India: The Supreme Court Decision - Unstamped Arbitration Agreement Cannot Be Acted Upon

INTRODUCTION

The Supreme Court of India (Supreme Court) in its recent judgment, Garware Walls Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. in Civil Appeal no. 3631/ 2019, arising out of SLP(C) 9213/ 2018, pronounced on April 10, 2019, overruled a Bombay High Court judgment, Coastal Marine Constructions & Engineering Ltd. v. Garware Walls Ropes Ltd., in Arbitration Petition No.24/ 2017 (HC Judgment), and held that an arbitration clause in an agreement, which is not stamped as per law, cannot be given effect if and until the agreement is duly stamped, i.e., full stamp duty in respect of such agreement as provided by law has been paid. The Supreme Court further held that when a court is called upon to decide on an application for appointment of arbitrator under Section 11 of the (Indian) Arbitration and Conciliation Act, 1996 (Arbitration Act) on the basis of an arbitration clause in an agreement which is unstamped or deficiently stamped, the court must first impound the agreement, send it to the relevant authorities for payment of stamp duty and penalty (if any), for non-payment of stamp duty when the agreement was first executed, and proceed with the application only after such stamp duty and penalty have been paid.

BACKGROUND

Stamp Law

As a background, under Indian law, stamp duty, a levy in the nature of tax, is required to be paid in respect of every document/ instrument creating rights or obligations. In most instances, stamp duty is required to be paid to the State Government within whose jurisdiction the document/ instrument is first executed or brought after its execution. Rates of stamp duty depend on the nature of document/ instrument and may vary across Indian States and are governed by the provisions of a Central stamp legislation and/or State specific legislation (Stamp Law). If an unstamped instrument is brought before a person authorized to receive evidence or holding a public office, such person is required to impound the instrument. Such unstamped instrument cannot be received in evidence by or acted upon by such person unless the stamp duty and any penalty is paid in full by the party responsible for such payment.

Indian Arbitration Law

Per Section 7(2) of the Arbitration Act, an arbitration agreement between the parties may be in the form of an arbitration clause in a contract or in the form of a separate agreement. Section 11 of the Arbitration Act deals with appointment of arbitrators. Section 11(6) of the Arbitration Act, among others, provides that if a party fails to act or agree to appoint the arbitrator as per an arbitration agreement, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court, to take necessary measure. The relevant Chief Justice or the person or institution designated by the relevant Chief Justice shall then appoint the arbitrator(s). Section 16(1) of the Arbitration Act provides that the arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. In other words, Section 16(1) recognizes the separate existence of an arbitration agreement from the main contract in which it is contained.

Earlier law

The Supreme Court has been called upon to interpret Section 11(6) of the Arbitration Act on various occasions. Two key decisions in this regard are, 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 decisions led to a situation resulting in the courts examining a number of preliminary issues pertaining to the dispute between the parties while considering an application for appointment of an arbitrator for resolution of these very disputes. This was leading to a delay in appointment of arbitrators and accordingly delay in commencement and conclusion of the arbitration process.

Separately, in SMS Tea Estate (P.) Ltd. v. Chandmari Tea Co. (P.) Ltd., 2011 (14) SCC 66, (SMS Judgment), the Supreme Court had ruled that unless the stamp duty and penalty due on the instrument is paid, a court could not act upon the instrument including the arbitration clause contained in such instrument.

Amendment in Arbitration Law

To limit court's intervention at the pre-arbitral stage and expedite the process of appointment of arbitrators, the Law Commission of India, by its Report No. 246 of August 2014, suggested various sweeping changes to the Arbitration Act which were given effect through an amendment to the Arbitration Act in 2015 (2015 Amendment). 2015 Amendment, among others, incorporated Section 11(6A) in the Arbitration Act which provides that the Supreme Court or the High Court, while considering any application for appointment of arbitrator under Section 11 of the Act, shall notwithstanding any judgment, decree or order of any court, confine the examination to the "existence of an arbitration agreement".

The Law Commission of India provided the basis for the above incorporation as follows: "... The scope of the judicial intervention is only restricted to situations where the Court/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/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. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal. However, if the judicial authority concludes that the agreement does not exist, then the conclusion will be final and not prima facie. The amendment also envisages that there shall be a conclusive determination as to whether the arbitration agreement is null and void...".

The Statement of Objects and Reasons to the Bill, which introduced the 2015 Amendment, in paragraph 6(iv) mentioned the reason for incorporation of Section 11(6) of the Arbitration Act to be, "... to provide that while considering the application for appointment of arbitrator, the High Court or the Supreme Court shall examine the existence of a prima facie arbitration agreement and not other issues...".

SUPREME COURT DECISION

In the aforesaid background, the Supreme Court was called upon to decide the appeal against the HC Judgment which had held that Section 11(6A) of the Arbitration Act had also removed the basis of SMS Judgment, so that a court is only supposed to examine the existence of an arbitration agreement as per Section 11(6) of the Arbitration Act and if it existed but the agreement containing it was unstamped, such unstamped agreement is to be impounded not by a judge hearing an application under Section 11 of the Arbitration Act, but by an arbitrator who is appointed under Section 11 of the Arbitration Act.

The Supreme Court was asked to consider the effect of 2015 Amendment, in particular Section 11(6A) inserted by 2015 Amendment in the Arbitration Act and whether it had removed the basis of SMS Judgment as well and not just other judgments which gave courts the power to undertake a preliminary trial of issues pertaining to the dispute prior to passing an order for appointment of arbitrator. In other words, the question before the Supreme Court was the effect of an arbitration clause contained in a contract which was not stamped and whether court could order appointment of an arbitrator pursuant to such arbitration clause.

  1. The Supreme Court rejected the argument that because Section 16 of the Arbitration Act envisages the existence of an arbitration agreement independent of the agreement it is part of this principle should be applied while deciding an application under Section 11 of the Arbitration Act. It held that as per established case law Section 16 of the Arbitration Act will operate fully only where the arbitral tribunal has been appointed without intervention of the court under Section 11 of the Arbitration Act. In a situation where the court is asked to appoint the arbitral tribunal pursuant to Section 11 of the Arbitration Act, decision of the court on existence of arbitration agreement and jurisdiction of the arbitral tribunal would be binding on the parties and the arbitral tribunal, subject to the outcome of any appeal against the decision of the court.
  2. The Supreme Court observed that neither the 'Statement of Objects and Reasons' of the 2015 Amendment nor the Law Commission Report (basis which 2015 Amendment was introduced) mentioned SMS Judgment. This, the Supreme Court held, was for the very good reason that the Supreme Court or the High Court, while deciding a Section 11 application, does not, in any manner, decide any preliminary question that arises between the parties. In examining whether the agreement is stamped or not, the Supreme Court or the High Court is only giving effect to the provisions of Stamp Law, a mandatory enactment i.e., "to protect revenue". The Stamp Law applies to the agreement as a whole and not to the agreement and the arbitration clause contained in it separately. Accordingly, when a court considers an application under Section 11 it is bound to apply the provisions of the Stamp Law in case it comes across an unstamped instrument containing an arbitration agreement. Therefore, the Supreme Court held that introduction of Section 11(6A) of the Arbitration Act does not nullify the effect of SMS Judgment and it continues to remain a valid decision even after the introduction of Section 11(6A).
  3. The Supreme Court observed that first part of Section 7(2) of the Arbitration Act provides that the arbitration agreement may be in the form of an arbitration clause in a contract. As per Indian contract law, Section 2(h) of the Indian Contract Act, 1872, an agreement enforceable by law is a contract. Further, as per the Stamp Law, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Based on the above, the Supreme Court held that the said provisions make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law. This, the Supreme Court said, also is the reason why SMS Judgment has not been affected by Section 11(6A) which requires the courts to examine existence of an arbitration agreement.
  4. The Supreme Court held that its decision in Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729, was not relevant for the issue before it. The above mentioned Duro Felguera decision had held that "59. The scope of the power under Section 11(6) of the 1996 Act [Arbitration Act] was considerably wide in view of the decisions in SBP and Co. [SBP and Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117]. This position continued till the amendment brought about in 2015 [2015 Amendment]. After the amendment, all that the courts need to see is whether an arbitration agreement exists—nothing more, nothing less. The legislative policy and purpose is essentially to minimise 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.". Instead the Supreme Court went along with its decision in United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors., 2018 SCC online SC 1045, which had distinguished the abovementioned Duro Felguera decision.

    The above-mentioned United India Insurance decision, involved an application filed by an insured, under Section 11 of the Arbitration Act, for appointment of an arbitrator pursuant to an arbitration clause in an insurance policy, whose claim for payment under the policy was rejected and denied by the insurance company. The arbitration clause in the policy provided that no reference to arbitration can be made if the insurance company has disputed or not accepted its liability under the policy. In this decision, upon examination of facts, the Supreme Court had held that given the denial by the insurance company even though there was an arbitration clause in existence it became ineffective and incapable of being enforced because the dispute was not covered by the arbitration clause.

    Relying on the United India Insurance decision, the Supreme Court held that as in the case of United India Insurance decision where even though an arbitration clause did exist in the policy, it did not exist in law because the dispute was not covered by scope of the arbitration clause in the said policy, in view of the underlying facts of the current case, even though an arbitration clause exists under the agreement in question, it does not exist in law because the agreement is not duly stamped. Following the above reasoning that the arbitration clause may exist in fact but not in law, the Supreme Court rejected the argument that Section 11(6A) of the Arbitration Act refers to existence of an arbitration agreement as opposed to Sections 8, 16 and 45 of the Arbitration Act which deal with validity of the arbitration agreement. The Supreme Court refused to consider a number of other decisions (of certain High Courts) that were cited which had ordered appointment of arbitrators pursuant to an arbitration clause in an unstamped agreement and held that the law declared in these judgments was incorrect in view of the current decision of the Supreme Court and hence these were overruled.
  5. The Supreme Court didn't agree with the argument that if the agreement was impounded and sent for stamping before making an order for appointment of arbitrator it would breach the 60-day period provided in Section 11(13) of the Arbitration Act for passing an order for appointment of arbitrator. It held that by applying the doctrine of harmonious construction of statutes, the object behind the above provision which is to ensure expeditious appointment of an arbitrator and accordingly conclusion of the arbitration within the timeline prescribed by the Arbitration Act and of the Stamp Law which is collection of revenue can be met.

    Accordingly, the Supreme Court held that in case the court hearing an application for appointment of arbitrator impounds the instrument and sends it for stamping to the authority under the Stamp Law, the authority would decide the issues regarding stamp duty and any penalty as expeditiously as possible, and preferably within 45 days of receipt of the instrument by the authority. Any party can bring the instrument to the notice of the court after the stamp duty and penalty is paid and the court can expeditiously proceed to hear and dispose of the Section 11 application. In this manner, once an arbitrator is appointed, the arbitrator can procced to decide the dispute within the time period provided by the Arbitration Act.
  6. The Supreme Court also rejected the argument that since the person refusing to proceed with the appointment of arbitrator and opposing the Section 11 application for appointment of arbitrator was responsible for payment of stamp duty, such person should not be allowed to take advantage of its own wrong.

CONCLUSION & COMMENTS

This judgment brings home the importance of the need for paying closer attention to and taking advice on payment of stamp duty on instruments executed by the parties. While the immediate implication of this decision may be a delayed commencement of an arbitration pursuant to an arbitration clause contained in an unstamped agreement, the broader implication is delayed enforcement of parties right and payment of penalty because of failure to originally stamp the agreement.

While this judgment is now law and has to be followed, it does give rise to certain questions and leaves certain questions unanswered.

  1. While the Supreme Court did consider the objects and reasons of the 2015 Amendment, it is a moot point whether the decision fully advances the object of expediting the arbitration process and reducing courts' involvement at the pre arbitral stage. This is because now, a party to an unstamped agreement containing an arbitration clause would need to first approach a government authority to pay full stamp duty before it can obtain an order for appointment of an arbitrator. By requiring the stamp authority to stamp the agreement 'as expeditiously as possible' and preferably within a period of 45 days, the Supreme Court did bear in mind the 60-day time limit for appointment of the arbitrator. However, what happens if both the 45 or 60-day timeline are not kept by the stamp authority remains unclear. The outcome would certainly be that the arbitrator appointment would be on hold until the stamping is complete. This outcome would not expedite but delay the arbitration process.
  2. A question arises whether given the language used in Section 11(6A) of the Arbitration Act and the objects and reasons of 2015 Amendment, a slightly different conclusion may have better advanced these objects and reasons. The 2015 Amendment was brought to expedite the commencement and conclusion of arbitration process and to reduce courts' involvement at the pre arbitral stage to enhance parties' confidence in the arbitration process. Despite the various provisions of the Arbitration Act relating to appointment of arbitrators by court using both 'existence' and 'validity' of the arbitration agreement, the 2015 Amendment required courts to confine themselves to 'examination' of the existence of the arbitration agreement and not validity of the arbitration agreement. Given that the intent was to limit court's scrutiny of the dispute between the parties while considering an application under Section 11 of the Arbitration Act, it can perhaps be said that the word 'existence' and not 'validity' was deliberately used.

    Moreover, Section 11(6A) of the Arbitration Act uses the language 'notwithstanding any judgment, decree or order of any court'. Even though the Supreme Court did consider and reject this argument, the question still remains as to why should such language not affect the validity of SMS Judgment given the expression 'notwithstanding' qualifying 'any judgment, decree or order of any court'. The 2015 Amendment did not provide any specific carve out for the SMS Judgment.
  3. Even though there may be an argument that the Stamp Law provisions do not give courts the leeway to proceed with consideration of an arbitration clause in an unstamped agreement, the compliance with the Stamp Law provisions and the objects and reasons of 2015 Amendment can also be harmoniously achieved if simultaneously with impounding of the instrument containing the arbitration agreement the court ordered appointment of an arbitrator thereby allowing commencement of the arbitration and directing the party responsible for payment of stamp duty and penalty to submit duly stamped copy of the instrument with the arbitral tribunal within a certain time. This result would not have derogated from the contract law principle that the court considered to reach its decision.
  4. The Supreme Court's decision in the United India Insurance case was given after examination of the facts before it. The Supreme Court relied on its decision in the United India Insurance case for its decision in this case. In this situation, a question that arises is whether, in view of Section 11(6A) of the Arbitration Act, the Supreme Court in the United India Insurance decision should have examined the dispute between the parties to hold that it was not covered by the arbitration clause agreed by the parties or whether it should have confined itself to examining the existence of the arbitration clause and, because the arbitration clause existed, ordered appointment of the arbitrator who would have examined the dispute and decided whether it was covered by the arbitration clause.
  5. It is unclear as to how will this judgement be applied to a situation where the main contract is duly stamped however the underlying contact under which the dispute has arisen and which contains the arbitration clause by way of reference to main contract is unstamped.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Nikhil Pareek
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