India – Invoking Arbitration Agreements In Unstamped Documents – A Case Comment On Garware Wall Ropes V. Coastal Marine Constructions & Engineering.

Introduction 

 

There has been constant confusion with respect to admissibility of unstamped documents. Section 35 of the Indian Stamp Act, 1899 (“Stamp Act”), provides that an unstamped or inadequately stamped document is inadmissible in evidence. Applying Section 35 of the Stamp Act, the Supreme Court in Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd [1](“Garware Judgement”) held that an arbitration agreement contained in an unstamped contract cannot be taken in evidence and invoked. It was further held that, in case the Court is faced with an unstamped document, it must proceed to impound the same, in accordance with the provisions of the Stamp Act; only once such an impounding is done — the deficit stamp duty and penalty paid, can the Court proceed on the basis of the arbitration agreement.

 

The Stamp Act requires stamp duty to be collected on the execution of certain documents. The primary intention behind this is to generate revenue for the state. While the Apex Court may have upheld this revenue generating objective of the state, it is argued that the judgement takes away from the viability of conducting arbitrations in India and is being perceived as a hindrance to invoking arbitrations.

 

Differential application of the principle of severability

 

The Garware Judgement primarily relies upon the case of SMS Teas Estates Pvt. Ltd. v, Chandmari Tea Co Pvt. Ltd.[2] (“SMS Tea Estates Judgement”), where the issue was whether an arbitration clause in an unstamped and unregistered lease deed could be acted upon. SMS Tea Estates Judgement held that the non-registration of the lease deed did not affect the invocation of an arbitration agreement. The Court explained that a deed of transfer containing an arbitration clause was to be perceived as two separate contracts rolled into one – i.e., an agreement for registration of transferring the immovable property and an “independent” arbitration agreement for resolution of disputes. Non-registration would only affect the first agreement or the agreement to transfer the immovable property – it had no bearing upon the agreement to resolve disputes. In SMS Tea Estates Judgement, the Court came to this conclusion upon a conjoint reading of provisions of Registration Act, 1908 (“Registration Act”) and Arbitration and Conciliation Act, 1996 (“Arbitration Act”). These clauses are — Section 16(1) of the Arbitration Act, which provides that an arbitration clause is to be looked at as an independent agreement from the substantive contract; and the proviso to Section 49 of the Registration Act which provides an exception that allows non-registered instruments affecting immovable property be served as evidence of collateral transactions before the court of law.

 

However, while deciding whether the non-stamping of the lease deed affected the invocation of the arbitration agreement, SMS Tea Estates Judgement held to the contrary. It held that the arbitration agreement in an unstamped document could not be acted upon as Stamp Act does not contain an exception similar to that contained in Section 49 of the Registration Act. This reasoning has been squarely followed by the Garware Judgement.

 

Upholding parties’ intent to arbitrate 

 

The Court in Garware Judgement had the opportunity to expand the application of the principle of severability to uphold the parties’ intent to arbitrate. The raison d’être for the principle of severability is to ensure that the defects that threaten the existence of the substantive contract (like: lack of consent, improper signature, etc.) do not impede upon the invocation of arbitration agreement. The very purpose of severability is thus to take care of situations akin to the one that arose in the Garware Judgement.

 

Second, the effect of non-registration (Section 49, Registration Act), versus the effect of non-stamping (Section 35, Stamp Act) of instruments is generally construed to be the same, i.e., the transaction does not get completed and the document cannot be served as evidence in courts. The conclusion of the Court in the Garware Judgement made the principle of severability apply differently to Registration and Stamp Act, when the effect of non-registration and non-stamping in essence is the same.

 

Lastly, the stamp duty is levied on and varies according to the type of document – such as, a shareholder’s agreement, a lease, etc., and has no bearing on the contents or rights and obligations, including the right to resolve disputes, enshrined in the agreement.[3] Thus, the Court could have applied the doctrine of severability to separate and enforce the right to resolve disputes, thereby allowing the arbitration clause to be invoked.

 

Specifically with respect to interim relief applications, it should be noted that, civil courts have granted interim relief despite there being a deficit in payment of stamp duty, reasoning that it may be paid later at the stage of final hearing.[4] This principle could have been squarely applied for applications of interim relief in arbitration as well. The Garware Judgement appears to create more hindrance in the arbitration process than parties would otherwise have, if a suit was filed.

 

Does this precedent have other consequences?

 

The Court’s holding in Garware Judgement that the arbitration agreement in an unstamped document cannot be acted upon was vis-à-vis a Section 11 (Arbitration Act) application, i.e., the ultimate consequence of the judgement was only that an arbitrator could not be appointed until the unstamped agreement in question was impounded. However, if the same rationale is applied to a Section 9 or interim relief application, and the interim relief is also not granted, the non-grant may cause irreversible damage to the applicants. In this regard, the case of Gautam Landscapes Pvt. Ltd. v. Shailesh Shah[5] [“Gautam Landscapes Judgement”], though declared bad in law by Garware Judgement, is to be noted, since it allowed an interim relief application, despite the arbitration agreement being in an unstamped document.

 

Ideally, there should be a balance between laws of arbitration and procedural issues of stamping to ensure that arbitration as a mode of dispute resolution is promoted, while at the same time the revenue of the state is not compromised. The Garware Judgement attempts to balance this. It prescribed a timeline to resolve the issues related to stamping – 45 days from the date the stamping authority received the defective instrument. However, this timeline has been argued to be unfeasible as the process of impounding involves an adjudication of several substantive issues by stamping authorities, which may take longer than 45 days, especially when the orders passed are appealable in nature and subject to revision.

 

It may be plausible to argue that Gautam Landscape Judgement’s reasoning for granting the interim measure struck an ideal balance between arbitration law, stamping law and equitable the rights of litigants.

 

First, with respect to the stamping law, it was held that the defect of non-stamping can be cured at any stage of the proceeding and thus revenue can be secured later. For instance, say, an interim relief is granted and the case is referred to the arbitrator, the arbitrator can take objection to non-stamping and send the parties for impounding at that stage, if necessary.[6] Second, with respect to arbitration law, it was held that the right to get interim relief under Section 9 does not arise out of the contract, but a right guaranteed by statute to protect the rights and subject matter under adjudication. Third, with respect to equitable rights of litigants, it was held that the issue relating to stamping may be dragged before the revenue authorities. In such a situation, not granting interim relief, till the adjudication of stamping issues, may be too drastic and may cause severe hardship to the parties. In fact, post the Garware Judgement, too, there have been decisions which, on the basis of equity of parties, have agreed to invoke arbitration agreement for granting interim relief and extending the mandate of arbitral tribunal.[7]

 

The approach taken by Gautam Landscapes Judgement would allow the kick-starting of the arbitration process, while at the same time ensuring that stamp duty is not evaded. In fact, this was the approach undertaken by several Delhi High Court cases, which were over-ruled by the Garware Judgement. [8]

 

The Way forward 

 

Section 5 of the Indian Arbitration Act provides that judicial authority cannot intervene in arbitration process unless provided by the Act itself. Over the years, the legislature has been trying to systematically reduce such judicial interference by making amendments to the Act. The first such effort was by legislature by virtue of the 2015 Amendments, which introduced Section 11(6A), Arbitration Act, to clarify that the power to appoint an arbitrator was an administrative power given to courts, with limited scope of judicial interference in determining the existence of the agreement. In the 2019 Amendments, this limited scope has also been done away with. The entire process of appointing an arbitrator has been delegated to an arbitral institution.

 

While after the 2015 Amendment, both the arbitrators and the court could decide on the question of existence of the arbitration agreement; after the 2019 Amendment, since an institution is to appoint an arbitrator, and not the courts, it remains ambiguous as to which entity has the power to determine the existence of arbitration agreement – the Courts or the arbitral institution or the arbitrator.

 

If the questions regarding existence of arbitration agreement can only be determined by the arbitrator now, the legislature has expanded the nature of powers of an arbitrator, thus expanding their kompetence-kompetence. The 2019 Amendments would then provide their support to the view that the arbitrators, and not the courts, should ultimately scrutinise all objections at the stage of appointing an arbitrator, including the ones relating to stamping. Thus, it remains to be seen what will be the consequence of removal of Section 11(6A) of the Arbitration Act, which restricted the judicial enquiry into arbitration clauses to confine itself to examination of existence of arbitration agreement.

 

The Gautam Landscapes Pvt. Ltd. v. Shailesh Shah case has reached the Supreme Court.[9] It is expected that the Supreme Court will clarify on issues related to non-stamping, invoking an arbitration agreement and addressing the inconsistencies created with the Garware judgement. It would be helpful if it also sheds some light on how the removal of Section 11(6A) would affect the stamp duty issues.