Author: Adhiraj Singh, Student at Institute of Law, Nirma University.
Co-Author: Rishi Raj Pandey, Student at Institute of Law, Nirma University.
Arbitration agreement is a contract wherein the parties through mutual consent agrees to settle their dispute via arbitration which could arise between them in the course of their dealing with each other. However, the problem arose when document having the arbitration clause is not duly stamped. In such circumstance issue regarding the enforceability and effects of such arbitration clause arises as to whether such arbitration agreement is enforceable. The two differing opinion has been put forward by the court in two different judgment. In the case of Gautam Landscape V/S Shailesh Shah, the High Court of Bombay held that the judicial authority can act on an unstamped agreement/contract containing an arbitration clause. However, the Supreme Court recently in the case of Garwar Wall Ropes v Costal Marine Construction Engineering overruled the aforesaid judgment and laid down certain principles. However, Supreme Court again departed from the principles laid down in Garware in the case of M/s N.N. Global Mercantile pvt ltd v. Indo Unique Flame. In light of the same, the authors in the present paper evaluate the impact of an unstamped document containing an arbitration clause.
BACKGROUND OF CONTROVERSY – SMS TEA ESTATES (P) LTD. V. CHANDMARI TEA CO. (P) LTD
1st time dispute regarding the issue as to whether any document containing an arbitration clause can be acted upon if such document has not duly stamped or unstamped arose before the Supreme Court in the SMS Tea Case wherein it was held before hearing the application of sec. 11 of Arbitration Act, Court is bound to ensure that stamp duty is given in accordance with the relevant provisions of the Stamps Act. Thus, by effect of this judgment a document containing an arbitration clause if not duly stamped or unstamped then such clause cannot be acted upon by the court.
STEPS TO BE ADHERED TO WHERE THE ARBITRATION CLAUSE IS CONTAINED IN A DOCUMENT WHICH IS NOT REGISTERED (BUT COMPULSORILY REGISTERABLE) AND WHICH IS NOT DULY STAMPED
- The court must, before taking into account any document as an evidence or acting upon such document, examine whether such document is duly stamped and whether it is an instrument which is compulsorily to be registered.
- If the document is not duly stamped in such condition the relevant section of the Stamp Act bars the said document being acted upon. Therefore, even the arbitration Clause contained therein cannot be acted upon. Thereafter, the court must proceed to impound the document Under the relevant section of the Stamp Act and follow the procedure mentioned therein.
- If the document is duly stamped, or if the deficit stamp duty and penalty is paid, either before the court or before and the defect with respect to deficit stamp is cured, the court may treat the document as duly stamped.
SBP & CO. V. PATEL ENGINEERING LTD DECISION AND THE AMENDMENT ACT OF 2015
In this the court has laid down the test of live claim and dead claim and by doing so the court has empowered itself to hear the application of section 11 of the Arbitration Act with respect to preliminary issues as well. The Court interpreted the application in such a way that it confer wider power on itself to decide the preliminary issue that has no nexus with existence of arbitration agreement. Therefore, in the year 2015, the Sec.11(6A) was inserted in the Arbitration Act by Amendment, which says that
“The Supreme Court or, as the case may be, the High Court, while considering any application under subsection (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”
The purpose was to minimise the judicial intervention in the arbitration mattes. The aforesaid section says that court should confine itself to check only the existence of an arbitration agreement. After this amendment the question that arose was whether the aforesaid section has removed the basis of SMS Tea case so now after the insertion of section 11(6A) ,the impounding of instrument is done by arbitrator instead of judge hearing the section 11(6) application.
However, in the SBP case it was settled by the court that sec. 16 of the same Act will comes into picture only after the constitution of arbitral tribunal without court’s intervention under sect.11 of the Arbitration Act. The section 11(6A) of the Arbitration Act suggest that where the Supreme Court or the High Court hearing an application under section 11 of the same act come across a clause in an unstamped document, it is empowered under the provision of Indian Stamp Act to firstly impound the document and ensure stamp duty and penalty is paid before such document is acted upon. It is essential to note that Indian Stamp Act is applicable to agreement or document as whole and therefore, it is impossible to sever arbitration clause from the rest of the agreement or document so as to give it independent existence after the introduction of Sec.11(6A) does not, in any manner, deal with or get over the basis of the judgment in Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd, which continues to apply even after the amendment of Section 11(6A).
In the case of Duro Felguera, S.A. v. Gangavaram Port Ltd. Following were the observations That after the introduction of 2015 amendment it is clear that all courts have to confine itself to look only whether the arbitration contract exists and nothing more and less. The very purpose of the amendment is reduce the court intervened at the stage of appointing arbitrator and same has been given shape under section 11(6A) of the Act.
246TH LAW COMMISSION REPORT
The Law commission later on published its report on the above issues and it was observed by the commission that it is prudent for the Judiciary to revisit the decisions of SBP & Co. v. Patel Engineering Ltd because of which the court has been conferred with wide power to decide the preliminary issue, therefore, the commission was of opined that far as Section 11 is concerned, the Supreme Court or, as the case may be, the High Court, while considering any application under Section 11(4) to 11(6) is to “confine itself to the examination of the existence of an arbitration agreement and leave all other preliminary issues to be decided by the arbitrator.“
GAUTAM LANDSCAPES PRIVATE LIMITED V. SHAILESH SHAH
In the aforementioned case two main issues arose before the High Court of Bombay. The following were the issues before the Court:-
- Whether the court is empowered to entertain an application under section 9 of the Arbitration Act to provide the interim or ad-interim relief if an unstamped document containing an arbitration clause.
- Whether the court should wait for the adjudication of dispute by the stamp authorities where the document is not adequately stamped.
The Court while dealing with aforesaid issue held that a court is empowered to grant relief under section 9 even though the document containing an arbitration clause is unstamped. The Court held that decision given in SMS Tea is not applicable here as the present case is dealt with section 9 and the right given to party under this section is not be of an nature of right under a contract. However, the SMS Tea case was with respect to section 11 of the Arbitration Act and therefore, the aforesaid decision is not applicable and remedy under section 9 of the Arbitration Act can be granted. While dealing with second issue, the Court observed that Stamp Act is enacted for the collection revenue and therefore, it can only be achieved by impounding the document before the stamp authorities. However, if the court will wait for the decision of stamp authorities then it would not be feasible for attaining the justice. Hence, while deciding the application of section 11, the court must not wait for the decision of stamp authorities.
GARWARE WALL ROPES LTD. V. COASTAL MARINE CONSTRUCTIONS AND ENGINEERING LTD.
The Judgement of Bombay High Court in Gautam Landscapes case has overruled by the Supreme Court in the aforesaid case following the reasoning from United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors, wherein the Court said that an arbitration Clause would get activated only if an insurer admits or accepts liability. Likewise, in the present case, it is clear that the arbitration Clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped. Thus, the concluded as follows:
- Until and unless the agreement which prescribes the arbitration clause is sufficiently stamped, the court cannot appoint an arbitrator;
- There must be, impound the agreement on which adequate stamp duty has not been paid and hand it over to the relevant stamp authority for rectification;
- The authorities should solve issue relating to the stamp duty as soon as possible , and preferably within a period of 45 days from the date on which the authority receives the agreement.
M/S N.N. GLOBAL MERCANTILE PRIVATE LIMITED V. INDO UNIQUE FLAME
In this, the court departed from the ratio of Garware Judgment. The court observed that because of the competence- competence doctrine and principle of separability, the arbitration clause is independent from the document even though such arbitration clause is contained in an unstamped or not duly stamped. Further, the Court relied upon the section 16 of the Arbitration Act and observed that aforesaid section givers power to the arbitral tribunal to rules on it’s on jurisdiction and therefore, recognises the independent existence of an arbitration clause. It has been further observed that arbitration agreement is not instrument therefore duty cannot be charged on it under Indian Stamp Act. Thus, by applying the doctrine of competence- competence it has been held that non-payment of stamp duty will not affect invocation of arbitration clause as it is not chargeable on it. Therefore impounding of document containing arbitration clause can even be done after it placed before, the arbitrator. The Arbitral Tribunal thereafter direct the parties to pay stamp duty as required. The Court must refer the matter for arbitration before Arbitrator Tribunal. The Court can also grant interim relief under section 9 and thereafter may direct the party to impound the document and to pay stamp duty if not paid.
The controversies surrounding the unstamped document containing an arbitration clause is most debated issue in the recent times because of differing judgments by various High Courts and Supreme Court. The Supreme Court Garwar Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering limited finally settled the controversy. However, again the Supreme Court in N.N. Global Mercantile departed from the Garware decision, by recognising the independent existence of arbitration clause but this is welcome decision as it will ensures minimal intervention of Courts in the matters relating to an unstamped or insufficiently stamped document containing arbitration clause.
 Ashima Obhan & Shivam Patanjali, Remedies TO An Unstamped Arbitration Agreement, (July 3, 2019), https://www.mondaq.com/india/arbitration-dispute-resolution/820816/remedies-to-an-unstamped-arbitration-agreement.
 SMS Tea Estate Ltd. v. Chandmari Tea Co. Ltd, (2011) 14 S.C.C. 66.
 SBP & Co. v. Patel Engineering Ltd, (2005) 8 S.C.C. 618.
 Arbitration & Conciliation (Amendment) Act, 2015.
 Supra note 4
 Supra note 2
 Duro Felguera, S.A. v. Gangavaram Port Ltd (2017) 9 SCC 729
 246th Law Commission Report.
 Supra note 4
 Roopadaksha Basu, Invoking Arbitration on an Unstamped/ Insufficiently Stamped Document, (Jan. 17, 2020), https://www.mondaq.com/india/arbitration-dispute-resolution/884590/invoking-arbitration-on-an-unstamped-insufficiently-stamped-document.
 Gautam Landscapes Private Limited v. Shailesh Shah, 2019 S.C.C. Online Bom 563.
 United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors, AIR 2018 SC 3932.
 Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd (2019) 9 S.C.C. 209.
 Faraz Alam Sagar & Ors., Invoking Arbitration Agreement in Unstamped Document- Course Correction From the Garware Wall Ropes Judgment, (Feb. 16, 2021), https://corporate.cyrilamarchandblogs.com/2021/02/invoking-arbitration-agreements-in-unstamped-documents-course-correction-from-the-garware-wall-ropes-judgment/