India: Arbitration Clause In An Unstamped Agreement? Supreme Court Lays Down The Law

  • Unless the agreement which prescribes the arbitration clause is sufficiently stamped, the court cannot appoint an arbitrator;
  • The court must impound the agreement on which adequate stamp duty has not been paid and hand it over to the relevant stamp authority for rectification;
  • The stamp authorities should resolve the issues relating to 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 agreement.

INTRODUCTION

The Supreme Court of India in a recent judgment has considered the validity of an arbitration clause and the arbitral appointment made thereunder, when such arbitration clause formed part of an unstamped agreement. More specifically, in case of Garware Wall Ropes v. Coastal Marine Constructions & Engineering Ltd.,1 the Supreme Court had to consider an appeal arising out of the decision of the Bombay High Court, wherein an arbitrator was appointed pursuant to an arbitration clause arising out of an unstamped agreement. The Supreme Court set aside the Bombay High Court decision and remitted the same for a fresh determination.

FACTS

Disputes arose out of a sub-contract between the Appellant and the Respondent ("Contract"), following which the Appellant terminated the Contract. The Contract contained an arbitration clause for the resolution of the disputes. The Respondent invoked the arbitration clause and appointed an arbitrator. However, the Appellant disputed such appointment. Thereafter, the Respondent filed an application under Section 11 of the Arbitration and the Conciliation Act, 1996 ("Act") before the Bombay High Court seeking the appointment of an arbitrator. The Bombay High Court allowed the application and appointed an arbitrator to adjudicate the disputes between the parties.

ISSUE BEFORE THE SUPREME COURT

The Supreme Court had to consider the effect of an arbitration clause contained in an agreement which is not stamped.

JUDGMENT OF THE SUPREME COURT

Existence v. Validity of the Arbitration Agreement

The Supreme Court referred to its earlier decision in SMS Tea Estates v. Chandmari Tea Co. P. Ltd.,2 wherein it had held that if an arbitration clause is contained in an unstamped agreement, the Judge would be required to impound the agreement and ensure that stamp duty and penalty (if any) are paid before proceeding with the appointment of the arbitrator.

Subsequent to this judgment, in 2015, Section 11(6A) was introduced to the Act, which states that while appointing an arbitrator, courts should confine themselves to the examination of the existence of an arbitration agreement and no more. Relying on the introduction of Section 11(6A), it was contended that the judge appointing an arbitrator should not impound the agreement for being insufficiently stamped, rather the arbitrator appointed pursuant to Section 11 may do so if deemed necessary.

The Supreme Court observed that under the Maharashtra Stamp Act, 1958 ("Stamp Act"), an agreement becomes enforceable in law only when it is duly stamped. The Respondent attempted to draw a distinction between the "validity" and the "existence" of an arbitration agreement, and argued that the provisions of the Stamp Act are fiscal measures which will be covered under a determination of the "validity" of an arbitration clause and not its "existence", and thereby, the court should be permitted to appoint arbitrators even in cases where the agreement is unstamped. However, the Supreme Court was not impressed with such submissions and observed that an arbitration clause cannot be bifurcated entirely from the agreement it is contained in, as the Stamp Act applies to the entire agreement. Consequently, an arbitration clause would not 'exist' when the underlying agreement is not enforceable under law. Accordingly, the Supreme Court held that under Section 11 of the Act, the court can impound an agreement if it is not stamped in accordance with the mandatory provisions of the Stamp Act.

Interestingly, a full-judge bench of the Bombay High Court had rendered a judgment just a few days prior to the Supreme Court's finding in the present case on a similar question of law. In the case of Gautam Landscapes Pvt. Ltd. v. Shailesh Shah,3 the Bombay High Court held that for appointment of arbitrators under Section 11 of the Act, it was not necessary for courts to await the adjudication of stamp duty by stamp authorities in cases where a document was not adequately stamped. After considering this judgment, the Supreme Court held that the Bombay High Court in the aforementioned case had incorrectly decided the question of law.

Practicality of Impounding an Unstamped Agreement

The Respondent further argued that impounding an unstamped agreement would not be practically feasible at the Section 11 stage as the amended Act prescribes strict timelines to courts for disposing applications for appointment of arbitrator(s). Under Section 11(13) of the Act, an application for appointment of an arbitrator must be disposed of as expeditiously as possible, and in any event within a period of 60 days from the date of service of notice on the other party.

However, the Supreme Court held that the doctrine of harmonious construction should be adopted to read Section 11(13) of the Act with Sections 33 and 34 of the Stamp Act (which provide for impounding of unstamped instruments). The Supreme Court took a step further to lay down a mechanism to be followed by courts and stamp authorities when the underlying agreement is unstamped:

  1. The High Court must first impound the agreement which does not bear the requisite stamp duty;
  2. The unstamped or insufficiently stamped agreement should be handed over to the relevant authority under the Stamp Act, which will decide the issues relating to 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 agreement;
  3. Once the requisite stamp duty and penalty (if any) is paid by the parties, the parties can bring the instrument to the notice of the High Court. The High Court will then proceed to expeditiously hear and dispose of the Section 11 application.

ANALYSIS

Although the Supreme Court has balanced the dual objectives of expeditious disposal of cases and revenue collection by the authorities, it is unclear if such measures are sustainable. It remains to be seen how the judgment is practically implemented. In practice, the procedure to impound an agreement and payment of stamp duty is likely to take much longer than 45 days. Prescribing a 45-day timeline is ambitious, to say the least, but nevertheless, it remains to be seen whether the parties and the courts can meet this timeline.

One must also be cognizant of the fact that the present decision of the Supreme Court may not have any precedential value. The Supreme Court in State of West Bengal v. Associated Contractor,4 had held that the decision of the Chief Justice or his designate in a Section 11 application, not being the decision of the Supreme Court or the High Court, has no precedential value, being a decision of a judicial authority, which is not a court of record. Therefore, there may be a confusion on the how courts approached under the other sections of the Act would deal with arbitration clauses contained in unstamped agreements.

Footnotes

1 Civil Appeal No. 3631 of 2019 arising out of SLP(C) No. 9213 of 2018.

2  (2011) 14 SCC 66

3 Arb. Pet. No. 466 of 2017 (decided on 04.04.2019).

4 Civil Appeal No. 6691 Of 2005; Civil Appeal No. 4808 Of 2013.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions