Stamping of arbitration agreement when contract is executed outside State, What Bombay HC held

Justice GS Patel of the Bombay High Court recently clarified that an arbitration agreement must be stamped in the State where the arbitration is to take place (in this case, Maharashtra), even if the only “thing to be done” in the State is the arbitration of disputes. The ruling was passed relying on the Supreme Court’s ruling in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Ltd., combined with a reading of Sections 3 (b) and 19 of the Maharashtra Stamp Act..Factual Background.The main contract in question was executed outside Maharashtra and pertained to works to be carried out in Vishakhpatnam. However, the arbitration clause specified that the arbitration of any contractual dispute must take place in Mumbai. The main agreement had been stamped in accordance with the relevant laws in Vishakhpatnam. It had not been stamped under the Maharashtra Stamp Act, 1958..After contractual disputes emerged, and the parties were unable to nominate an arbitrator, an application was filed before the High Court under Section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator. However, a further dispute arose as to whether the arbitration agreement would be recognized since the agreement had not been stamped under the stamping laws in Maharashtra, where the arbitration was to be conducted..Issue before the Court.The question before the Court was whether the arbitration agreement must be stamped in Maharashtra as well. Justice Patel framed the issue thus:.“A contract is executed outside this State. It pertains to work to be done outside the State. It contains an arbitration clause. That clause, and the jurisdiction clause, reference Mumbai. The arbitration is to be in Mumbai. Nothing else is to be done in Mumbai or Maharashtra. Disputes arise. Arbitration is invoked. The agreement is ‘brought into’ this State — on the agreement, an application under Section 11 of the Arbitration Act is fled. Is the agreement liable to stamp in this state, where the only thing to be done is arbitration? Is arbitration a ‘thing done or to be done’ in this state? That is the short, yet interesting, question of interpretation of one portion of Section 3 of the Maharashtra Stamp Act 1958 that arises in this application.”Legal PositionIn Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Ltd, the Supreme Court had ruled that an arbitration agreement cannot be acted upon unless it is duly stamped.Read: What the Supreme Court held on Enforceability of Arbitration Clauses in Unstamped Agreements Section 3 of the Maharashtra Stamp Act, 1958 specifies the various instruments that are liable to stamp duty in Maharashtra. Clause (b) of Section 3 specifies that instruments executed out of State and relating to any matter of thing done or to be done in this State and is received in this State are also liable to be stamped. Such instruments are also subject to stamp duty under Section 19 of the Act (dealing with Payment of duty on certain instruments or copies thereof liable to increased duty in Maharashtra State).The Court noted that, in view of these provisions, the question was “whether arbitration, and only arbitration, can be said to be a thing done or to be done in the State.”Arguments made by the PartiesThe applicant, Satyanarayana & Co, argued that the “thing to be done” in this case pertains to the main contract work. It was submitted that arbitration is a dispute redressal mechanism, not a thing “done or to be done” under the agreement. It was his case that it is only when there is a dispute about a thing “done or to be done” under the agreement that the arbitration clause begins to operate. Therefore, arbitration per se is not under the contract. Consequently, there was no requirement to subject the same to the Maharashtra Stamp Act.The respondent, West Quay Multiport Private Limited, contested this position, maintaining that the agreement is liable to be subjected to an assessment as to stamp under the Maharashtra Stamp Act 1958. It was argued that even if the works under the contract were to be done outside Maharashtra if the agreement is brought into Maharashtra for any purpose at all, it would be liable to stamp.Advocate Ketan Chotani argued for the applicant, instructed by Advocate Pinky Bhansali. Advocate Ankita Singhania argued for the respondent, assisted by Advocates Ranjit Shetty, Jonathan Jose, and Avina Karnad and instructed by Argus Partners. What the Bombay High Court heldJustice Patel ultimately held that the arbitration agreement must be stamped under the Maharashtra Stamp Act, even if the main contract was executed outside the State.Firstly, the Court took note of the law laid down by Justice RF Nariman in the Garware Wall Ropes case. Justice Patel observed that the Court had ruled that,.“.. unless there is stamp paid on a document that is liable to stamp, that document cannot be acted upon for any purpose. For the purposes of a Section 11 application, such an unstamped document (being one that needs stamping but on which no stamp duty is paid) is simply not in existence or, might as well not be in existence. It can (and must) be acted upon only once it has been adjudicated as to stamp, and that stamp has been paid with all penalty etc.“.In this backdrop, the High Court proceeded to deal with whether arbitration would be a “thing to be done” under Sections 3 and 19 of the Maharashtra Stamp Act. In this regard, the judge observed that to insist that arbitration clauses alone are exempt from stamp duty under the Act would entail severing it from the rest of the agreement, which is not possible..“… I should have the greatest difficulty in accepting Mr Chotani’s argument without running seriously afoul of the Supreme Court decisions in Garware Wall Ropes and SMS Tea Estates Private Limited. To accept that argument would necessarily involved a severance of the arbitration clause from the rest of the contract. That in turn would require me to return a fInding that while the rest of the contract may be required to be stamped, since that portion of the agreement is not being ‘brought into the State’ and nothing is being done under the remaining portion, and further since arbitration agreements are themselves not assessable to stamp, therefore no stamp is payable. Of necessity, this would involve segregating or severing the arbitration clause from the rest of the agreement. That I think is now clearly impermissible and cannot be done ….… I believe the applicant’s argument overlooks a cardinal principle of arbitration and arbitration law. Arbitration is founded in contract and Garware Wall Ropes now tells us that such a contract is one and indivisible at least to the extent of its arbitration agreement. There is party autonomy in what they may decide between themselves and this must be respected by the Court. The arbitrator himself is a creature of contract. Arbitration is impossible without agreement.”.Even on a literal appreciation of the provisions of the Maharastra Stamp Act, the Court found it could not rule in favour of the applicant on this aspect..“The other reason that militates against acceptance of Mr Chotani’s submission is purely linguistic. To hold in his favour, I should necessarily have to conclude that arbitration is not a thing done or to be done at all. It is difficult, without doing some very serious violence to the language, to arrive at any such conclusion.“.The Court added,.“If the applicant has paid stamp duty in the local State and of course there will be an adjustment and credit given for the amount already paid, that will however not exempt the document from payment to stamp duty under the Maharashtra Stamp Act.“.[Read the Order]