Column: Enforceability of Arbitration Clauses in Unstamped Agreements

Bar & Bench May 6 2019
arbitration clauses, arjun, khushboo

Arjun Krishnan and Khushboo Mittal

Can an arbitration clause contained in an agreement which is not stamped or inadequately stamped, be acted upon for the appointment of arbitrator(s) under section 11 of the Arbitration & Conciliation Act 1996 (‘1996 Act’)? 

This question was recently answered by the Supreme Court in Garware Wall Ropes v Coastal Marine Constructions & Engineering (Judgment dated April 10, 2019, in CA 3631 of 2019).

The Supreme Court relied on its earlier decision in SMS Tea Estates. v. Chandmari Tea Co., (2011) 14 SCC 66 to hold that before appointing an arbitrator under section 11, the Supreme Court or the High Court is duty bound to ensure that the document is impounded and stamp duty and penalty (if any) is paid before the agreement (including the arbitration clause) can be acted upon. 

The Supreme Court also held that the SMS Tea Estates decision would continue to operate despite the 2015 Amendment to section 11 of the 1996 Act. By the 2015 Amendment, the inquiry was restricted to the ‘existence’ of the arbitration agreement between the parties. According to the Supreme Court, an agreement only becomes a ‘contract’ if it is enforceable, and it is not enforceable unless it is duly stamped. The Supreme Court clarified that the Indian Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. An arbitration clause can be given an independent existence only for certain limited purposes, for instance, where the document was not duly registered, as held in SMS Tea Estates.

The Supreme Court reversed the decision of the Bombay High Court under challenge before it, and also overruled several decisions of the Delhi and Karnataka High Courts. In all these cases, it was held that after the 2015 Amendments to the 1996 Act, objections, as to stamp duty, could be decided by the arbitrator, who could if necessary, impound the document and direct payment of stamp duty and penalty. These judgments are no longer good law.

What does an arbitrator do when faced with an unstamped agreement?

The necessary implication of the Supreme Court’s decision in Garware Wall Ropes appears to be that the arbitrator(s) must necessarily refer the parties to the appropriate authority under the Stamp Act before taking any steps in the matter. The arbitration cannot proceed on the basis of an unstamped document since the arbitration clause contained in such an agreement would be unenforceable.

Can interim relief be granted under section 9 in relation to an arbitration clause in an unstamped agreement?

In Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors., (2019) SCC OnLine Bom 563. In this case, two questions were considered by a Full Bench of the Bombay High Court.

  1. Whether any interim relief under Section 9 of the 1996 Act can be granted when a document containing arbitration clause is unstamped or insufficiently stamped?
  2. Whether an arbitrator can be appointed under section 11 in respect of an arbitration clause in an agreement that not stamped or insufficiently stamped?

While answering the first question, the Bombay High Court held that awaiting adjudication on stamp duty before granting relief would defeat the scheme and provisions of the 1996 Act. It was held that the arbitration agreement was separate and distinct from the document in which it was contained, and would not require stamping. While answering the second question, the Bombay High Court held that the appointment of arbitrators need not await the adjudication on stamp duty and penalty. 

The Supreme Court in Garware considered the Bombay High Court’s judgment in Gautam Landscapes, and expressly overruled it only in respect of the second question. Does this mean that the Gautam Landscapes is good law for the first question i.e. that a court can decide on interim/ad-interim reliefs under section 9 without waiting for adjudication on stamp duty? The reasoning adopted by the High Court appears to be directly contrary to the reasoning of the Supreme Court in Garware that an agreement as a whole (including the arbitration clause) is unenforceable if it is not properly stamped. Even though the Supreme Court stopped short of expressly overruling Gautam Landscapes on the first question of interim measures under section 9, it would appear that even on the question, Gautam Landscapes can no longer be relied on.

Has the Supreme Court come to the right conclusion?

The decision of the Supreme Court in Garware appears to be contrary to a basic tenet of arbitration law that the arbitration agreement is separate and distinct from the agreement in which it is contained. The approach of the Bombay High Court in Gautam Landscapes has much to commend it. The purpose of stamp duty is, after all, revenue for the state, and proceeding with the appointment of arbitrators (or any other matter) need not be paused while the adjudication takes place before the appropriate authority for stamp duty.

The adjudication itself may take longer than 45 days as contemplated by the Supreme Court. The entire purpose of the 2015 Amendments was to confine the inquiry to the mere existence of the arbitration agreement, as held in Duro Fulguera v Gangavaram Port (2017) 9 SCC 729. It is uncertain as to how Courts would react to questions of interim measures in respect of an un-stamped agreement after Garware. What is certain, however, is that there is a high premium on ensuring that documents are properly stamped at the very inception.

 

Arjun Krishnan is a Partner and Khushboo Mittal is an Associate at Samvad Partners.

 

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