India – Contract Cannot Appoint The Arbitrator In Case The Arbitration Clause Is Contained In An Unstamped Or Insufficiently Stamped Agreement: Supreme Court.

8 June, 2019

 

The Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.[1], held that the Court cannot appoint the arbitrator in case the arbitration clause is contained in an unstamped or insufficiently stamped agreement. This judgment overruled the Bombay High Court judgment in Gautam Landscapes Pvt. Ltd. v. Shailesh S. Shah & Anr.[2], wherein the Court held that on an application for the appointment of the arbitrator, the Courts should not await the adjudication of the stamp authorities in case the agreement is unstamped or not adequately stamped and go ahead to appoint the arbitrator.  

 

Factual Background

 

Garware Wall Ropes Ltd. (Appellant) hired Coastal Marine Constructions & Engineering Ltd. (Respondent) for installation of a geotextile tubes embankment with toe mound at village Pentha in Odisha for protection against coastal erosion. Parties entered into a sub-contract agreement which contained an arbitration clause. Disputes arose between the parties, the Appellant terminated the sub-contract.

Respondent sent a notice for appointment of sole arbitrator. Appellant replied stating that the appointment is unacceptable as invocation of arbitration in pursuance of the agreement is premature. Respondent, therefore, filed a petition for appointment of the arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (the Act) before the Bombay High Court. The petition was allowed by the Court and sole arbitrator was appointed to adjudicate upon the arisen disputes between the Parties.

 

Aggrieved by the order of the Bombay High Court, Appellant filed an appeal in the Supreme Court. The question raised in the appeal was as to what is the effect of an arbitration clause contained in an unstamped or inadequately stamped agreement.

 

Appellant’s contentions

 

• Appellant based its arguments on the merits of the judgement passed in the case of in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[3] e case, Section 33 and 35 of the Indian Stamp Act, 1899 (similar to Section 33 and 34 of Maharashtra Stamp Act, 1958) mandates the judicial authorities to impound such instruments, which cannot be admitted in evidence or cannot be acted upon until duly stamped. Thus, the agreement containing the arbitration clause should be impounded before appointment of the arbitrator.
• It was argued that the 246^th Law Commission Report which led to the amendment contained in Section 11(6A) of the Act does not disturb the precedence set by the SMS Tea Estates[4]. He articulates that as a result of operation of law, an instrument is to be impounded, upon which stamp duty and penalty (if any) are then to be paid, must be followed as Section 11(6A) does not seek to interfere with the Indian Stamp Act, 1899, at all.

 

Respondent’s contentions

 

• Respondent argued that the case at hand should be adjudged according to the provisions of Arbitration and Conciliation (Amendment) Act, 2015. The object of the Arbitration and Conciliation (Amendment) Act, 2015, in introducing Section 11(6A), was to confine the Court hearing the Section 11 application to examination of the ‘existence’ of an arbitration agreement. Respondent stated that the provisions of the Indian Stamp Act, 1899, are a fiscal measure intended merely to collect revenue and, if at all, will question the ‘validity’ of an arbitration agreement and not its ‘existence’.
• Further, the Respondent’s counsel argued that an arbitration agreement once in writing, is independent of the agreement in which it is contained. Hence, when a Court hears an application under Section 11 of the Act, it is just to appoint an arbitrator for furtherance of justice. The Court should not engage in a mini-trial at the Section 11 stage, impounding the agreement that contains an arbitration clause.
• Respondent also emphasised upon Section 11(13) of the Act, which states that application for appointment of the arbitrator ought to be disposed-off within a period of 60 days from the date of service of the notice. This would be impossible to achieve if questions relating to stamping were to be decided at the Section 11 stage, thereby defeating the object of the amendment.
• Another argument that came up was that it is the Appellant who is to pay stamp duty under the Indian Contract Act, 1872. By impugning the agreement, it will end up in him taking advantage of its own wrong and benefitting from his own mistake.

 

Judgement

 

The Supreme Court ordered that while proceeding with the Section 11 application, the High Court must impound the instrument which has not borne stamp duty. It must hand over the agreement to the authority under the Maharashtra Stamp Act, 1958, who will then decide issues relating to payment of stamp duty and penalty (if any) preferably within a period of 45 days.

 

Once that is done, any of the parties can bring the instrument to the notice of the High Court for the hearing. Consequently, an arbitrator can be appointed for the disposal of the Section 11 application. The arbitrator can then proceed to decide the dispute within the time frame provided under Section 29A of the Act.

 

The Supreme Court relied heavily on the rationale applied in the case of SMS Tea Estates[5]. The logical inferences that helped Supreme Court construe the judgement are as follows:

 

• When a contract or instrument is voidable at the option of a party (as for example under Section 19 of the Contract Act, 1872), the invalidity that attaches itself to the main agreement may also attach itself to the arbitration agreement. It so happens if the reasons which make the main agreement voidable exist in relation to the making of the arbitration agreement also.
• Therefore, the Court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/document is duly stamped. If not, Section 35 of the Indian Stamp Act, 1899, bars the said document being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The Court should then proceed to impound the document under Section 33 of the Indian Stamp Act, 1899, and follow the procedure under Sections 35 and 38 of the Indian Stamp Act, 1899. By doing so, the Supreme Court or High Court is only giving effect to the provisions of a mandatory enactment which, no doubt, is to protect revenue. It is important to remember that the Indian Stamp Act, 1899, applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence.

• When an arbitration clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law. Under the Indian Stamp Act, 1899, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the Act and Section 2(h) of the Contract Act, 1872, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law.

 

Our Analysis

 

A quick look at the object of the Indian Stamp Act, 1899, will convince one to consider the provisions of the Indian Stamp Act, 1899, as a fiscal measure, the principal object of which is to secure revenue for the State. The object of the enactment is not to enable parties to raise technical objections to meet the case of their opponent.[6]

 

On the contrary, the whole object and scheme of the Arbitration and Conciliation Act was to secure an expeditious resolution of disputes.[7] Moreover, the purpose of the 2015 amendment was to facilitate and encourage alternative dispute mechanism, especially arbitration, for settlement of disputes in a more user-friendly, cost effective and expeditious manner since India is committed to improve its legal framework to facilitate disposal of cases.

 

As per sub-section (6-A) of Section 11 of the Act, the power of the Court has now been restricted only to examination of the existence of an arbitration agreement. This is also followed in the judgments of the Supreme Court in SBP and Co. v. Patel Engg. Ltd.[8] and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.[9] and was even reiterated in the judgement of Duro Felguera v. Gangavaram Port Ltd.[10]

 

The precedence set by the said judgement will only open a flood-gate of litigation, allowing the parties to take objection in order to delay the arbitral proceedings. This will adversely affect the pro-arbitration regime and disallow the system from a speedy, hassle free dispute resolution mechanism.

 

The entire exercise will prove to be more cumbersome in situations when either of the parties or even both the parties are of foreign origin with the arbitration seated in India. Moreover, where the unstamped agreement seated in India is between an Indian party and a foreign party then the foreign party in desperation will end up paying the opposition party’s stamp duty obligations and incur yet additional time and money for the disposal of justice. All of this will hamper the image of India aiming to become  a hub for international commercial arbitration.

 

In case this judgment is applied to applications for interim measures under Section 9 of the Act, then the parties seeking urgent remedy will have to get the document impounded first before the Court adjudicates upon their substantive rights. This will make applications under Section 9 of the Act lengthy and may also make the Section 9 proceedings unfruitful.

 

This issue of an arbitration clause being in an unstamped or insufficiently stamped agreement can be resolved by allowing the parties to impound the documents after the Court appoints the arbitrator under Section 11 of the Act. No prejudice would be caused to any party if the arbitrator were to commence the arbitration and if at all desirous, ask the parties to impound the documents containing the arbitration clause thereafter. This will also ensure that none of the parties are benefitted from their own wrong and safeguard India’s image of being a pro-arbitration jurisdiction.

 

In alternative, the Court should clarify that this judgment will only apply to current and future agreements where the arbitration has not commenced. Such clarification will avoid any further delays in the arbitration process by not allowing the parties to raise objections regarding the stamping of agreements in front of the court or the arbitrator.

 

In most of the jurisdictions, there is no requirement of payment of stamp duties on commercial contracts. Therefore, in a matter of international commercial arbitration, where one of the parties is from foreign jurisdiction, the obligation to pay the stamp duty shall be on the Indian party. Further, the legislature should put a uniform stamp duty in all the commercial agreements or should remove any stamp duty where the agreement includes the possibility of international commercial arbitration.

 

This article was first published in Mondaq here.

 

 

For further information, please contact:

 

Krrishan Singhania, Managing Partner, Singhania & Co

mumbai@singhanialaw.com

 

[1] Civil Appeal No. 3631 of 2019.