– By Nitin Potdar
Given the Legal Clarity offered by the SC Decision seven Judge-Bench which Opens Doors for Smooth Dispute Resolution in Business Contracts, it is high time that the government takes steps to exempt payment of stamp duty on Arbitration Agreements and offer a lifeline to countless commercial agreements and documents containing arbitration provisions.
The recent landmark decision by a 7 seven-judge Supreme Court bench, led by Chief Justice Dr. DY Chandrachud, has the potential to revolutionize arbitration in countless unstamped or inadequately stamped agreements. This ruling not only benefits businesses but also promises to alleviate the burden on the judiciary.
The SC decision on unstamped arbitration agreements has brought a ray of hope for many businesses and individuals in India, especially for small and medium-sized enterprises (SMEs), micro, small, and medium enterprises (MSMEs), startups, and limited liability partnerships (LLPs), who do not pursue their claims or dispute because of inordinate delays and high costs associated in going to Courts. Consequently, lot of legitimate claims and recovery matters remain unsettled making businesses sick and consequently the economy.
With the ruling given by the Supreme Court even if an agreement doesn’t have the proper stamps on it, it can still be used for arbitration, which is a kind of private, quicker, and often less expensive way to resolve disputes. So, for all those people and businesses who have been holding back because of the delays and costs of going to court, this decision means they can now consider arbitration as a viable option. It’s a positive step towards making dispute resolution more accessible and efficient for everyone in India.
Earlier, this legal journey began with a Five-Judge bench ruling in the N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. case, which resulted in a divided opinion. Three judges declared that unstamped arbitration agreements are not valid, while two judges dissented. While hearing a curative petition, the Five-Judge Bench had referred the matter to a seven Judge-bench to hear the judgment relating to unstamped arbitration agreements. The seven-judge Supreme Court bench has now provided a definitive stance: failure to pay stamp duty renders an agreement inadmissible, but it doesn’t render it void. Importantly, stamp duty can be paid later to rectify this issue, while void agreements are beyond repair.
The seven-judge bench emphasized that the interpretation of the Stamp Act should not enable people to circumvent the law, ensuring that the Arbitration Act remains aligned with the Stamp Act. Moreover, they highlighted that the Arbitration Act’s aim is to minimize court involvement in arbitration matters, making it impractical for the court to decide stamping issues under Sections 8 and 11. Instead, objections related to stamping should be addressed by the arbitral tribunal.
Businesses routinely enter into several agreements, including employment contracts, vendor/customer agreements, agency agreements, maintenance contracts, outsourcing contracts, service contracts, consultant engagements, distributor appointments, technical collaborations, investment agreements and many others. Due to the fast-paced nature of business operations, many of these agreements may have overlooked stamping requirements. Seven Judge-Bench of the SC has now opined that while these agreements remain legally valid and enforceable, their inadmissibility as evidence due to stamping issues is a curable defect. And all that it means is – arbitration clauses within agreements lacking proper stamping can still be legally invoked and pursued to seek effective and quick remedy.
Despite clear intentions, the Arbitration and Conciliation Act, 1996, has faced setbacks due to challenges associated with various provisions. While efforts have been made to create an effective alternative dispute resolution mechanism, the journey has encountered hurdles that hinder its full realization. Nevertheless, ongoing reforms and amendments have shown the strong commitment of the Government to enhance the arbitration landscape and ensuring a more robust and efficient system for resolving disputes outside of traditional court proceedings.
The recent Supreme Court decision on unstamped arbitration agreements emphasizes the urgency for the government to act. To avoid further confusion and multiple challenges on account of all existing unstamped arbitration agreements, it is strongly, suggested that the Government should exempt the payment of stamp duty on all such arbitration agreements and with retrospective effect. If at all the Government is concerned with the loss of revenue, it may stipulate payment of stamp duty as part of the duty payable on the final award.
It is also high time that the Government rationalize stamp duty rates across India, which has led to inconsistencies, tax arbitrage, and confusion for businesses and individuals. A harmonized and standardized approach to stamp duty rates would not only promote ease of doing business but also reduce the potential for disputes related to jurisdiction and stamp duty calculations. This is certainly an avoidable burden on the judiciary. Rationalizing stamp duty rates across the country would be a crucial step toward achieving greater transparency, efficiency, and fairness in the taxation of various transactions and instruments.
Going forward all every person doing business or otherwise should consider including an arbitration clause in any commercial agreements. By taking this proactive step, they not only ensure an efficient avenue for dispute resolution but also align with the recent Supreme Court ruling. This could provide a clear and legally sound framework for addressing disputes that may arise during business operations, safeguarding the interests of all parties involved, improving business efficiency, and significantly reducing the burden on the judiciary. The time for stamp duty exemption on arbitration agreements and rationalizing stamp duty across India, is now, and it would be a step in the right direction for India’s business and legal landscape.
(Nitin Potdar is the Corporate Partner at J. Sagar Associates.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)