Supreme Court Holds that Unstamped Arbitration Agreement is Not Enforceable

In an order dated April 25, 2023, in M/s NN Global Mercantile Private Limited vs. M/s Indo Unique Flame Ltd. & Ors. (CA No. 3802-03/ 2020), the Supreme Court held that the arbitration clause in an unstamped agreement is not enforceable as per provisions of the Indian Contract Act, 1872.

It was opined by Justice KM Joseph, Justice Aniruddha Bose and Justice CT Ravikumar that an arbitration agreement which is not duly stamped as per the Indian Stamp Act cannot be acted upon as per section 35 of said Act. On the other hand, the minority judgment given by Justice Ajay Rastogi and Justice Hrishikesh Roy highlighted that non-stamping or insufficient stamping is a curable defect which does not render the arbitration agreement unenforceable.

On account of certain disputes, Karnataka Power Corporation Ltd. (KPCL) invoked the bank guarantee provided by the first respondent, M/s Indo Unique Flame Ltd. (under the principal contract or work order dated September 18, 2015, for beneficiation/ washing of coal) which then invoked the bank guarantee furnished by the appellant, M/s NN Global Mercantile Private Limited under the sub-contract or work order dated September 29, 2015, for coal transportation, handling, etc.

The appellant filed a civil suit before the Commercial Court, Nagpur contending that the bank guarantee was fraudulently invoked since no work was allotted under the sub-contract and no loss was suffered by the first respondent. The court ruled that a status quo has to be maintained with regard to the bank guarantee’s enforcement. Further, in 2018, the application requesting a reference to arbitration filed by the first respondent (as per the arbitration clause contained in the sub-contract) was rejected by the Commercial Court, Nagpur.

A writ petition was filed before the Bombay High Court challenging the order of the Commercial Court. The court decided that the application for arbitration was maintainable and the Commercial Court’s order was set aside. The present case has been filed before the Supreme Court and one of the issues raised was whether the arbitration clause contained in the sub-contract or work order dated September 29, 2015, is enforceable considering that the said work order is unstamped.