NPAC's Arbitration Review: Existence of arbitration agreement under Section 11(6-A) of Arbitration Act

Bar & Bench September 2 2019
arbitration, Renu Gupta

Renu Gupta

The Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., 2019 SCC Online SC 515 has held that if an arbitration agreement is not sufficiently stamped, the arbitration agreement cannot be said to be in “existence”, and, therefore, an arbitrator cannot be appointed under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

In its earlier decision in SMS Tea (2012), the court held that where an arbitration clause is contained in an unstamped agreement, the court hearing the Section 11 application should impound the agreement and ensure that stamp duty and penalty are paid before proceeding with the application.

The question before the Supreme Court in Garware was whether the basis of SMS Tea has been removed after introduction of Section 11(6-A) of the Arbitration Act in 2015.

In Garware, the court overruled the decision of the Single Judge of the Bombay High Court as well as the decision of Full Bench of Bombay High Court in  Gautam Landscapes Private Limited v. Shailesh S. Shah and another. However, the finding in Gautam Landscapes that relief under Section 9 of Arbitration Act can be granted even when the arbitration agreement is insufficiently stamped, has not been overruled in Garware.

To understand the decision of the Supreme Court in Garware, one must appreciate the Single Judge’s decision in Garware and in Gautam Landscapes.

Bombay High Court’s decision in Garware

Coastal Marine Construction and Engineering Limited/contractor sought appointment of an arbitrator before the Bombay High Court under Section 11 of the Arbitration Act. The existence of the arbitration agreement was not denied by the employer.

The respondent/employer/Garware-Wall Ropes Limited resisted the appointment of the arbitrator on two grounds, namely (i) the agreement is unstamped and appointing an arbitrator upon an unstamped document will be in violation of Section 33 and 34 of Maharashtra Stamp Act, 1958; and (ii) pre-arbitration mechanism set out in the agreement had not been followed and hence the petition was pre-mature. The second argument was rejected by the court.

In response, the contractor argued that the court under Section 11 must only examine the existence and not go into the issue of enforceability and validity of the agreement. It also argued that all the duties etc under the agreement had to be borne by the employer and therefore, the employer cannot take the defence of insufficiency of stamp duty.

Decision

Section 11 (6-A) mandates that in an application for appointment of an arbitrator, the court must confine itself to examination of the existence of an arbitration agreement. While relying upon paragraphs 28 to 33 of the 246th Report of the Law Commission, the court observed that the report recommended restricting judicial intervention to situations where the arbitration does not exist or is null and void. However, the phrase “null and void” from the report did not find its way into Section 11(6-A). 

Given the existence of the arbitration agreement was not disputed by the employer, the fact of insufficiency of stamp duty will not affect the existence of the arbitration agreement. The court replied on the decision of the Supreme Court in Duro Felgura, S.A v. Gangavaram Port Limited, (2017) 9 SCC 729 where the Supreme Court held that what is to be seen is if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.

The court while relying on the decision of Supreme Court in Hindustan Steel Ltd. v. Messrs Dilip Construction Company, (1969) 1 SCC 597 held that the provisions of Stamp Act are for securing revenue for the Government and not to arm a dishonest litigant with a technical defence and frustrate/delay arbitration proceedings. In this case, it was the employer’s liability under the contract to pay stamp duty and the employer cannot take advantage of its own wrong and frustrate the arbitration proceedings.

While dealing with the decision of SMS Tea, the court observed that this decision has lost its efficacy after Section 11(6-A) was incorporated which uses the words “notwithstanding any judgment”. It also held that whether a document is properly stamped or not is an issue which can be decided by the arbitrator and if a document is found insufficiently stamped, the arbitrator can always impound it and send it to the relevant authorities for adjudication.

Full Bench of Bombay High Court in Gautam Landscapes Private Limited v. Shailesh S. Shah and another

There were 2 questions before the court. (i) Whether court can grant an interim protection under Section 9 when a document containing arbitration clause is insufficiently stamped? (ii) Whether before considering an application under Section 11(6), the court has to await adjudication by stamp authorities if the document which is objected to, is not adequately stamped?

Main Arguments

It was argued by the amicus curaie that even if the main contract in an instrument is null and void, it would not mean that the arbitration clause is rendered invalid. 

The court under Section 9 and Section 11 will be “acting upon” an arbitration agreement and not on the contract contained in the instrument which requires stamping and the two are severable. The former is not an instrument on which stamp duty is leviable nor is it required to be compulsorily registered.

The issue of insufficiency of stamp duty can be considered at the stage of trial or evidence and is not germane at the stage of deciding an application for interim relief. Provisions relating to non-payment of stamp duty are not applicable to the stage of interim reliefs in civil suits. If it were held otherwise, it would deter parties from entering into an arbitration agreement.

The decision in SMS Tea cannot be applied to proceedings under Section 9 as it pertained to a proceeding under Section 11. It can also not be applied to a proceeding under Section 11 because of Section 11(6-A).

Decision

The first question was answered in the affirmative that the court can grant interim relief under Section 9 even if the document containing the arbitration clause is insufficiently stamped as an arbitration clause is severable from the other clauses of the contract and is not required to be stamped or registered. SMS Tea is not a precedent where the court considered an application under Section 9. SMS Tea cannot be used to contend that a document needs to be adequately stamped before the court considers an application under Section 9. Further, the consequences of not granting interim relief under Section 9 can sometimes be drastic and would cause severe hardship to the parties who deserve protection under Section 9.

The issue whether the word “existence” will mean court has to weed out cases where subject matter is incapable of arbitration has been referred to the larger bench in Vidya Drolia & Others v Durga Trading Corporation. Until then, the settled law is Duro Felgura.

According to Section 11(6-A), the decision in SMS Tea cannot be applied after 23.10.2015, i.e., the date of coming into force of the 2015 amendment. The court agreed with the decision of Bombay High Court in Garware and answered the second question in the negative.

The legislature would not have provided for a speedy disposal of applications under Section 9 and Section 11 if such application is required to be postponed till order of adjudication on applicable stamp duty is passed by the relevant authority. 

Supreme Court in Garware

The Law Commission in its 246th report while outlining its recommendations for amendments to Section 11, in paragraphs 28 to 33, states that decisions in SBP  & Co. v. Patel Engineering and National Insurance Co. v. Boghora Polyfab (P) Ltd. need to be relooked at. However, it did not specify SMS Tea. Therefore, SMS Tea continues to apply even after introduction of Section 11(6-A).

An arbitration clause contained in an agreement becomes a contract if it is enforceable by law. Under Indian Stamp Act, an agreement does not become a contract, i.e., it is not enforceable in law, unless it is duly stamped. Therefore, an arbitration clause in an agreement does not exist when it is not enforceable by law. 

Relying on SBP, the court held that Section 16 comes into full play only when a tribunal is constituted without intervention of court under Section 11. Therefore, it cannot be said that Section 16 makes it clear that an arbitration agreement has an independent existence of its own. 

Analysis

1. It is arguable that retaining the phrase “null and void” in addition with the words “existence” of an arbitration agreement in Section 11(6-A), as recommended by the Law Commission, would have expanded the scope of judicial intervention from examining mere “existence” of arbitration agreement to also determining enforceability and validity of the agreement. 

However, the phrase “null and void” did not find its way in Section 11(6-A). The intention of the legislature by not including the words “null and void” must be given meaning. If issues other than “existence” were to be examined by court under Section 11, such an interpretation would takes us to the position prior to the 2015 amendment where courts while deciding  applications under Section 11 did examine the issue of limitation, whether the claims were alive or dead, whether there was accord and satisfaction etc.

2. The issue whether the word “existence” will mean court has to weed out cases where subject matter is incapable of arbitration has been referred to the larger bench in Vidya Drolia & Others v Durga Trading Corporation

The decision in Garware equates the terms “existence” and “enforceability” of an agreement. An agreement may not be enforceable for lack of consideration, lack of free consent etc., but it surely exists. Therefore, this analysis is perhaps not proper.

3. The court relies on United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd.  and Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private Limited. These decisions dealt with situations where the arbitration clause was applicable only when the insurer did not dispute liability. In other words, only when the insurer admitted liability, dispute regarding quantum could be adjudicated by the arbitrator. The disputes related to liability were excluded from the arbitration clause. They were “excepted matter”. Reliance on these decisions and to equate them to a situation of non “existence” of an arbitration agreement is not proper.

4. The Supreme Court and the Bombay High Court effectively disagree on what was the intention of legislature in introducing Section 11(6-A). While the Supreme Court holds that the legislature did not intend that SMS Tea will be overridden. This reasoning is based on the premise that if the legislature intended to nullify the effect of SMS Tea, in addition to mentioning SBP and National Boghora, the Law Commission report would have also mentioned SMS Tea. Therefore, by not mentioning SMS Tea, it must be construed that the legislature did not intend to override it in Section 11(6-A). 

The problem with this reasoning is that there is no mention of SMS Tea anywhere in the report. How does one reason that not mentioning the same in the report amounts to not overriding it? What is the rule of interpretation of statute which would justify this reasoning? Could the report have simply missed it?

On the other hand, the Bombay High Court is of the view that the intention of the legislature of overriding SMS Tea and any other judgment is clear from the words in Section 11(6-A) “notwithstanding any judgment”. This appears to be more in consonance with the strict rule of interpretation. 

 

About the Author: Renu Gupta practices before the Delhi High Court and other courts and tribunals in Delhi.

Members of the Nani Palkivala Arbitration Arbitration Centre (NPAC) will be writing a weekly column for Bar & Bench analyzing the latest developments on the law of arbitration.

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