Bombay High Court on Arbitration Agreement in an Unstamped Instrument

[Mansi M Patel is an Associate at IndusLaw]

The Bombay High Court in Coastal Marine Construction and Engineering Limited v Garware-Wall Ropes Limited (March 2018) observed that in accordance with the amended provisions of section 11 of the Arbitration & Conciliation Act, 1996 (the “Act”), the role of the court to refer a dispute to arbitration is narrow and is limited to examine the existence of an arbitration agreement. Considering the scope of the amended section 11 of the Act, the Bombay High Court distinguished the long-followed principle, laid down by the Supreme Court in SMS Tea Estates v Chandmari Tea Company Pvt. Ltd. (2011) 14 SCC 66, that the courts cannot act upon an unstamped instrument (even to make a reference to arbitration), and held that an unstamped instrument is not a bar to refer the parties to arbitration.

Facts

After disputes arose between Costal Marine Construction and Engineering Limited (“CMCEL”) and Garware-Wall Ropes Limited (“GRL”) with regards to a sub-contract executed between them, CMCEL approached the Bombay High Court under section 11 of the Act. The sub-contract was executed between CMCEL and GRL pursuant to a tender awarded in favour of GRL. There was no dispute between the parties that the sub-contract contained an arbitration clause. The arbitration clause provided that the dispute shall be referred to a sole arbitrator jointly appointed by both the parties. Pursuant to the arbitration clause contained in the sub-contract, CMCEL called upon GRL to agree upon the appointment of a sole arbitrator, but GRL failed to do so. Accordingly, CMCEL filed the application under section 11 of the Act.

Arguments

GRL argued that the relief of appointing the arbitrator cannot be granted by the Court on two grounds. First, the sub-contract is un-stamped therefore by appointing the arbitrator on the basis of the arbitration clause contained in the sub-contract, the Court would be acting upon an un-stamped document. Such order of the Court would be in violation of sections 33 and 34 of the Maharashtra Stamp Act, 1958 (which provide for impounding of un-stamped document and renders it inadmissible in evidence before the Court). In support of this submission, GRL relied upon SMS Tea Estates judgment of the Supreme Court. Second, GRL argued that the invocation of the arbitration clause by CMCEL is premature, as the mandatory pre-arbitral procedure as per the arbitration clause has not been followed.

Judgment and Analysis

The Court dealt with the second issue first and observed that before the invocation of the arbitration clause, CMCEL made several requests to GRL to resolve the issue, but none materialized. Therefore, the invocation of arbitration clause by CMCEL was justified and was not premature.  

Interestingly, before addressing the second issue, the Court dealt with the scope and application of section 11 of the Act and the change in the role of the Court while appointing an arbitrator as introduced by the Arbitration and Conciliation (Amendment) Act, 2015. Notably, Section 11(6-A) of the Act reads as follows:

(6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or subsection (5) or subsection (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.  (emphasis supplied)

The Court observed that on a plain reading of this sub-section it can be seen that the court or judicial authority, while considering an application under section 11 of the Act, shall confine itself to the examination of the existence of an arbitration agreement and that the scope of judicial intervention is only restricted to situations where the court or judicial authority finds that the arbitration agreement does not exist or is null and void. The Court went on observe that that the aforestated position is in consonance with the purpose of bringing about this amendment, as the similar intent has been expressed by the Law Commission in its 246th Report on amendment to the Act. The Court further fortified its stance by placing reliance on a recent judgment of the Supreme Court, viz. Duro Felguera, S.A. v. Gangavaraman Port Limited (2017) where the Supreme Court, after considering section 11 prior to and following its amendment, observed as follows:

From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect-the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple-it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.

Notably, whilst rejecting the objection of GRL concerning the violation of the Maharashtra Stamp Act, the Court observed that it is a settled principle of law that the provisions of the Stamp Act are enacted for the purposes of securing the revenue for the Government and not to arm a dishonest litigant with a technical defence. In support of this stand, the Court placed reliance on the observations of Supreme Court in Hindustan Steel Ltd. v. Messers Dilip Constructions Company (1969).

The Court thereafter dealt with the observations of the Supreme Court in SMS Tea Estates judgment, which authoritatively covers and supports the objection raised by GRL, in respect of the violation of the Stamp Act. In SMS Tea Estates judgment, the Supreme Court held that having regard to section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the instrument, which means that it cannot act upon the arbitration agreement also which is part of the instrument. However, in the present judgment the Court observed that the SMS Tea Estates judgment has lost its efficacy after the amendment to section 11 of the Act. The Court went on to observe that whether the document is properly stamped or not is an issue that can certainly be decided by the arbitrator once the matter is referred to arbitration. It is not as if the arbitrator is powerless to impound the document if found insufficiently stamped and thereafter forward to the appropriate authority for adjudication and recovery of stamp duty. In addition to this, the Court also observed that on going through the relevant clause of the sub-contract the liability to pay the stamp duty was accepted by GRL.  Hence, the stamp duty, if any, has not been paid by the GRL. Therefore, it cannot take advantage of its own wrong and frustrate the arbitration agreement between the parties. Accordingly, the arbitration application under section 11 of the act was allowed.

Conclusion

This judgment of the Bombay High Court clearly expresses the pro-arbitration stand of the Court, furthering the objective of the Arbitration and Conciliation (Amendment) Act, 2015 of ensuring minimum judicial intervention in the arbitral process. The Court has in effect rendered the observations of the SMS Tea Estates ineffective with regard to un-stamped documents containing an arbitration clause. This effectively waives a technical defence often taken by the parties in order to stall and delay the appointment of the arbitrators.

Mansi M Patel

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