The Bombay High Court ("Court") on November 28, 2019, in the case S. Satyanarayana & Co. v. West Quay Multisport Private Limited, passed an order clarifying that, if an arbitration agreement specifies a state where the arbitration shall take place, stamp duty of that state shall be applicable on that arbitration agreement.
In the present matter, West Quay Multisport Private Limited ("West Quay") was awarded a works contract in 2012 by Vishakhapatnam Port Trust for development of a berth at Vishakhapatnam. West Quay entered into two contracts dated December 05, 2012, with S. Satyanarayana & Co. ("Satyanarayana"), appointing them as the sub-contractor for the above assignment.
The agreement was signed by West Quay in Mumbai and by Satyanarayana in Vishakhapatnam and was formally executed in Vishakhapatnam. However, Clause 55.2 of both contracts specified the arbitration clause and stated Mumbai as place of arbitration, in the event there was any dispute. In 2015, dispute arose between the two parties and Satyanarayana invoked arbitration and called upon West Quay to nominate its arbitrator. West Quay failed to appoint its arbitrator, thereupon, Satyanarayana filed an arbitration petition under Section 11 of the Arbitration and Conciliation Act, 1996.
Arguments on behalf of West Quay
West Quay did not argue on the validity of the arbitration clause, however, they argued that since the arbitration clause requires arbitration to be conducted in Mumbai, Maharashtra Stamp Act 1958 shall apply on this agreement. West Quay relied on the Supreme Court judgment in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. ("Garware case"). In Garware case, the Supreme Court held that an agreement is an indivisible unit. If there is an arbitration clause, then appointment of arbitrator should arise from that clause itself and hence, the document needs to be duly stamped.
West Quay then cited Section 3(b) of the Maharashtra Stamp Act ("Stamp Act") which provides that any instrument which has been executed out of Maharashtra but is related to any matter or thing done or to be done in Maharashtra, then such instrument shall be stamped according to Stamp Act. Further, since arbitration clause is non-severable clause of the agreement, arbitration should be considered as "a thing done or to be done" and must be stamped as per Stamp Act.
Arguments on behalf of Satyanarayana
The Counsel for Satyanarayana stated that they agree with majority of West Quay's contention, except that the term "a thing done or to be done" should not be interpreted broadly. This term has a restricted scope of including only the contract work to be done by the contractor. Arbitration is merely a dispute resolution mechanism and should not form a part of the same.
What did the Court hold?
The Court relied on Garmare case and reiterated that the agreement should be stamped in the State where the arbitration agreement shall take place, if it is not done, then it will result in severing that clause from the rest of the agreement. This would be irrational as arbitration clause is an integral part of the agreement. Further, the Court rejected the argument of Satyanarayana that "a thing done or to be done" should only include contractual obligations of the contractor.
The Court opined that even though linguistic meaning of the phrase would not include arbitration, but since arbitration clause is an integral part of the agreement and appointment of arbitrator should arise from the contract itself, the phrase should include arbitration clause.
The Court also relied on Section 19 of the Stamp Act, which reiterates the position of law stated in Section 3(b) of the Stamp Act, that an agreement signed outside the State must be stamped in that State if reference for a thing done or to be done is made in that particular State. Therefore, the Court held that the agreements in this matter were liable to be stamped in state of Maharashtra as well.
The prevalent approach with respect to stamping of agreements, in India, as per law or in general practice too, has been, to get the agreements stamped where they are executed. However, the Court by this judgment clarifies the applicability of stamp act on the agreements which include any arbitration clause. The agreements will have to be stamped in the state in which arbitration is supposed to be conducted as per the terms of arbitration clause of that agreement.
The Court has provided an excellent interpretation of the precedents and the clause in question to come to this conclusion. The Court clarified the position of law part by part. First of all, they concluded that for the purpose of Arbitration and Conciliation Act, 1996, the agreements need to be duly stamped. Duly stamped means to be stamped according to the law, which means that in this case the agreements shall have been stamped as per Stamp Act.
A problem that this judgment poses is the enforceability of payment of additional stamp duty for arbitration clause. For example, In the event parties execute an agreement at Jaipur but the venue of arbitration is specified as Mumbai, in such a scenario the judgment fails to address the logistical challenges parties might face to pay the proper stamp duty in Mumbai as per the Maharashtra Stamp Act.
03 December, 2019
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