Supreme Court on Unstamped Arbitration Agreement: A Further Analysis

[Rahul Kanoujia and Venkata Supreeth K are student at Gujarat National Law University]

The case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Co. Ltd, decided by the Supreme Court in April 2019, involved an application made by Coastal Marine under section 11 of the Arbitration and Conciliation Act, for the appointment of a sole arbitrator in response to certain disputes arising as a result of termination of the sub-contract by Garware. The sub-contract, which contained an arbitration clause, was unstamped according to the provisions of sections 33 and 34 of the Maharashtra Stamp Duty Act. The said agreement, therefore, had no backing in law and was not enforceable. The issue before the Supreme Court was whether the court, in the exercise of its powers, was competent to deviate from the express restriction placed by the 2015 amendment to section 11, namely sub-section 6(A), and impound the unstamped contract upon which the parties have grounded their request for the appointment of an arbitrator.

Sub-section 6(A) of section 11 states:

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

Position of Law on Section 11 prior to the 2015 Amendment

In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., the Court held that, where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 require the judge hearing the section 11 application to impound the agreement and ensure that stamp duty and penalty (if any) are paid thereon before proceeding with the section 11 application. The question is whether section 11(6A), which was introduced by way of the Arbitration and Conciliation (Amendment) Act, 2015, has removed the basis of this judgment, such that the stage at which the instrument is to be impounded is not by the judge hearing the section 11 application, but by an arbitrator who is appointed under section 11, as held in the impugned judgment.

The case of SBP Co Ltd. v. Patel Engineering established the position in respect of handling applications for the appointment of arbitrators. Prior to this judgment, it was established that courts act under an administrative capacity while appointing arbitrators under the provisions of section 11. In SBP Co. Ltd, the seven-judge bench of the Supreme Court reversed the position, conferring a judicial role upon the courts in exercise of these powers. It was thus within the powers of the court to preliminarily decide its own jurisdiction to entertain the arbitration petition and also the existence of a live claim, i.e., one not hit by limitation.

Subsequently, in National Insurance Company Limited v. Boghara Polyfab Private Ltd., an attempt was made to delineate and categorize issues as per the stage at which the application was made, vis-à-vis:

(i) issues which the Chief Justice or his designate is bound to decide, e., decisions on the jurisdiction and existence of a valid arbitration agreement,

(ii) issues which he can also decide i.e. whether the claims made by the parties are tenable, and

(iii) issues which should be left to the arbitral tribunal to decide which include the substantive aspects and merits of the dispute which has been strictly kept out of the court’s purview at a section 11 application stage.

Scope of Judicial examination of Applications Made to Courts under Section 11 of the Arbitration Act, 1996 post 2015 Amendment

Sub-section 6(A) of section 11 of the Arbitration and Conciliation Act was inserted by the 2015 amendment to the Act. The sub-section pertains to the adjudication of the Supreme Court or the High Court, as the case may be, of the existence of an arbitration agreement, and the provision states that the court shall strictly confine itself whenever an application with respect to the appointment of an arbitrator is challenged by application to the court with competent jurisdiction.

Clause V of the statement of objects and reasons for the 2015 Amendment reads that the aim of the courts must be to dispose applications made under section 11 of the Act in an expeditious manner in not more than 60 days from the date of the service of notice to the parties. In this context, section 11 6(A) has a specific purpose of limiting the court’s concern to a single issue of determining whether there exists a valid arbitration agreement or not.

In Duro Felguera, S.A. v. Gangavaram Port Ltd, the Court has highlighted the object and intent of the 2015 amendment, which is to limit the scope of judicial authority as exercised by the courts following the law laid down in National Insurance Co., which had opened a wide door to judicial activity. This position continued till the amendment brought about in 2015. After the amendment, all that the courts needed to examine was whether an arbitration agreement exists, and nothing more. The legislative policy and purpose were essentially to minimize the court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in section 11(6-A) ought to be respected.

The scope of the 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. In so far as the nature of intervention is concerned, it is recommended that in the event the court or judicial authority is prima facie satisfied against the argument challenging the arbitration agreement, it shall appoint the arbitrator and/or refer the parties to arbitration, as the case may be. The amendment envisages that the judicial authority shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void.

According to the settled position of law, the court cannot make a ruling on the appointment of an arbitrator upon application under section 11 of the Act, until the court satisfies itself with the existence of a valid and enforceable arbitration agreement. In the case of unstamped contracts, the arbitration agreement is not treated as an independent entity, as established in the Garware judgment from the remainder of the contract, and for all purposes is not a valid contract enforceable by law. Hence in such cases, unless proven otherwise the court will hold the presumption that there exists no valid arbitration agreement, and in furtherance of the statutory mandate under sub-section 6A of section 11 of the Act, shall dismiss the application made for appointment of an arbitrator.

Harmonious Construction of Section 11 6(A) of Arbitration Act and Section 33 of the Maharashtra Stamp Duty Act

The Maharashtra Stamp Duty act provides for stamping of all deeds and conveyancing documents, as the same is the fiscal objective laid down by the legislation, and has further tasked with the courts to impound those deeds and agreements which are not in conformity with the provisions of the Stamp Duty Act. Such an impounding is to direct the parties in default to the concerned stamp duty authority to pay the outstanding value along with any applicable penalty. In this case, the court held that those deeds in want of stamping are to be impounded for a period not more than 45 days, so as to maintain the 60 day deadline laid down by the Arbitration Amendment act of 2015, to maintain a section 11 application.

In interpreting the existence of a valid arbitration agreement in Garware, the Court rejected the argument that an arbitration agreement is distinct from the remainder of the contract, and held that by virtue of non-fulfillment of stamp duty requirements, there exists no agreement enforceable by law and hence no arbitration agreement. The same has been held by the Court in exercise of its statutory authority under section 11(6A), the Court confined itself to ascertaining whether there exists a valid arbitration agreement, and has not delved into the merits of the case.

The Court hinged its reasoning upon the fact that the ratio of SMS Tea Estates has not been discussed or relied upon in the 246th Law Commission report or the 2015 Amendment Act, and therefore, the position of law established in that case is unaffected by the operation of section 11(6A). The Court observed that the Maharashtra Stamp Act mandated the impounding of any instrument that is unstamped to ensure that the stamp duty and penalty (if any) is paid on such instrument before it is acted upon. At the same time, the Court observed that the Amendment Act had introduced a time limit of 60 days to dispose of an application under section 11 of the Act.

It is pertinent to note 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 so as to give it an independent existence, as it was contended by the Coastal Marine.

Analysis and Conclusion

The Arbitration and Conciliation (Amendment) Bill, 2018 proposes to have the courts designate arbitral institutions for appointing arbitrators and proposes the omission of section 11(6-A) of the Act. If the Bill does come into effect, it is unclear as to what procedure an appointing authority would follow in case of an arbitration agreement contained in an unstamped contract.

The detailed discussion in light of the decisions provided by Supreme Court in this case has three key takeaways: (i) the court cannot appoint the arbitrator unless, the agreement which prescribes the arbitration clause is sufficiently stamped; (ii) the court must impound the agreement on which adequate stamp duty has not been paid and it over to the relevant stamp authority for rectification; (iii) the stamp authorities should resolve the issues as soon as possible, and preferably within a period of 45 days. 

Rahul Kanoujia & Venkata Supreeth K

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