Arbitral References under Unstamped Agreements: The Issues with InterContinental v Waterline

[Karan Kamath is an Advocate, Bombay High Court and an LLM candidate at the University of Edinburgh. The author would like thank Mr Rohan Deshpande, Counsel, Bombay High Court, Barrister (unregistered), Inner Temple, and MCIArb, for comments on an earlier draft]

In a section 11(6) application, a three-judge bench of the Supreme Court recently dealt with the vexed issue of arbitration agreements contained in unstamped instruments. The Court in InterContinental Hotels Group (India) Pvt Ltd v Waterline Hotels Pvt Ltd allowed that application, although the general issue on enforceability of such agreements has been referred to a Constitution Bench. The decision is generally pro-arbitration in its approach, but raises some issues about the stamping question.

The facts in the case were straightforward. InterContinental Hotels Group (“ICHG”) initially invoked arbitration and approached the Singapore International Arbitration Centre. Waterline Hotels (“WH”) refused submission to arbitration, leading to an application being filed before the Supreme Court. Initially, WH did not challenge the application on the stamping ground. Subsequently, however, the ground was raised citing Garware, a decision of a Division Bench of the Supreme Court holding such agreements unenforceable. Without prejudice to its case, ICHG paid the duty under the Karnataka Stamp Act that it thought was applicable and “to establish its bona fide”. Additionally, to avoid an argument on the adequacy of the same, ICHG paid the maximum penalty prescribed under that Act as well. WH challenged the stamp duty payment. It contended that parties cannot self-certify and self-adjudicate duties and penalties and that the same amounts to incorrectly assuming powers under the Act.

The stamping question

Arbitration agreements in unstamped documents have been subject of a controversy for long. For the sake of brevity, three judgments are relevant here. First, a Division Bench in Garware held that such agreements cannot be acted upon unless the underlying document is dealt with under the relevant Stamp Act and stamp duty paid accordingly. Thereafter, a three-judge bench in Vidya Drolia (while not dealing with the stamping issue specifically) quoted Garware with approval. Finally, another three-judge bench in NN Global doubted the ruling in Garware, principally citing the principle of separability. But it could not overrule Garware, given the coordinate strength of the Vidya Drolia bench. Instead, it sought a reference to a Constitution Bench to resolve the controversy.

In InterContinental, the Court understandably could not approach the question once again. Nonetheless, it opined that while the Constitution Bench reference was pending, arbitration applications could not sit unaddressed. This pragmatic approach is laudable and unquestionably pro-arbitration. But to consider the application further, the Court borrowed from Vidya Drolia that “subject matter arbitrability cannot be decided” at the tribunal appointment stage “unless it’s a clear case of deadwood”. It is unclear why the Court would opt for this proposition. Subject matter arbitrability is a question about whether the subject matter of the dispute is capable of being resolved by arbitration. Contrastingly, the issue here is whether applications should be referred to arbitration at this stage, given a Constitution Bench reference is pending. Nonetheless, the ‘deadwood’ metaphor was applied to the stamping question: that until the NN Global reference is decided courts should allow arbitrations “unless the issue before the Court patently indicates existence of deadwood”.

Applying its formulation to the facts at hand, the Court appointed an arbitrator noting two reasons. Firstly, WH had given a warranty in the underlying document that the contract would be legally valid in India. This makes the stamping question not ‘deadwood’, and whether WH is estopped from raising the same due to the warranty can be decided “at a later stage”. It is necessary to note that the Court relied on a warranty provided by WH in the unstamped instrument. The Court should not prima facie act upon an unstamped instrument. On the other hand, if it can still rely on such terms – then it is unclear why it cannot simply rely on the arbitration agreement itself and confirm its ‘existence’ as is required under the Arbitration and Conciliation Act. In fact, what NN Global argues is that the unstamped nature of the underlying instrument does not prevent reference to arbitration as long as the arbitration agreement’s existence can be observed.

According to the Court, the other reason to appoint an arbitrator was that the parties had competing arguments as to the nature of the document under the Stamp Act. This question demands a detailed answer that the Court should not provide in a section 11(6) application. This was distinguished from NN Global, where the document was unstamped. Here, ICHG had paid duty without prejudice, and only the correctness of such payment had to be adjudicated. Thus, the matter was referred to arbitration “to adjudicate the issues”.

‘Deadwood’ issues

Although the Court’s efforts to enable arbitrations pending the NN Global reference is understandable, the reasoning in InterContinental raises some interesting questions. At the outset, however animative the metaphor, what a ‘deadwood’ issue is in the stamping question is unclear. According to Vidya Drolia, it means issues that where arbitrability is “clearly barred”. In NN Global, the bench obviously did not refer the parties to arbitration pending reference to the Constitution Bench. According to InterContinental, that is the correct approach in cases of unstamped documents. But if some duty has been paid, and the correctness of that payment is under question, the issue does not clearly bar arbitration.

The Stamp Act makes no prima facie distinction between unstamped and insufficiently stamped instruments. Documents not “duly stamped” can be impounded and adjudicated upon. The quoted term means stamping with amount not less than the proper one [See, for example, section 2(11), the Stamp Act, 1899 and section 2(h), the Maharashtra Stamp Act, 1958]. It is unclear how NN Global is distinguished on that ground. In any case, the question relates to the nature of the document insufficiently stamped (and should be decided by the arbitrator). Importantly, the Constitution Bench reference would impact either situation similarly. In fact, if the ‘deadwood’ approach is continued, the reference would have to provide for arbitrations enabled in the interim. At the same time, because this approach lacks clarity, going forward, parties merely have to pay namesake duties with penalties to defeat the stamping argument. Ideally, whether the facts relate to an unstamped or an insufficiently stamped instrument, Stamp Act adjudication should be left to the arbitrator.

This issue arises majorly as Vidya Drolia deals with arbitrability while NN Global and Garware are about the stamping question. Technically, Vidya Drolia’s approval of Garware should not have validated the latter’s proposition on the stamping question. However, NN Global read the same as Vidya Drolia’s ratio. Further, there are at least two three-judge judgments in Black Pearl Hotels and Dharmaratnakara Rai Bahadur which confirm an earlier Division Bench decision in SMS Tea Estates. The SMS Tea Estates judgment ruled similar to Garware, but was expressly overruled by NN Global, as the aforesaid three-judge decisions were not brought to its attention. The Court in InterContinental should have ideally considered those two judgments while ruling on its ‘deadwood’ standard. Although relevant for ‘existence’ and ‘validity’ issues, borrowing directly from Vidya Drolia raises more questions than it answers.

The other question raised by InterContinental is that whether a court can delegate the stamping question to the arbitrator in a Section 11 application? The Bombay High Court preferred this approach pre-Garware (by a Full Bench in Gautam Landscapes and by a single judge in Garware itself) noting that arbitrators were empowered to adjudicate under the Maharashtra Stamp Act. However, the Supreme Court in NN Global held that the appointing court under Section 11 is the proper authority. As the author (with a co-author) has previously pointed out, this approach in NN Global would potentially stymie arbitrations and burden courts further. It is preferrable if arbitrators are allowed to adjudicate the questions about unstamped documents in all cases. But given the unstable grounds on which InterContinental has enabled reference to arbitrations to take place in the interim period, the Constitution Bench would have to provide for these cases alongside comprehensively ruling on the power to adjudicate.

The reference in NN Global

The unresolved questions of stamping, adjudications, and now the ‘deadwood’ standard, will multiply until the NN Global reference is decided. The Constitution Bench will have to decide which authority should adjudicate questions on the nature of the underlying instrument under the respective Stamp Act(s). Would this authority differ in case of a party appointment, a section 11 application, or a section 8 reference? Moreover, in any case, the reference would have to rule on the applications under section 11 allowed in the interim period. If the reference is decided in the vein of Garware / Vidya Drolia, then, would references like InterContinental be rendered null? It would do great disservice to arbitration, both domestic and international, if that result is to entail. Further, if bona fide self-identification and payment of applicable stamp duty ensures a reference to arbitration, then, it is understandable that more parties would seek that avenue. The quantity of applications so permitted would necessarily impact the Constitution Bench’s decision on the reference as well. To prevent such proliferation of issues, there is a need for the reference to be decided at the earliest.

Karan Kamath

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