Jatin Ghuliani
Enforceability of Arbitration Clause in an Unstamped Arbitration Agreement Vis-À-Vis Section 9 and Section 11 of the Arbitration and Conciliation Act, 1996; A Conundrum
The present article focuses on the aspect of invocation of arbitration in an unstamped or inadequately stamped arbitration agreement and the regime to be followed by the designated courts if confronted with such a situation. The present article is also an attempt to shed light on the conundrum surrounding the aforesaid question of law which still prevails while entertaining an application for appointment of arbitrator under Section 11 and seeking interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘Act’).
PREFACE
In the recent times, we often come across, parties having inter-se dispute tend to resolve such issues by resorting to Alternate Dispute Resolution Mechanisms such as Arbitration, given the fact that litigation is a time-consuming and a financially drilling process. Hence, in order to resolve the said issues, parties upon reaching a consensus-ad-idem, reduce their terms of oral understanding in form a written contract containing an arbitration clause, whose terms thereof, sets out the rights and obligations of the parties which ultimately bind and govern their relationship inter-se.
However, while entering into such agreements, parties often fail to fulfil certain mandatory obligations such as non-payment of adequate stamp duty in terms of the Stamp Acts governing the execution of such agreement and such failure renders the agreement as unenforceable under eyes of law.
It is in this backdrop that the conundrum regarding the enforceability of the arbitration clause stipulated in an unstamped agreement has come to the fore and dealt by the Hon’ble High Courts and the Hon’ble Apex Court in several judgments. The present article is an attempt to discuss and analyse the recent judgments on the issue as regards the enforceability of arbitration in an unstamped agreement and whether such question of law as has been put to rest or not.
BACKRGOUND
Since the geneses of the Arbitration Act, the courts have been vested with a wide amplitude of powers while dealing with an application for appointment of an arbitrator under Section 11(6) of the Act, as also held by the Hon’ble Supreme Court in the case SBP and Co. v. Patel Engineering Ltd.[1](hereinafter referred to ‘SBP’)and in the case of National Insurance and Co. Ltd. Boghara Polyfab[2] (hereinafter referred to as ‘Bogphara Polyfab’),that the powers exercised by the Chief Justice or designated Judge under Section 11(6) is a judicial function and not an administrative function. Thus, the concerned Judge has the power to decide preliminary aspects, including the jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence of a live claim and qualifications of arbitrator(s) etc.
Later on, in the year 2011, the Hon’ble Supreme Court in notable decision, i.e. M/s. M/s. SMS Tea Estates Private Limited vs. M/s. Chandmari Tea Co. Private Limited (hereinafter referred to as ‘M/s.SMS Tea Estate’)[3], had the opportunity to examine the enforceability of the arbitration agreement if the main agreement was not adequately stamped.
The Hon’ble Supreme Court while dealing with the aforesaid question of law,held that where an arbitration clause is contained in an unstamped agreement, the provisions of Indian Stamp Act would require the judge to impound the Agreementand upon payment of full Stamp Duty, decide any application under Section 11(6) of theAct. In terms of Section 35 of the Indian Stamp Act, it was held that the Court cannot act upon such agreement without it being impounded and duly stamped.The said principle was also reiterated in the case of Black Pearls Hotels Private Limited vs. Planet M. Retail Limited.[4]
However, due to the aftermath of thesaid judgments and precedents, parties would often find themselves having being engrossed into a full-blown trial even at the pre-arbitral stages, which lead to considerable amount of delay in disposing and entertaining applications under Section 11 of the Act, thus such issue being a contention one needed a massive overhaul in the said regime which was followed up till 2015 Amendment.
On October 23, 2015, the 246th Law Commission Report brought a notable change in the aforesaid regime and a new provision i.e. Section 11(6A)was introduced and inserted in the Act of 1996. The relevant extract of the said provision is being reproduced hereinbelow:
“(6A) 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 subsection (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement. “
The underlying objective behind insertion of the said provision was to curtail and limit the powers of the court while dealing with an application under Section 11 which were otherwise of wide amplitude. The said provision seeks to restrict the courts while entertaining an application under Section 11only to examine the existence of an arbitration agreement.
Post the insertion of Section 11(6A) in the Act, The Hon’ble High Court of Bombay in the case of Gautam Landscapes Pvt. Ltd. Vs Sailesh Shah[5] (hereinafter referred to as ‘Gautam Landscapes’) and the Hon’ble Apex Court in the case of Garware Wall Ropes vs. Coastal Marine Constructions and Engineering Limited[6] (hereinafter referred to as ‘Garware Ropes’), have had the opportunity to determine whether the applications seeking interim relief and appointment of arbitrator under Section 9 and 11(6) respectively of the Act could be entertained if the main agreement containing the arbitration clause is unstamped.
In the former judgment, the Full bench of the Hon’ble High Court of Bombay, while answering the first question in affirmative held that awaiting adjudication on Stamp Duty before granting relief would defeat the schemeof the 1996 Act. It was held that the arbitration agreement was separate and distinct from the document in which it was contained, and would not require stamping and while answering the second question in negative, it was held that powers of the court while entertaining an application under Section 11 now being restricted to the scope of existence of an agreementin light of the newly introduced Section 11(6A), thus the court need not await the determination of the requisite amount of stamp duty from the appropriate authorities, and the issue as regards the payment of the stamp duty could be dealt with by the arbitrator so appointed. Hence, an application under Section 11 could be dealt with despite the main agreement being inadequately stamped.
In latter judgment, a similar issue came up for consideration i.e. whether an unstamped arbitration agreement can be relied upon while dealing with an application under Section 11, the Hon’ble Apex Court while dealing with the same, unambiguously clarified that despite the insertion of Section 11(6A), the powers of the courts in impounding an unstamped document containing an arbitration clause at the stage of appointment of an arbitrator remains unfettered.
The Hon’ble Apex Court inter-alia reasoned that the underlying objective behind the 246th Law Commission Report was to curtail the unfettered powers conferred upon the courts while adjudicating preliminary issues at stage of application under Section 11, which were expounded in the case of SBP and Boghara Polyfab. However, the court also observed that there was no whisper of the judgment rendered in the case of M/s. SMS Tea Estate and this was primarily because while impounding an unstamped document, the court hearing an application under Section 11 does not in any manner decide any preliminary issues between the parties but only gives effect to mandatory provisions of Indian Stamp Act, which have been enacted to protect revenue.
The Hon’ble Apex Court also held that the import of provisions contained in Indian Stamp Act applies to the entire agreement as a whole and the arbitration clause cannot be segregated from the main agreement so as to give it an independent existence and said clause forming part of the main agreement shall only be enforceable in terms of Section 2(h) of the Indian Contract Act only if the proper stamp duty has been levied, else the said agreement shall be rendered unenforceable being devoid of the adequate stamp duty.
Hence, in light of the aforesaid findings and observations, the Hon’ble Apex Court, held that while dealing with an application under Section 11 has to ensure if proper stamp duty is paid or not, and if the answer is in negative, the Court will be left with no option but to impound the said document. In doing so, the Hon’ble Apex Court, partially overruled the judgment rendered by the Full Bench of Hon’ble High Court of Bombay in the case of Gautam Landscapes, however re-affirmed the extract of the said judgment wherein it was held that a court couldrely upon an unstamped document while dealing with an application seeking interim measures under Section 9.
RECENT AFTERMATH
In December, 2019, the Hon’ble High Court of Bombayhas re-affirmed the decision of Garware Ropesin its judgment i.e. S Satyanarayana & Co. vs. West Quay Multiport Private Limited[7].In this case the Hon’ble High Court of Bombay, upon being confronted with the question whether the payment of the stamp duty is a condition precedent before appointment of arbitrator in terms of Section 11 of the Act, held that if the arbitration clause is segregated from the main agreement and treated as a stand-alone agreement being exempt from the stamp duty then it shall lead to presumption that the rest of contract needs to be stamped while the arbitration clause need not be thereby falling foul of the rationale laid down by the Hon’ble Apex Court in Garware Ropes.
Recently on February 14, 2020, Three judge bench of the Hon’ble Apex Court, comprising ofHon’ble Chief Justice S.A. Bobde, Hon’ble Mr. Justice B.R. Gavai, and Hon’ble Mr. Justice Surya Kant, seems to have crystallised the issue as regards the enforceability of arbitration clause in an insufficiently stamped agreement vis-à-vis Section 11, in a reported judgment in the case of i.e. M/s. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities & Ors. vs. M/s. Bhaskar Raju & Brothers & Ors.[8]
The Hon’ble Apex Court, while dealing with an application under Section 11 of the Act, and relying upon the judgment rendered in the case of M/s. SMS Tea Estateheld that an arbitration clause embodied in an unstamped arbitration agreement cannot be relied upon and the same needs to be impounded mandatorily in the manner as set out in Section 38 of the Stamp Act, 1899 regardless of there being any objection in that regard. It was further held that if the said instrument is adequately stamped then the same can be relied and acted upon.
Also, it is apposite to mention that the judgment rendered in the case of Gautam Landscapes[9], has been challenged before the Hon’ble Apex Court, however no stay being granted, said judgment still continues to hold the field in so far as Section 9 is concerned.In fact,the Hon’ble Single Judge of the Hon’ble High Court of Bombayin the case of Saifee Developers vs. Sanklesha Constructions[10], has heldthat the decision of Garware Ropes does not affect the court’s powers under Section 9 of the Act.
CONCLUSION
Hence, in view of the judgments rendered in the aforesaid cases, it can be concluded that the aspect of enforceability of arbitration clauses contained in an unstamped agreement vis-à-vis Section 11 seems to have been put to rest, however there still remains a conundrum, when the judicial courts are confronted with the same situation while entertaining an application under Section 9 expressly in light of the judgment rendered in the case Garware Ropes wherein it has unequivocally held that the arbitration clause cannot be given an independent existence and the main agreement having been declared unenforceable as a whole on account of non-payment of stamp duty.
Thus in view of circumstances that is prevailing in respect of Section 9 of the Act, it will be interesting to see whether the view of the Full Bench in respect of Section 9 will stand in light of the view rendered by the Hon’ble Apex Court in Garware Ropes, wherein it was observed that an agreement is not enforceable unless it is duly stamped, and therefore an arbitration clause would not exist when it is not enforceable by law.
[1]2005 8 SCC 618
[2] 2009 1 SCC 267
[3]2011 14 SCC 66
[4](2017) 4 SCC 498
[5]AIR2019Bom149
[6]Civil Appeal 3631/2019 (Supreme Court); (2019) 9 SCC 209
[7] 2020 (2) ABR 490
[8] Civil Appeal no. 1599 of 2020 (Arising out of SLP(C) No. 7088 of 2015)
[9] SLP (C) 10232-10233 of 2019.
[10]Order dated 15 July 2019 passed in Commercial Arbitration Petition 1060/2019.
