This article is written by Veena Chandra, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com.

Introduction

It is recognised that arbitration is a form of Alternative Dispute Resolution ( ADR), which is essentially a way of resolving disagreements, preferably outside the courts. It can be used to determine any rights-related dispute about something specific; however, arbitration is often used in the context of international business transactions to resolve commercial disputes. In arbitration, the disagreement is decided by one or more individuals (as necessary) called the adjudicator by rendering the Arbitration Award. An arbitration award binds both sides of the dispute legally and is enforceable in the courts.

The arbitration agreement is a contract between two or more parties agreeing to resolve a potential dispute which may arise in the future, without resorting to Court. It can also be a standard clause of a larger contract and acts as a prerequisite for arbitration to be chosen. Mostly, as a preparation, the arbitration agreement is signed at the start of a business alliance and the written contracts will help in addressing the disputes.

This article attempts to highlight the issues that arise if an arbitration agreement in place is not stamped or has been inadequately stamped as specified under the Indian Stamp Act.

Issue of enforceability of arbitration clause in an unstamped contract

The question raised in the appeal before the Supreme Court in Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd was whether the Supreme Court’s earlier judgement in the case of SMS Teas Estates (P) Ltd vs Chandmari Tea Co (P) Ltd (SMS Teas Estates) would continue to refer to the amendment of Section 11(6A) of the Arbitration and Conciliation (Amendment) Act 2015.

In SMS Teas Estates, the Supreme Court held that if an arbitration arrangement is found the provisions of the Indian Stamp Act 1899 (Indian Stamp Act) require the judge to hear the application under Section 11. The question is whether section 11(6A), which was introduced by way of the Arbitration and Conciliation (Amendment) Act, 2015, has removed the basis of this judgment, such that the stage at which the instrument is to be impounded is not by the judge hearing the section 11 application, but by an arbitrator who is appointed under section 11, as held in the impugned judgment.

In the present case, the Supreme Court held on 10 April 2019 that ‘the implementation of Section 11(6A) does not in any way deal with or resolve the foundation of the SMS Tea Estates (supra) judgment, which continues to exist even after the amendment of Section 11(6A).’ The reason for arriving at this judgement was that when it is not enforceable by statute, that is, when the agreement is unstamped/ insufficiently stamped, an arbitration provision found in a contract does not exist.

Can an unstamped Arbitration Agreement be acted upon?

Picture of Section 11 before 2015 amendment

In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., the court held that the provisions of the Indian Stamp Act, 1899, where an arbitration clause is contained in an unstamped agreement, requires the judge hearing the application under section 11 to enforce the agreement and to ensure that the stamp duty and penalty (if any) are paid thereon before proceeding with the request under section 11. The question is whether section 11(6A), enacted by Arbitration and Conciliation (Amendment) Act 2015, has eliminated the basis of the judgement in such a way that a stage at which the instrument is to be implemented is not that of a judge hearing the application under section 11, but that of the arbitrator appointed under section 11, as stated in the judgement under appeal.

In the case of SBP Co Ltd. v. Patel Engineering, the situation was developed concerning the handling of petitions for the appointment of arbitrators. Prior to this judgement, it was decided that, under the provisions of section 11, the courts operate in an administrative capacity when appointing arbitrators. The position was reversed by the seven-judge bench of the Supreme Court, giving the courts a judicial role in the exercise of those powers. It was therefore within the jurisdiction of the court to determine preliminarily on its own jurisdiction to entertain the petition for arbitration and also on the presence of a live claim, i.e. one that was not impaired by limitation.

An attempt was made to delineate and categorise issues as per the point at which the request was made in National Insurance Company Limited v. Boghara Polyfab Private Ltd., vis-à-vis:

(i) Issues to be determined by the Chief Justice or his appointee, e. decisions on the authority and the validity of a binding arbitration agreement, 

(ii) Issues which he can also determine, i.e. whether the parties’ claims are tenable and whether the parties’ claims are justifiable, and

(iii) Issues that should be left to the arbitral tribunal to determine which include the substantive aspects and merits of the conflict that were explicitly removed from the jurisdiction of the court at the point of the application of section 11.

Scope of Judicial Examination under Section 11

In Duro Felguera, S.A. the Court highlighted the aim of the 2015 amendment, which is to restrict the scope of judicial authority as exercised by the courts pursuant to the law set out in National Insurance Co., which opened a broad door to judicial operation. This position continued until the 2015 amendment was introduced. Everything that the courts wanted to investigate after the amendment was whether an arbitration arrangement existed, and nothing more. The legislative strategy and aim were essential to reduce the interference of the court at the stage of appointing the arbitrator, and this aim should be upheld as incorporated in section 11(6-A).

The scope of judicial interference shall be limited to cases in which the court or judicial authority considers that the arbitration arrangement is null and void or does not exist. As far as the essence of the interference is concerned, it is recommended that the arbitrator be named and refer the parties to the arbitration, as the case may be, in the event that the court or judicial authority is prima facie satisfied with the claim questioning the arbitration agreement. The amendment envisages that the judicial power shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void.

According to the agreed position of law, unless the court satisfies itself with the existence of a fair and enforceable arbitration agreement, the court cannot make a decision on the appointment of an arbitrator upon request under section 11 of the Act. In the case of unstamped contracts, the arbitration arrangement is not considered as a separate party in compliance with the terms of the Garware judgement in respect of the remainder of the contract and is not a legal contract enforceable by statute for all purposes. Therefore, in such cases, unless proved otherwise, the tribunal shall conclude that no legitimate arbitration contract exists and shall reject the application made for the appointment of an arbitrator in support of the legislative mandate provided for in subsection 6A of section 11 of the Act.

Balance between Stamp Law and Agreements 

Under Section 33 of the Indian Stamp Act, 1899 (‘Stamp Act’), any court or arbitrator before which an unregistered contract charged with duty is created is required to review the agreement in order to decide whether it is properly stamped. A contract that is not adequately stamped is inadmissible in proof under the Stamp Act and thus can not be enforced upon. This may also result in the impounding of the paper. 

Under most rules of the High Court, when asking the High Court for the appointment of an arbitrator, there is a provision to apply either the initial arbitration agreement or an appropriately certified copy along with the application under Section 11 under the Arbitration and Conciliation Act, 1996 (hereinafter the ‘Act’). If what is generated is a certified copy of the contract containing the arbitration clause, the stamp duty paid on the original should be disclosed.

It is pertinent to note 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 passage so as to give it an independent existence, as it was contended by the Coastal Marine case. 

Conclusion 

The Arbitration and Conciliation ( Amendment) Bill, 2018 proposes that the courts can nominate arbitral bodies to appoint arbitrators and proposes that section 11(6-A) of the Act be removed. It is unclear what protocol an approving authority will follow in the event of an arbitration arrangement found in an unstamped contract if the Bill comes into effect.

The discussions in light of the decisions provided by Supreme Court in this case has a few takeaways: (i) the court must not designate the arbitrator until the agreement prescribed by the arbitration provision is properly stamped; (ii) the court must enforce the agreement on which appropriate stamp duty has not been paid and transmit it to the applicable stamp authority for correction; (iii) the stamp authority for correction should resolve the issues as soon as possible.

References 

• https://www.lawyered.in/legal-disrupt/articles/enforceability-unstamped-arbitration-agreement
• https://indiacorplaw.in/2019/07/supreme-court-unstamped-arbitration-agreement-analysis.html
• https://taxguru.in/corporate-law/enforceability-arbitration-clause-unstamped-arbitration-agreement.html
• https://www.mondaq.com/india/trials-appeals-compensation/805998/the-supreme-court-decision–unstamped-arbitration-agreement-cannot-be-acted-upon
• https://www.mondaq.com/india/arbitration-dispute-resolution/820816/remedies-to-an-unstamped-arbitration-agreement

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