This article has been written by Debasmita Goswami pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Table of Contents
Introduction
It is a settled principle of law that a document that is not duly stamped and registered is not admissible as evidence in any court of law. Stamp Duty is one of the important sources of revenue generation for the Government. Therefore, it may be inferred that it was one of the sole intentions with which the legislators enacted the Indian Stamp Act of, 1899 (Stamp Act) along with an intention to give the documents a legal sanction and to make them admissible as valid evidence in the court of law. In this regard Section 35 of the Stamp Act expressly mentions that “Instruments not duly stamped are inadmissible in evidence.” Although the opening line of this Section gives a negative connotation, subsequently in its sub-section 35(a) the legislator provides a remedial measure for the documents not duly stamped and mentions that in case the parties have insufficiently stamped any document, the document shall be admissible as evidence only post the parties pay the required penalty and the stamp duty as enshrined under the Act. The Garware Wall Ropes Ltd. V. Coastal Marine Construction and Engineering Ltd(Garware Judgment) is one such case wherein the Apex Court has analyzed the issue of whether an arbitration agreement in a contract that is not duly stamped be admissible as valid evidence. Various debates and narratives have erupted post the decision of the Garware Judgment. Therefore, the author through this article has attempted to clear the air in this regard.
The intention at stake: tussle between the Stamp Act and the Arbitration Act
We all are very well aware that an Arbitration clause is covered under the garb of “Doctrine of Severability” which means that an arbitration clause has the capacity to survive even if the contract or the agreement is repudiated or is declared to be as invalid. The Garware judgment in this regard upsets by not upholding the true essence of this doctrine and contravenes with the sole intention of Section 16 (a) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) which expressly mentions that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.” The apex court while deciding the Garware case has relied on its erstwhile decision given in the case of SMS Tea Estates Pvt. Ltd. V. Chandmari Tea Co. Pvt. Ltd (SMS Tea Estates Judgment) wherein the Apex Court has adjudicated on similar issues as has been observed in the Garware Judgment. In the SMS Tea Estates Judgment, the Apex Court did observe that non-registration of the Sale Deed will in no way restrict the parties to invoke the arbitration clause. Further, the Apex Court through its reasoning in para 7 of the said judgment did uphold the essence of Section 16(a) of the Arbitration Act, it has further observed the exception laid down under Section 49 of the Registration Act, 1908 (Registration Act) that is, instruments that are not registered and affect the immovable property can be served as valid evidence of collateral transactions. But, to the contrary in para 18 of the said judgment, the Apex Court has observed that non-registration of the Lease Deed will lead to non-appointment of the arbitrator with regards to adjudication of the disputes arising out of the said Lease Deed. Lastly, the Apex Court, in this case, has held that non- stamping of the Lease Deed will therefore act as a hindrance and will not allow the parties to invoke the Arbitration Agreement.
The decision laid down in the SMS Tea Estates Judgment even though being rigid in nature, the Apex Court has iterated similar interpretation and analysis in the Garware Judgment too. The Court while adjudicating the Garware case opted for a narrowed pathway while interpreting the principles, clauses, and statutes. The Court in this judgment has construed the “Doctrine of Severability” in its narrowest form and has, therefore, applied this doctrine differently to the Section 35 and Section 49 of the Stamp Act and Registration Act respectively, even when it may be established that the inference drawn from these two sections intent and mean the same. The Apex Court in the Garware Judgment has further observed that going by the harmonious interpretation of the provisions enshrined under the Stamp Act and Indian Contract Act, 1872 (Contract Act) it can be inferred that, an agreement would be said to be invalid if it is not duly stamped. It further iterated whilst not upholding the true meaning and essence of the “Doctrine of Severability” and held that bifurcation of the arbitration clause as enshrined in the agreement will not be possible since the applicability of the Stamp Act to the agreement acts in its entirety.
In the Garware Judgment the Apex Court did not give permission to invoke the Arbitration agreement reason being that the arbitration agreement was enshrined in an unstamped contract and as a result the arbitrator in the instant case could not be appointed under Section 11 of the Arbitration Act, thus causing huge loss and agony to the party. The arbitrator could only be appointed only after the court impounds the document which is not stamped and the parties duly completing their compliances including due payment of the Stamp Duty. It is imperative to mention that the decision laid down in the Garware Judgment attracted huge criticism and as a ‘course correction’ the precedent laid down in the case of N.N. Global Mercantile Pvt. Ltd. V. Indo Unique Flame Ltd. (N.N. Global Mercantile Judgment) came as a huge breather rightly observing that the decision laid down in both SMS Tea Estates Judgment and Garware Judgment were not correct. The Apex Court in the N.N. Global Mercantile Judgment expressly mentioned that even if the Stamp Duty on the contract is not paid even then the arbitration clause or the arbitration agreement will survive and will not be invalidated. The Apex Court has also placed its reliance on various international cases in order to substantiate the significance of “Doctrine of Severability” and “Kompetenz – Kompetenz.” This is definitely an extremely welcoming and one of the landmark judgments in the Arbitration arena, therefore, rightly catering towards making India an arbitration-friendly locus.
Concluding remarks
Through the analysis of the above-mentioned judgments, I in no way intend to say that parties should not get their documents stamped and registered. The parties must adhere to the compliances and abide by the procedural law. What I intend to cater to is that there needs to be a balance between both the legislation that is the Stamp Act and the Arbitration Act. We needn’t brainstorm on the fact that the sole purpose behind the enactment of the Arbitration Act, which was to ensure minimal to nil judicial intervention of the courts yet again upholding the essence of Section 5 of the Arbitration Act which being a non-obstante clause. Not only this, we further need to acknowledge the true essence of the “Doctrine of Severability” as has been rightly iterated in the N.N. Global Mercantile Judgment which very clearly mentions that technical snag such as non- payment of the Stamp Duty will in no way evade the rights of the parties from invoking the Arbitration Agreement and the parties will not be devoid of their ad- interim measures. While we cannot say that there haven’t been any precedents where even when the documents not being stamped or insufficiently stamped the courts haven’t invoked the arbitration clause or the arbitration agreement, the courts have invoked the arbitration clause in such cases and have also provided interim relief to the parties.
The Bombay High Court in the case of Gautam Landscapes Pvt. Ltd. v. Shailesh Shah (Gautam Landscape Judgment) has duly given its reasoning stating that the Stamp Act which is a fiscal statute shall in no way be used as a defense mechanism by the opposite parties and due interim relief shall be granted to the Petitioner(s). We may further infer that the SMS Tea Estates Judgment and the Garware Judgment acted as a hindrance against the entire arbitration mechanism negating the main purpose of this Alternative Dispute Resolution mechanism. The N.N. Global judgment is one of its kind wherein the Apex Court has intended to uphold the principles of UNCITRAL model law and there also has been the due application of the judicial mind. In a nutshell, I conclude that the intent of the courts must be to safeguard the equitable rights of the parties and cater more towards arbitration-friendly mechanisms rather than being entangled in the vicious cycle of technical compliances.
References
- https://www.scconline.com/blog/post/tag/stamp-duty/ (Last retrieved on 29th June, 2021, 10:00 P.M.)
- https://www.scconline.com/blog/post/2020/11/07/stamping-of-agreements-vis-a-vis-section-9-of-the-arbitration-conciliation-act-1996/ (Last retrieved on 1st July, 2021, 1:00 A.M.)
- https://www.conventuslaw.com/report/india-invoking-arbitration-agreements-in-unstamped-2/ (Last retrieved on 30th June, 2:00 A.M.).
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