Supreme Court Affirms Validity of Arbitration Agreements in Unstamped Contracts

Source- This post is based on the article “Arbitration agreements in unstamped contracts valid, says Constitution Bench” published in “The Hindu” on 13th December 2023.

Why in the News?

Recently, a seven-judge Constitution Bench ruled that arbitration agreements in unstamped or insufficiently stamped commercial contracts remain valid, enforceable, and existent.

What are the Highlights of the Judgment in simplified terms?

1) The court held that unstamped or insufficiently stamped agreements are not void or unenforceable.

2) The Arbitration Act is independent of the Stamp Act. Even if a document is invalid under the Stamp Act, any arbitration agreement reached over the invalid document is valid.

3) The court applied the “separation presumption” by which an arbitration agreement is presumed to have a separate existence from the contract. This means that the validity of the arbitration agreement is independent of the validity of the underlying contract.

4) The separation presumption applied in this case gave effect to the doctrine of competence-competence. According to this doctrine, the arbitral tribunal has its own  authority/ is competent to decide its own jurisdiction. Thus, an arbitration agreement can be valid if the arbitral authority gives it approval, despite the case being of unstamped or insufficiently stamped commercial contracts.

5) With this, the 7 judge bench has overruled an earlier verdict of the Supreme Court in the N.N. Global case.

Note- In the N. N. Global case, a five-judge bench ruled that an arbitration agreement without proper stamping was deemed void and unenforceable.

What is the Significance of the Judgement?

1) Swift resolution of commercial disputes- Previously, disputes of this nature faced obstacles due to parties failing to pay the necessary stamp duty or inadequately stamping contracts.

2) The ruling provides a significant boost to India’s aspirations of becoming a global arbitration hub.

What is Arbitration?

Arbitration is a form of alternative dispute resolution (ADR) in which a neutral third party resolves a dispute outside of court. Arbitration in India is governed by the Arbitration and Conciliation Act,1996.

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