Is your Arbitration Agreement/Clause valid enough and enforceable?

Today in high octane and complex business relationship runs on contractual relationship and at times the strain on such relationship results in disputes among the parties in commercial relationship which makes it difficult to continue together in business. Arbitration is an efficient and effective manner to resolve such disputes among the parties.

Arbitration often try to preserve or protect the existing relationship amongst the parties, unlike court procedures where sometimes the final outcome can result in the relationship coming to an end between both parties. To protect their rights, the parties enter into agreements and include the arbitration agreement /clause as part of their commercial transactions. In recent few years, the enforceability of such agreements had been challenged on ground of no-payment of stamp duty or insufficient stamp duty.

In 2021, in the matter  N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited & Ors. (2021) 4 SCC 379 (“NN Mercantile Case”), it was been held by the hon’ble Supreme Court that- “that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and unenforceable, is not the correct position in law” and the matter was referred to While in NN Mercantile Case, it was been held by Hon’ble Supreme Court  that – “non-payment of stamp duty would not invalidated the arbitration agreements and are enforceable”, whereas in its earlier judgments in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.(2011) 14 SCC 66 (“SMS Tea Case”) where it was been held by the hon’ble Supre Court that- “An unstamped arbitration clause in an agreement that is compulsorily registrable or chargeable to stamp duty cannot be the basis for the appointment of an arbitrator” and the same was upheld in the matter of Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd.(2019) 9 SCC 209("Garware Case"),  and  Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 (“Vidya Drolia Case”).

Due to such conflicting judgments by the Apex Court, the NN Mercantile matter was been referred to the constitutional bench of the Supreme Court for final adjudication of the burning issue- “Enforcement of arbitration agreement without payment of stamp duty?”

This review was necessitated to address the court's jurisdiction to adjudicate issues at the pre-appointment stage, which has been the subject matter of numerous cases before the hon’ble Supreme Court as well as various High Courts in India. Different benches of the Supreme Court have rendered conflicting decisions on this issue.

The constitutional bench of the Supreme Court which has ruled in 3:2 that – “an instrument which is eligible to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of S. 2(h) of the Contract Act and is not enforceable under S 2(g) of the Contract Act”, which in essence means that- If an Agreement is unstamped or insufficiently stamped, the arbitration clause is not enforceable. With the ramifications and impact on the future arbitrations as it’s now a settled law that any agreement without payment of stamp duty or insufficient stamp are not enforceable,  there are few issues which need to review by the parties, litigants etc. to avoid any future settlement of conflict among the commercial transactions via arbitration :


a.    The impact on on-going arbitration with unstamped agreement?

b.   The parties who already have an arbitration agreement/clause but no stamp duty has been paid on such agreements? Would their disputes to be settled through civil court or is there any way  for them to enforce the arbitration agreements?

c. Are there any precautionary measures which the parties should opt for it, to avoid any non-enforcement issues w.r.t. arbitration agreements/clause in future?

This article is for information purpose only and should not be taken as legal advice.

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