The Hon’ble Supreme Court of India recently made a significant ruling on the validity of unstamped arbitration agreements. A 5-judge bench led by Justice K.M. Joseph held that an unstamped arbitration agreement is not enforceable until the stamp duty and penalties have been paid. The decision was reached by a majority of three judges, while the other two judges dissented, emphasizing that the court should limit its involvement in arbitration disputes.

This ruling follows a long-standing debate over the validity of arbitration agreements that have not been stamped. In 2011, the Supreme Court held that an unstamped arbitration agreement cannot be enforced, a position that was reiterated in a 2019 case. However, in January 2021, a 3-judge bench disagreed with these earlier decisions and referred the matter to a 5-judge bench for a final ruling.

The majority opinion in the recent ruling held that an unstamped agreement would be void and unenforceable as per Section 2(g) of the Indian Contract Act, 1872. In addition, the Arbitration Act requires that a certified copy of the arbitration agreement be provided to the Supreme Court, indicating the stamp duty paid. Without this, the court cannot entertain an application to refer the parties to arbitration.

The dissenting judges, on the other hand, argued that requiring stamp duty to be paid at the appointment stage defeats the purpose of the Arbitration Act, which is to ensure effective and efficient arbitration proceedings. They suggested that such issues should be dealt with by the arbitrator rather than allowing judicial intervention. Finally, they made a plea to the Legislature to amend the Indian Stamp Act to address any inconsistencies between the Indian Stamp Act and the Arbitration Act.

Key takeaways from the judgement: –

1. A document containing an arbitration clause has to be mandatorily stamped. This means that stamp duty has to be paid on the following: –

a) The agreement; 

b) Arbitration clause; and

c) Indemnity clause

Please note that the above stamp duty rates are only indicative and would depend upon each and every individual agreement.

2. In the event there is deficient stamp duty, the same can be paid before the Court/Arbitrator on payment of penalty which may up to 10 times the amount of stamp duty payable. This is a combined reading of Sections 33 and 35 read with Section 42 of the Indian Stamp Act.

3. The court has not decided the issue as to whether a party can seek relief under Section 9 of the Arbitration Act while relying on an unstamped agreement.

4. In case a certified copy of the agreement is produced, the same has to mention the stamp duty paid specifically.

5. An Arbitration Agreement, within the meaning of Section 7 of the Act, which attracts stamp duty and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, a necessary certificate is provided under Section 42 of the Indian Stamp Act.

6. The provisions of Sections 33 and the bar under Section 35 of the Indian Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Indian Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Indian Stamp Act.