The Judiciary has given India a better chance to emerge as an arbitration hub

In April 2023, a 5-judge SC bench in NN Global Mercantile (P) Ltd vs Indo Unique Flame Ltd had held such agreements to be unenforceable. Before that, parties would often casually affix stamp paper worth ₹100 to contracts worth huge sums without checking the right stamp duty. It worked in cases where the contracts did not need to be registered and remained between the parties. But the April judgement restrained courts from appointing arbitrators until stamp duty was paid, and threw courts and parties into disarray. Not only were unstamped agreements unenforceable, they could attract a penalty of 10 times the deficient stamp duty. This would often come as a shock to parties, who also faced delays while approaching local government authorities and courts to evaluate and pay the remaining duty.

This week, a 7-judge bench of the SC overturned the NN Global judgement, restoring certainty in the arbitral arena. The bench held that an unstamped or insufficiently stamped agreement would still be enforceable. Courts will not examine the sufficiency of stamp duty before appointing an arbitral tribunal, and leave this matter to arbitrators. This defers to the principles of arbitral competence and minimal court intervention in arbitral processes. It does not mean that contracts with arbitration clauses do not need to be stamped; just that arbitration will not get stalled in court before an arbitrator is appointed.

Commercial parties choose arbitration over courts because it is faster, more flexible and more cost effective than litigation. When these factors are in doubt, parties move on to jurisdictions that offer speedy and budget-friendly dispute resolution. While India is keen to emerge as a global hub for arbitration, our centres in Delhi, Mumbai, Hyderabad and GIFT City are yet to attain the prestige of, say, the Singapore International Arbitration Centre. Speaking in 2016, Prime Minister Narendra Modi had said, “An enabling alternative dispute resolution ecosystem is a national priority as it will not only add to investors’ comfort level, but also ease the burden on courts." Minimal judicial intervention in the arbitral process, cost effectiveness and promptness in dealing with challenges to the final award are key attributes of an effective arbitration ecosystem.

Beyond settling the stamp duty issue, this week’s SC judgement reasserts that courts will respect the principles of arbitral autonomy and minimal judicial interference. The former lets parties choose the governing law, arbitral venue and the arbitrators themselves. In technically complex matters, like infrastructure contracts or technology disputes, parties can appoint technical arbitrators with in-depth sectoral knowledge. This works well for cross-border transactions, where, the SC notes, parties may want to avoid the parochialism of a domestic legal system. Further, the ruling notes that the Arbitration and Conciliation Act, 1996, incorporates the principle of minimizing the supervisory role of courts in the arbitral process. The Act does not exclude courts from that process altogether, but limits their role to circumstances where judicial support is required to implement and enforce the arbitral process, or to prevent fraud, injustice or violation of public policy.

The SC usually has benches of two judges. Seven-judge benches are rare and their decisions hard to overturn, as they can only be set aside by a bench of nine judges or more. The 7-judge ruling is thus likely to hold for a long time.

The latest judgement protects the interests of the revenue department, since stamp duty (and any penalty) would have to be paid at the arbitration stage in any case. By curing the defect of badly timed stamp duty hold-ups, it will save months for disputant parties and will add certainty, predictability and expedience to dispute resolution in the country. The SC’s decision should help India emerge as a hub for arbitration and improve investor confidence.