Indian court rules ‘unstamped’ arbitration agreement unenforceable

Wee Jian Ang and Arpan Gupta of Pinsent Masons were commenting after the Indian Supreme Court ruled (298-page / 1.62MB PDF) that an arbitration agreement must be stamped in order to be enforceable in India.

In a split ‘3-2’ decision, a five-judge bench held that an arbitration agreement for which stamp duty has not been paid does not constitute a contract under Indian law and that, as a result, such arbitration agreements are unenforceable. This was primarily on the basis that the Indian Stamp Act of 1899 requires all agreements to be stamped or have stamp duty paid on them, to benefit the Indian government from a national fiscal perspective i.e. earning revenue.

Ang and Gupta said the ruling has attracted criticism at a time when both the Indian legislature and courts have been seeking to encourage Indian-seated arbitrations – currently, many arbitration proceedings involving Indian parties are seated in jurisdictions such as Singapore, Hong Kong, Dubai or London, which are globally-renowned arbitration hubs.

They said courts are entitled to determine what constitutes a valid arbitration agreement in accordance with the law in their jurisdiction, and that the Indian Supreme Court had missed an opportunity to endorse a pragmatic, arbitration-friendly, interpretation of Indian law.

Ang and Gupta said they were sympathetic to the views of the two dissenting judges in the ruling and of those put forward by an advocate that the court had invited to make submissions in the case.

Gourab Banerji, a barrister with Essex Court Chambers, had submitted that determination of whether an arbitration agreement has been stamped is one for the arbitrator, not the courts. He said the courts in India could only consider whether the arbitration agreement existed, not whether it was valid.

The dissenting judges considered that if an arbitration agreement is unstamped then this is a “curable defect” since it can be acted upon at a later stage. They said non-stamping of such an agreement does not render that agreement non-existent in law, void and unenforceable. However, the majority of the bench disagreed.

“In light of the recent pro-arbitration judgments coming out of India, this decision seems like two steps forward, one step back,” said Gupta.

“We agree with the dissenting judgments of two judges stating that this decision would be opposite to the purpose of India’s Arbitration Act to ensure effective and efficient arbitration proceedings. The defect of unstamped agreement is a curable defect and cannot affect the enforceability of the arbitration agreement. Further, the stamp duty is levied on the instrument and not the transaction. The issue of unstamped agreement could have been referred to the arbitrator,” he said.

Wee Jian Ang added: “One would have thought that an unstamped agreement could simply be stamped retrospectively. In other words, such a ‘defect’ can easily be cured and should not be weaponised to defeat what is otherwise a clear agreement to arbitrate.”

“The ruling could have significant ramifications on existing contracts, with arbitration agreements, which have not been stamped at this time. I hope that it does not disincentivise parties from choosing India as the arbitral seat,” Ang said.