The Supreme Court by a significant judgment on 10 April 2019, clarified that the power of the court to impound an unstamped document containing an arbitration clause, at the stage of appointment of an arbitrator, remains unchanged with the introduction of Section 11 (6A) of the Arbitration and Conciliation Act ("Act").
The Court was hearing an appeal by Garware Wall Ropes Limited from an order passed by the Bombay High Court appointing an arbitrator to adjudicate the disputes that had arisen between the parties with regard to termination of a works sub-contract. The issue before the court was whether with the introduction of Section 11 (6A) of the Act, the court was stripped of its power to impound an unstamped document at the Section 11 stage and could now only be impounded by an arbitrator appointed by a section 11 petition.
While the appellant placed reliance on a prior decision of the apex court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. ("SMS Tea") to contend that section 33 and 34 of the Maharashtra Stamp Act, 1958 ("MHA") require judicial authorities to impound unstamped instruments, which cannot be admitted in evidence till deficit stamp fee and penalty (if any) are paid on it, the respondent, Coastal Marine Construction and Engineering Ltd. drew a distinction between 'existence' and 'validity' of an arbitration agreement and argued that provisions of Stamp Acts being fiscal measures for collection of revenues, relate to 'validity' of an arbitration agreement and not it's existence. The respondent further contended that an arbitration agreement being independent and severable from the underlying contract, exists in fact even in an unstamped document and therefore the court hearing a Section 11 application under the Act must proceed to appoint an arbitrator while leaving other preliminary issued between the parties to be decided by the arbitrator.
The Court while upholding the contention of the appellant, reasoned that a perusal of the 246th Law Commission Report together with its statement of objects and reasons, reflect that an amendment by way of inserting section 11 (6A) to the Act was brought about to curtail the wide and sweeping powers conferred upon courts to adjudicate preliminary issues at the section 11 stage, by the court's prior judgments in SBP & Co. v. Patel Engineering and National Insurance Co. v. Boghara Polyfab (P) Ltd. The court observed that there was no mention of the judgment of SMS Tea in the Commission's report and noted that this was primarily because while impounding an unstamped document, the court hearing a section 11 application does not in any manner decide any preliminary issues between the parties but only gives effect to mandatory provisions of Stamp Acts, which have been enacted to protect revenue.
" A close look at Section 11 (6A) would show that when the Supreme Court or the High Court considers an application under section 11 (4) to 11 (6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon."
The court further held that provisions of the Indian Stamp Act apply to the agreement or conveyance as a whole and therefore it is not possible to bifurcate the arbitration clause to give it an independent existence. The court reasoned that an agreement only becomes a contract when it is enforceable by law and as under the Indian Stamp Act, an agreement does not become enforceable in law unless it is duly stamped, an arbitration clause contained in an agreement which is not stamped will not exist because the agreement is not enforceable by law. The court then proceeded to draw a distinction between existence in law and existence in fact and held that while an arbitration clause contained in an unstamped document exists in fact, it does not exist in law.
In conclusion, the court while allowing the appeal and setting aside the judgment of the Bombay High Court opined "It is clear, therefore, that the introduction of Section 11 (6A) does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates, which continues to apply even after the amendment of Section 11 (6A)."
The Bombay High Court has recently affirmed the decision of the Supreme Court by its judgment in S Satyanarayana & Co. v. West Quay Multiport Private Limited . The Bombay High Court was hearing a Section 11 application wherein, it had to decide whether conducting an arbitration in a State attracts liability to pay stamp duty in the given State. In the matter at hand, the contract between the parties was executed out of the State of Maharashtra for works to be done outside Maharashtra and the only thing to be done in Maharashtra was conducting the arbitration. The Bombay High Court relying on the decision of the apex court reiterated that "an arbitration clause cannot be plucked out of the agreement in which it is embodied or embedded and treated as a stand-alone agreement immune to or exempt from stamp duty." The court reasoned that doing so would amount to a finding that while the rest of the contract needs to be stamped, the portion of the contract containing the arbitration clause need not be, thereby falling foul of the rationale laid down by the apex court in Garware Ropes.
1 Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. (2019) SCC Online SC 515
2 (2011) 14 SCC 66
3 (2005) 8 SCC 618
4 (2009) 1 SCC 267
5 Decided on 22 November 2019
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