Seven-judge Constitutional Bench reserves verdict on validity of unstamped arbitration agreements

Authored by: Esha Jaiswal ( Intern at Legal Soch Foundation)

Meta Description: This news deals with the judgment given by the Seven-judge bench of the Supreme Court on the validity of unstamped arbitration claiming that court participation in such cases is subject to strict restrictions.

Keywords: Arbitration, Unstamped Agreements, Validity

On Thursday, a seven-judge Supreme Court Constitution Bench gave judgment in a group of petitions addressing whether unstamped arbitration agreements are legally enforceable.

The bench consists of Chief Justice of India (CJI), DY Chandrachud, and Justices Sanjay Kishan Kaul, Sanjiv Khanna, BR Gavai, Surya Kant, JB Pardiwala, and Manoj Misra.

In the previous month, the Honourable Supreme Court of India invoked the issues disused and decided in the case of NN Global Mercantile Pvt Ltd V. Indo Unique Flame Ltd & Ors by a five-judge Constitutional Bench. The five-judge Constitutional Bench on April 25 held with a 3:2 ratio that according to law unstamped arbitration agreements are not valid. Then it was given for reconsideration to a seven-judge Bench.

A short time afterward, the Union Law Ministry established an expert group to study the country's arbitration laws and provide recommendations for changes to the Arbitration and Conciliation Act.

The seven-judge bench indicated its concerns with the five-judge bench's judgment orally on Wednesday, stating that there were strict restrictions on judicial intervention in such cases.

During the hearing, the Senior Advocate said that The courts' only responsibility was to determine whether the arbitration agreement existed. Stamped and Unstamped agreements should be seen by Tribunals.

Justice Khanna remarked that “stamping has nothing to do with validity” whereas CJI said, “unstamped agreement is not valid”.

Datar argued that Section 11(6)(a) of the Arbitration Act aims to remove deadlock in arbitrator appointments, stating that the five-judge Bench in the NN Global decision contradicted the Indian Contract Act and Stamp Act.

Senior Advocate Gourab Banerji, the Amicus Curiae, submitted that The case of SBP continues to impact all Section 11 (Arbitration Act) applications in India, even after the 2015 amendments. The Supreme Court's 2005 decision in SBP and Co vs Patel Construction allowed courts to appoint arbitrators on the judicial side when parties couldn't agree on one.

Senior Advocate Darius Khambata argued that the Stamp Act is a revenue-generating tool, and arbitration helps in this process. He argued that the issue of the stamp should be left to the tribunals, with the first look at the matter being given to the tribunal. He argued that arbitration is a separate contract, and stamps are a curable defect. The CJI remarked that the purpose of sending parties to arbitration is defeated.

The case started to become apparent when the respondent (Charitable Trust) entered into a leased agreement. The major aim of the lease agreement was to build a multi-purpose community hall and an office complex along with revamping other properties that were present on the land. Both parties entered into the lease agreement in the year 1996 for 38 years and it has a security deposit clause which was ₹55 lakh.

The respondents (Charitable Trust) in the year 2008 filed a lawsuit against the appellants for not giving a security deposit of ₹55 lakhs and instead, they only gave ₹25 lakhs. The respondents also alleged that the samadhi in the land was treated disrespectfully. Further, the appellants were alleged of tried to file a fresh sale deed in connivance with some of the trust's members.

The Bengaluru City Civil Court issued a status quo temporary order. In 2013, the appellants brought an arbitration clause claim before the Karnataka High Court, two years after the suit's first filing.

Afterward, the Judicial Registrar highlighted that the relevant document was a lease deed and not a lease agreement. As a result, the Registrar ordered the appellants to pay an additional ₹1,01,56,388 in stamp duty and penalties.

The High Court, however, went on to reject the Registrar's conclusions and appoint an arbitrator. The Supreme Court will now evaluate whether the same was justified in its curative jurisdiction.

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