x

June 2019

Effect of an unstamped agreement containing an arbitration clause

by Siddharth Agrawal Himanshu Setia

 

Recently, the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. [2019 SCC Online SC 515; Civil Appeal No. 3631 of 2019] (“Garware Wall Ropes”) decided the effect of an arbitration clause contained in a contract which requires to be stamped and also discussed the effect of judgment of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd [(2011) 14 SCC 60] (“SMS TEA”).

The present case arose out of a sub-contract awarded by the appellant to the respondent in respect of work to be done for installation of a geo-textile tubes embankment with toe mound at a village in Odisha for protection against coastal erosion. The sub-contract agreement contained an arbitral clause. Disputes had arisen between the parties and the appellant terminated the sub-contract and subsequently, the appellant issued a notice of appointment of a sole arbitrator. However, the respondent replied by saying that it’s premature to appoint a sole arbitrator as invocation of arbitration under the agreement was pre-mature. Therefore, the respondent was constrained to file a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) before the Bombay High Court for appointment of arbitrator, which was allowed.

The underlying contract which contained the arbitration clause was an unstamped document and the Court observed that the agreement as a whole has to be acted upon. The Indian Stamp Act applies to the agreement as a whole and therefore, it is not possible to bifurcate the arbitration clause contained in such agreement to give an independent existence, which can only be done for limited purposes. Further, the court observed that Section 11 (6A) of the Act does not in any manner get over the basis of the judgment in SMS TEA and it continues to apply even after the amendment of Section 11(6) of the Act.  In SMS TEA, the Supreme Court held that when an arbitration clause is contained in an unstamped agreement, the Court hearing the Section 11 application is required to impound the agreement and ensure that the stamp duty and penalty (if any) are paid before proceeding with the Section 11 application.

Furthermore, the Court observed that an agreement only becomes a contract if it is enforceable by law. As observed above, an agreement which is not duly stamped does not become a contract. Therefore, an arbitration clause in an agreement would not exist when it is not enforceable by law. [Refer Section 11(6A) r/w 7(2) of the of the Act, Section 2(h) of the Contract Act 1872]

The Court further held that the arbitration clause contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped.  The Court placed reliance on United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors.  (2018 SCC Online SC 1045) and opined that Section 11(6A) deals with “existence” as opposed to Sections 8, 16 and 45 of the Act which deals with the “validity” of an arbitration agreement.

The Court overruled judgments of various High Courts including the Full Bench judgment of the Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh Sha and Ors. [2019 SCC Online Bom 563; Arb. Pet. No. 466/2017, decided on 4 April 2019] (“Gautam Landscapes”). The Bombay High Court held that the Court can entertain an application under Section 9 for an interim measure as well as an application under Section 11 (6) of the Act for appointment of arbitrator in case of an unstamped or insufficiently stamped document.  In Garware Wall Ropes, the Supreme Court held that the Bombay High Court’s judgment in Gautam Landscapes was incorrectly decided as regards Section 11 of the Act.

In so far as Section 11(13) of the Act is concerned, the Supreme Court held that appropriate stamp duty should be paid on an instrument before it is acted upon by any authority. The endeavour of the Court is to dispose off the application under Section 11 of the Act as soon as possible.

The Court opined that doctrine of harmonious construction of statutes is strongly imbedded in our interpretative canon. It can be done by safeguarding the revenue and the High Court must impound the instrument which has not borne the stamp duty and hand it over to the relevant authority under the Maharashtra Stamp Act who will then decide the issues regarding payment of stamp duty as expeditiously as possible and preferably within a period of 45 days. And once the duty is paid, the High Court shall expeditiously dispose the application under Section 11 of the Act and the arbitrator can decide the dispute within the time-frame under Section 29-A of the of the Act.

The Supreme Court allowed the appeal and set aside the judgment and remitted the matter back to the Bombay High Court for disposal of the same in light of the Supreme Court decision.

While the Supreme Court did not go into the question of whether an application under Section 9 of the Act for interim relief is maintainable in an arbitration that emanates out of an unstamped agreement, in view of the ratio in the Garware Wall Ropes it seems that such applications may not be maintainable. However, since there is no express ruling on this aspect, it is likely to be open for debate until a specific decision is given on this issue by the Supreme Court.

[The authors are Principal Associate and Associate, respectively, in Arbitration practice, Lakshmikumaran & Sridharan, New Delhi]

Browse articles