India: Effect Of An Arbitration Clause In An Unstamped Agreement

Introduction

Two recent judgements of the Indian courts portray differing judicial views on the consequence of arbitration clauses in unstamped agreements. A Full Bench of the Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors¹. decided on 4 April 2019, ruled that a judicial authority could act on an unstamped agreement containing an arbitration clause and deferred the question as to the validity of the agreement to the arbitral tribunal.

In contrast, the Supreme Court in a judgement rendered two weeks later in Garware Wall Ropes Ltd vs. Coastal Marine Constructions & Engineering Ltd.², (another case) overruled the judgement of the Bombay High Court, and held that an unstamped agreement must necessarily await adjudication by the stamp authorities in order for the court to act on an arbitration clause embedded in it. The appeal before the Supreme Court arose out of an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 ("Act") (Article 11 of the UNCITRAL Model Law), for appointment of an arbitrator.

Under the Indian Stamp Act, all instruments sought to be relied on before a court or judicial authority in India, must bear the requisite amount of stamp duty. Failure to stamp an agreement renders the document inadmissible in evidence and the judicial authority is enjoined from acting on it.

Factual Matrix

In the case before the Supreme Court, a dispute arose between the parties out of a construction contract containing an arbitration clause. As the parties were unable to agree to the appointment of an arbitrator, Coastal Marine applied to the Bombay High Court as the designated appointing authority under Section 11 of the Act.

Garware opposed Coastal's application for appointment of an arbitrator on the ground that the contract was un-stamped and any order passed by the Bombay High Court based on an un-stamped document would violate Sections 33 and 34 of the Maharashtra Stamp Act, 1958.³

The Appellant relied on an earlier judgement of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.⁴ ("SMS Tea Estate") in which the Supreme Court held that an arbitration clause contained in an unstamped agreement would require the Court to impound the agreement and ensure that stamp duty and penalty (if any) were duly paid before determining the application for appointment of an arbitrator.

However, the High Court of Bombay allowed the application under Section 11 of the Act and appointed an arbitrator by reasoning that the validity and existence of the agreement could be decided by the arbitral tribunal under Section 16 of the Act (Article 16 of the UNCITRAL Model Law). In short, the Bombay High Court deferred the question and stage for payment of stamp duty to the tribunal.

Supreme Court Judgment

The judgement of the Bombay High Court was carried in appeal to the Supreme Court. The Supreme Court disagreed with the Bombay High Court and held that the introduction of Section 11(6A) did not change the law declared by the Supreme Court in SMS Tea Estate case. The Supreme Court interpreted the relevant provisions of the Stamp Act as requiring a judicial authority not to act on an unstamped document. Consequently, the court held that it could not appoint an arbitrator under Section 11 of the Act until the contract was stamped.

According to the Supreme Court, the Stamp Act applied to the agreement as a whole and it was not possible to bifurcate the arbitration clause contained in the contract to give it an independent status. The Supreme Court relied on Section 2(h) of the Indian Contract Act, 1872, to hold that an unstamped agreement was not a contract and was consequently unenforceable. In the Court's view, an arbitration clause contained in an unstamped agreement would similarly be unenforceable. Such an arbitration clause according to the Supreme Court, would not exist as a matter of law until the underlying agreement was duly stamped.

Conclusion

The judgement of the Supreme Court on a strict technical interpretation of the Stamp Act, cannot be faulted. However, the Court whilst rigidly applying the Stamp Act, failed to foresee the practical implications of its decision. The judgement will inevitably encourage a recalcitrant party to raise technical objections to stall the appointment of the tribunal thereby delaying arbitration. A party seeking urgent interim protective measures from the Court under Section 9 of the Act, may also be frustrated in circumstances where the agreement sought to be relied on is unstamped. The judgment is a step back from the otherwise pro-arbitration judicial philosophy exhibited by the Indian Courts in recent times.

The amendments to Indian arbitration law were introduced with the objective of modernising Indian arbitration law and promoting India as an attractive destination for arbitration. Given India's abysmal ranking on contract enforcement, it is imperative that arbitration law in India be developed and applied by courts in a flexible and pragmatic manner so as to facilitate the enforcement of contractual rights and encourage resolution of disputes by arbitration, where agreed by the parties.

The Supreme Court missed the opportunity of striking a balance between augmenting government revenue through stamp duty and holding parties to their contractual bargain. Both these objectives could have been achieved by the simple expedient of the Court constituting the tribunal and directing the applicant to pay the requisite stamp duty within a reasonable period of time, failing which the arbitration would be suspended.

Finally, a moot question. Where the appointing authority is an institution in an Indian seated arbitration, would the same approach to unstamped documents be adopted?

Footnotes

1 Arb. Pet. No. 466 of 2017.

2 Civil Appeal No. 3631 of 2019 (Arising out of Special Leave Petition (Civil) No. 9213 of 2018.

3 Under Section 33 of the Maharashtra Stamp Act, judicial authorities must impound an unstamped document- while under Section 34 an unstamped document is inadmissible in evidence and cannot be acted upon by any judicial authority.

4 (2011) 14 SCC 66

Originally published April 15, 2019.

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.