As a matter of general practice, the parties, upon reaching a consensus, reduce the terms of their understanding in writing by way of an agreement, which govern the relationship between the parties and set out their rights and obligations. As litigation is a timeconsuming procedure, parties often mutually agree to resolve their disputes through recognized Alternate Dispute Resolution mechanisms, like Arbitration. Thus, most of the agreements have a specific clause related to arbitration.
However, parties often fail to adequately stamp the Agreement in terms of the Stamp Act(s) governing such agreement. Such failure renders the Agreement unenforceable.
This led to a controversy regarding the powers of a Court under Section 9 and 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") with respect to such unstamped / inadequately stamped agreements. This article makes an attempt to analyse the recent Supreme Court and Bombay High Court judgements on this issue and whether they give finality to the controversy.
Arbitration and Conciliation Act, 1996
- Section 7 - Arbitration agreement
- Section 9 - Interim Measures etc. by Court
- Section 11 - Appointment of arbitrators
The Maharashtra Stamp Act, 1958
- Section 33 - Examination and impounding of instruments.
- Section 34 - Instruments not duly stamped inadmissible in evidence, etc.
Since inception of the Arbitration Act, the scope of judicial intervention with respect to an arbitration proceeding, more specifically at pre-arbitral stage, became a contentious issue. This section of the article looks at the various judgements passed by the Supreme Court with respect to such judicial intervention as well as the amendment to Section 11 brought about by the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act").
Judicial Pronouncements prior to Amendment Act
1. Konkan Railway Corporation Limited v Mehul Construction Co. [(2000) 7 SCC 201]: In this judgement, the Supreme Court held that the powers of the Chief Justice to appoint an arbitrator under Section 11 (6) of the Arbitration Act are administrative in nature and the Chief Justice does not act as a judicial authority while appointing an arbitrator
2. Konkan Railway Corporation Limited v Rani Construction Pvt. Ltd. [(2002) 2 SCC 388]: The view taken by the Supreme Court in the first Konkan Railway case, was reiterated in this case.
3. SBP and Co. v Patel Engineering Ltd. [(2005) 8 SCC 618]: The view rendered in the Konkan Railways case was overruled by a seven-Judge Bench of the Supreme Court. The Court concluded 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 claim etc.
4. National Insurance Co. Ltd. v Boghara Polyfab. [(2009) 1 SCC 267]: The Supreme Court reiterated the view rendered in the SBP judgement and segregated preliminary issues into (i) issues which the Court is bound to decide; (ii) issues which the Court may decide; and (iii) issues which should be left to the Arbitral Tribunal to be decided under Section 16 of the Arbitration Act. Issues (i) and (ii) included determining the existence of an arbitration agreement, existence of claim, limitation etc.
5. SMS Tea Estates (P) Ltd. v Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66]: The Supreme Court 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 Agreement first and upon payment of full stamp duty, decide any application under Section 11 (6) of the Arbitration Act. In terms of the clear wording 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.
Amendment Act of 2015
As the SBP Co. and Boghara Polyfab judgment empowered the Court to decide several preliminary issues under Section 11 (6), the Law Commission interalia suggested for amendment to Section 11 (6) by adding a new sub-section Section 11 (6A) to the Act. Section 11 (6A) is reproduced hereunder:
"(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 Section limits the power of the Court under Section 11 (6) only to examine the existence of an arbitration agreement.
Invocation of Arbitration for Unstamped Agreement
Post the Amendment Act of 2015, the question which arose for determination was whether the insertion of Section 11 (6A) removed the basis of SMS Tea Estate judgement and whether the aspect of impounding should be left to the Arbitrator to decide under Section 16 of the Arbitration Act. This issue was considered recently in the following 2 judgements:
(i) Gautam Landscapes Pvt. Ltd. Vs Sailesh Shah by the Full Bench of Bombay High Court
(ii) Garware Wall Ropes v Coastal Marine Constructions and Engineering Limited by the Supreme Court
This section of the Article deals with the aforementioned judgements
Gautam Landscape Judgement – Full Bench of the Bombay High Court
The Bombay High Court constituted a Full Bench to decide the following questions:
1. Whether a court, under the Arbitration and Conciliation Act, 1996, can entertain and grant any interim or adinterim relief in an application under Section 9 of the Act when a document containing arbitration clause is unstamped or insufficiently stamped?
2. Whether, inter alia, in view of Section 11 (6A) of the Arbitration and Conciliation Act, 1996, inserted by Arbitration and Conciliation (Amendment) Act, 2016, it would be necessary for the court before considering and passing final orders on an application under Section 11(6) of the Act to await the adjudication by the stamp authorities, in a case where the document objected to, is not adequately stamped?
With respect to the first question, the Court held that the judgement rendered in SMS Tea Estate was with respect to Section 11 of the Act and cannot be made applicable for an application under Section 9 of the Act. The Court concluded that for the purpose of deciding an application under Section 9, the Arbitration Agreement will be considered independent of the main contract and interim / ad-interim reliefs can be granted even though the main agreement is inadequately stamped.
Placing reliance on Section 11 (6A), the High Court answered the second question in the negative and held that the powers of the Court is restricted only to determine the existence of an arbitration agreement. The issue of stamp duty has to be decided by the Arbitrator. Thus, an application under Section 11 could be entertained even though the main agreement is inadequately stamped.
The Coastal Marine Judgement –Supreme Court
A similar question came for consideration of the Supreme Court in the matter of Coastal Marine. The Supreme Court examined:
- What is the effect of an arbitration clause contained in a contract which requires to be stamped? And the question;
- Whether findings in SMS Tea Estate case continue to hold the field or the same has been done away with by introduction (in Section 11(6A) of Act) of the phrase "notwithstanding any judgment, decree or order of any court"?
The Supreme Court took the view that 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. SMS Tea Estates, has taken account of the mandatory provisions contained in the Indian Stamp Act and held them applicable to judicial authorities, which would include the Supreme Court and the High Court acting under Section 11.
The provisions of Stamp Act are mandatory in nature and have been enacted to protect revenue, and the same appears to be the reason because of which there is no mention of the SMS Tea Estate anywhere in the Report. In view thereof, the Supreme Court held that:
"16. 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 (supra), which continues to apply even after the amendment of Section 11(6A)."
The Supreme Court also observed that an agreement becomes a contract when it is enforceable by law (Section 2h, Indian Contract Act, 1872), and as per the Indian Stamp Act, an agreement is not enforceable unless it is duly stamped. Hence, an arbitration clause would not exist when it is not enforceable by law.
The Supreme Court reiterated the position laid down by SMS Tea Estate and held that while deciding an application under Section 11 (6A), if the main agreement is unstamped, the Court would impound such document and hand it over to the Authority for adjudication of stamp duty which authority shall decide within 45 days.
Recently the Parliament has passed the Arbitration and Conciliation (Amendment) Act, 2019 ('Amending Act'). Section 11 of the Act now provides appointment of arbitrators by arbitral institution(s) designated by the Supreme Court (international commercial arbitration) or the High Court (other arbitration). The Amending Act has abrogated the powers of the Supreme Court or the High Court to even determine the existence of the arbitration agreement. The amendment is aimed to achieve minimal judicial intervention.
Though, till date no procedure/guideline has been laid down for such arbitral institution(s) while appointing arbitrators, it appears that the same will not dilute the ratio laid down in the Coastal Marine Case which will bind even arbitral institutions.
Present scenario under Section 11 & Section 9
Though, the issue pertaining to Section 11 (6) has been put to rest by the Coastal Marine judgment, the issue with respect to Section 9 was not decided. The Supreme Court referred to the Gautam Landscape judgement and specifically overruled it to the extent of its applicability qua Section 11. However, no reference was made with respect to Section 9 of the Act.
In respect of an application under Section 9 of the Act, the Full Bench has held that a party's right to seek reliefs under Section 9, does not arise out of a contract containing the arbitration agreement. In coming to this finding, the Full Bench relied upon the decision of the Supreme Court in Firm Ashok Traders Vs Gurumukh Das Saluja ('Firm Ashok Traders').
In Firm Ashok Traders the Supreme Court has held that the reliefs which the court may allow to a party under clauses (i) and (ii) of Section 9 flow from the power vesting in the court exercisable by reference to 'contemplated', 'pending' or 'completed' arbitral proceedings. The essential requirement, for invoking jurisdiction of the court under Section 9 is that there exists an "arbitration agreement" between the parties. Thus, if the observation of the Supreme Court that an unstamped document is unenforceable in law is made applicable, then the basic requirement of Section 9 is not fulfilled.
Taking note of the fact that the Coastal Marine Case has not overruled the findings of the Full Bench, the Bombay High Court recently in Saifee Developers Vs Sanklesha Constructions and Ors, granted interim reliefs under Section 9 of Act.
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 Supreme Court in Coastal Marine Case, where the court has 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.
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.