the arbitrator can decide on its own jurisdiction by determining the existence and validity of the arbitration agreement; and
  • Since the severability presumption applies at a pre-arbitral stage, a Referral Court is only required to determine the existence of an arbitration agreement on a prima facie basis, and leave the issue of stamping to the arbitrator.

Principle of kompetenz-kompetenz

The 7-judge Decision also examines and reinforces the principle of competence-competence (or kompetenz-kompetenz), including its positive and negative aspects. The positive aspect allows arbitrators to determine their own jurisdiction in the first instance. The negative aspect limits a court’s authority to determine the competence of the arbitrators as a threshold matter. Instead, it subjects the arbitrator’s decision to a limited review at a later stage when the award is challenged.

Hence, the Supreme Court’s application of the kompetenz-kompetenz principle in the 7-judge Decision limits the authority of a court to a prima facie review of the existence of an arbitration agreement at the reference stage to appointment of an arbitrator or reference to arbitration. Any objection relating to the inadequacy or insufficiency of stamping is a matter for the arbitral tribunal, when constituted, to determine.

Referral court’s limitations

The 7-judge Decision analyzes Section 11(6A) of the Arbitration Act which stipulates that a court, while considering an application for the appointment of an arbitrator, shall “confine [itself] to the examination of the existence of an arbitration agreement” (emphasis supplied). In the Supreme Court’s view, the use of the term “examination” (as distinct from an adjudication) only requires prima facie proof of the existence of an arbitration agreement and not a contested inquiry with respect to the validity of an arbitration agreement.

Accordingly, it holds that the words “confine” and “examine” are meant to limit the jurisdiction of a Referral Court to merely examining the existence of an arbitration agreement – not ruling on its validity. It clarifies that such issues must be decided by the arbitrator in the first instance.

Conclusion

The 7-judge Decision is a welcome one for the following reasons:

  • It reestablishes the legal distinction between the admissibility of a document in evidence and its enforceability. An inadequately stamped document may be inadmissible, but it is still enforceable.
  • It not only reiterates, but restates certain cornerstone principles of arbitration – i.e., severability, competence-competence, party autonomy and minimal judicial interference.
  • By allowing impounding of a deficiently stamped agreement at a later stage, it removes the difficulties and delays in the appointment of an arbitrator before a Referral Court. However, parties must bear in mind that inadequacy of stamping should be cured promptly to minimize delays in the arbitration proceedings.
  • Lastly, and equally importantly, it clarifies that courts are not required to deal with the question of adequacy of stamping at the stage of granting pre-arbitration relief under Section 9 of the Arbitration Act.


This insight has been authored by Niti Dixit, Viral Mehta, Abhishek Tewari and Zahra Aziz from S&R Associates. They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.