Supreme Court on Arbitration Agreement in an Unstamped Instrument

[Mansi Patel is a Partner, SRA Consulere, Advocates]

In Garware Wall Ropes v Coastal Marine Constructions & Engineering Ltd (10 April 2019), the Supreme Court held that an arbitration agreement in an unstamped instrument does not exist in law; thus it cannot be acted upon by courts for the appointment of an arbitrator under section 11 of the Arbitration and Conciliation Act, 1996. By this judgment, the Supreme Court has reinforced the principles laid down in SMS Tea Estates v Chandmari Tea Company Pvt. Ltd., (2011) 14 SCC 66, which held that the courts cannot act upon an unstamped document.

Brief Background

Before the matter had reached the Supreme Court, Coastal Marine Construction and Engineering Limited (‘CMCEL’) had approached the Bombay High Court under section 11 of the Arbitration Act. The Bombay High Court took note of the fact that the scope of section 11 of that legislation, after the amendment, has been narrowed; hence the court’s role following the amendment is limited to only examining the existence of an arbitration agreement. Accordingly, the Bombay High Court had held that an unstamped instrument is not a bar to refer the parties to arbitration. Assailing this order of the Bombay High Court, Garware Wall Ropes Limited (‘GRL) approached the Supreme Court. For detailed discussion on the judgment passed by the Bombay High Court, please refer to my earlier post on this Blog.    

Judgment and Analysis

The questions which the Supreme Court had to decide were as follows:

– The introduction of section 11(6A) by Arbitration and Conciliation (Amendment) Act, 2015 has removed the basis of SMS Tea Estates. In view thereof, whether the court at the stage of hearing of a section 11 application is required to impound the instrument?

– Also, whether the court can proceed to appoint an arbitrator on the basis an unstamped instrument, and whether it is the arbitrator who later can impound the instrument?

Notably, the Supreme Court in SMS Tea Estates had held that where an arbitration clause is contained in an unstamped agreement, the provisions of Indian Stamp Act, 1899 require the judge hearing the section 11 application to impound the agreement, before proceeding to appoint the arbitrator.

The Supreme Court now held that the introduction of section 11(6A) by Arbitration and Conciliation (Amendment) Act, 2015 was necessitated because of the two judgments of the Supreme Court: SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267. These judgments significantly broadened the scope of inquiry under section 11 of the Arbitration Act. Thus, in a section 11 application, parties were free to raise various preliminary issues, which did not relate to the existence of an arbitration agreement, and which issues could otherwise have been decided by the arbitrator under section 16 of the Arbitration Act.

In view thereof, in the 246th Law Commission Report, recommendations were made that these two judgments require reconsideration; as a result, section 11(6A) of the Arbitration Act was introduced. Presently, therefore, the court while considering an application under sections 11(4) to 11(6) is required to confine itself to the examination of the existence of arbitration agreement and to leave all preliminary issues to be decided by the arbitrator. However, neither in the Statement of Objects and Reasons of the Amendment Act nor in the Law Commission Report is there any mention of SMS Tea Estate. Therefore, it is clear that the introduction of section 11(6A) does not in any manner deal with or get over the basis of SMS Tea Estate.

The Supreme Court held that an analysis of section 11(6A) would show that when the court considers an application under sections 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and then see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. It is important to remember that the Indian Stamp Act 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 to give it an independent existence.

The Supreme Court further observed that 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. However, under the Indian Stamp Act, an agreement does not become a contract, i.e. it is not enforceable in law unless it is duly stamped. Therefore, it is clear that the arbitration clause that is contained in a contract would not ‘exist’ as a matter of law until the contract is duly stamped. In support of this proposition, the Supreme Court had placed reliance on United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors., 2018 SCC OnLine SC 1045. The Supreme Court also rejected the submission of CMECL that the obligation to pay the stamp duty was that of the GRL, and therefore GRL cannot take advantage by observing that the provisions of the Indian Stamp Act are mandatory provisions of law.

Thus, to conclude, the Supreme Court harmoniously interpreted the sections 33 and 34 of the Maharashtra Stamp Act, which is a general statute insofar as it relates to safeguarding revenue, and section 11(13) of the Arbitration Act, which applies specifically to the speedy resolution of disputes by appointment of an arbitrator expeditiously. It was held that while proceeding with the section 11 application the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Maharashtra Stamp Act, who will then decide issues qua payment of stamp duty and penalty (if any) as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the instrument.

As soon as stamp duty and penalty (if any) are paid on the instrument, any of the parties can bring the instrument to the notice of the High Court, which will then proceed to hear and dispose of the section 11 application expeditiously. It was observed that this would also ensure that, once an arbitrator is appointed, the arbitrator can then proceed to decide the dispute within the time frame provided by section 29A of the Arbitration Act.

Conclusion

In view thereof, the Supreme Court has reinstated the position laid down in SMS Tea Estates, and hence unstamped or insufficiently stamped documents cannot be acted upon to appoint an arbitrator. However, it is pertinent that while deciding the issue in the present judgment, a reference was made to the recent full bench judgment of the Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah (4 April 2019), where the Court has held the following:

– A court can entertain and grant any interim or ad-interim relief in an application under section 9 of the Arbitration Act, even though the document containing the arbitration clause is unstamped or insufficiently stamped.

– Because of section 11(6A) of the Arbitration Act, before considering and passing final order under section 11(6), it is not necessary for the courts to await adjudication by the stamp authorities, in case the document is objected to or is not adequately stamped.

Given the present judgment, the second finding of the Bombay High Court stands rejected. However, it will be a matter of argument that, in view of the observations made by the Supreme Court in the present judgment (especially the observation that the arbitration clause that is contained in contract would not ‘exist’ as a matter of law until the contract is duly stamped) the first finding of the Bombay Court also stands rejected.

Mansi Patel

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