This article is written by Pramil Kant, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).
Table of Contents
“If you want to prolong a dispute, litigate. But if you want to resolve a dispute, arbitrate”- Anonymous. There has always been confusion regarding the admissibility of an unstamped agreement containing an arbitration clause in a court of law. To give a background, certain documents are mandatorily required to be stamped. The list of such documents is provided in Schedule I of the Indian Stamp Act, 1899. In case, such documents are not stamped or proper stamp duty is not paid on such documents, Section 35 of the Indian Stamp Act, 1899 provides that such documents cannot be admitted in evidence by any person having by law or by the consent of parties, authority to receive evidence. Therefore, neither the court of law nor arbitrator can admit such documents in evidence. Further, if a court of law cannot admit such a document, it will not be able to appoint an arbitrator or arbitral tribunal.
On the other hand, Section 16(1)(a) of the Arbitration and Conciliation Act makes it clear that an arbitration clause that forms part of the contract shall be treated as an agreement independent of the other terms of the agreement. In other words, an arbitration clause contained in an agreement and the master agreement are essentially two different agreements. Any defect, irregularity in the substantive agreement shall not affect the arbitration clause contained in it. Therefore, the principle of severability has been introduced in an agreement containing an arbitration clause. The reason behind introducing the principle of severability is that no technical irregularity should be allowed to come between the intention of the parties to settle their disputes through arbitration. Further, this principle of severability follows from United Nations Commission on International Trade Law (UNCITRAL) model law on international commercial arbitration, 1985.
Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited
In the landmark case of Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited (“Garware Wall Ropes Judgment), a sub-contract was given by the appellant to the respondent which contains the following arbitration clause:
“Any and all claims, disputes, questions or controversies involving the parties and arising in connection with the agreement or execution, interpretation, validity, performance, termination hereof which cannot be finally resolved by such parties [sic through] negotiation shall be resolved by final and binding arbitration held in Pune. The disputes shall be referred to a sole arbitrator to be jointly appointed by GWRL and COMACOE jointly in agreement.”
It is important to discuss here the amendment made in the Arbitration and Conciliation Act, 1996 in 2015. This amendment inserted Section 11(6A) which reads as follows;
Section 11 : appointment of arbitrators
(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under subSection (4) or sub-Section (5) or sub-Section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.
Before Section 11(6A) of the Arbitration and Conciliation Act, 1996, the apex court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Company (P) Ltd., [“SMS Tea Estates”] has held that where the arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 [“Indian Stamp Act”] requires the judge hearing the Section 11 application to impound the agreement and ensure that the stamp duty and penalty (if any) are paid upon proceeding with the Section 11 application.
Therefore, the question before the apex court was:
Whether the ratio of SMS Tea Estates is still applicable after the insertion of Section 11(6A) of the Arbitration and Conciliation Act, 1996 and;
- Will the non-stamping of the master agreement affect the arbitration clause contained in it?
The decision of the Supreme Court
The apex court, after considering the contentions of both the parties in detail, held that the arbitration clause contained in an unstamped agreement, that compulsorily required to be stamped, cannot be invoked. The court held that as soon as the court is faced with an unstamped agreement, it should impound the same and only after the stamp duty and penalty (if any) has been paid in accordance with the stamp duty act, the court can invoke an arbitration clause contained in the agreement.
In simpler words, the court cannot appoint an arbitrator unless the deficit stamp duty and penalty (if any) has been paid.
In order to understand the reasoning of the court, we will have to analyse Section 7 of the Arbitration and Conciliation Act, 1996.
An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
Therefore, an arbitration agreement can be considered an arbitration clause only if it is contained in a contract. As per the Indian Contract Act, an agreement enforceable by law is a contract.
When an arbitration clause is contained in a contract, it is important to note that the agreement only becomes a contract when it is enforceable by the law. And an agreement, which requires proper stamp duty to be paid, shall become enforceable by law only when that particular agreement has been properly stamped and stamp duty duly paid. Therefore, on a conjoint reading Section 7(2) of the Arbitration and Conciliation Act, 1996 and Section 2(h) of the Contract Act, 1872, it becomes quite evident that arbitration clause shall “exist” only when it is contained in an agreement enforceable by law.
The court further held that once the stamp duty along with penalty (if any) has been paid on the agreement, the court can invoke the arbitration clause contained in it and appoint an arbitrator or arbitral tribunal.
Analysis of the judgment
The primary purpose of the Indian Stamp Act is to generate revenue for the state. Many experts have opined that though the apex court has upheld the revenue-generating objective of the Stamp Act, this judgment of the apex court will have an adverse effect on achieving the objectives of the Arbitration and Conciliation Act and promoting arbitration as an alternative dispute resolution mechanism.
Firstly, the experts have felt that the non-stamping of an agreement only affects the evidentiary value of the legal agreement and has no effect on its validity. However, in the Garware Wall Ropes Judgment, the supreme court has held that a legal agreement that is not duly stamped is not enforceable in law and therefore not a “contract”.
Secondly, the court has upheld the SMS Tea Estates Judgment in this case. In that judgment, the issue before the court was whether a lease deed, which requires compulsory registration and stamping, can be used by the court of law as a piece of evidence when it is neither registered nor stamped. In that case, the court applied the principle of severability differently to the Registration Act and the Stamp Act. The court held that even if the document is not registered, the arbitration clause contained in it will be independent of the terms of the lease deed and non-registration will only affect the admissibility of the lease deed and will not have any effect on the arbitration clause. But unless the deficit stamp duty is paid, the courts cannot look into the arbitration agreement contained in the contract unless the deficit stamp duty is duly paid. This is because unlike Section 49 of the Registration Act, Section 35 of the Stamp Act does not contain any provision enabling the instrument to be used to establish the collateral agreement.
Many of the legal experts have opined that non-compliance with the provisions of the registration act and the stamp act has a similar effect on the document; it makes the document inadmissible in evidence. But the supreme court in SMS Tea Estates has applied the principle of severability differently to the stamp act and the registration act.
It is pertinent to note that while after the 2015 amendment, the question regarding the existence of the arbitration agreement could be decided by both the court or the arbitrator but after the 2019 amendment, the arbitrator(s) is to be appointed by arbitral institutions, therefore the question of whether the court or arbitral institution or arbitrator will decide the existence of arbitration agreement remains ambiguous.
Further, a recent judgment of the supreme court in N.N Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd. & others (“Global Mercantile Judgment) has re-examined the Garware wall ropes judgment and held that technical lapses, defects or irregularities in the substantive agreement should not affect the intent of the parties to resolve their disputes through arbitration. The court further held that;
- If an arbitration clause is contained in an agreement that is not duly stamped, the court can refer the dispute to arbitration provided that the parties pay appropriate stamp duty to the concerned authorities after the dispute is referred for arbitration.
- Also, an insufficiently stamped agreement containing the arbitration clause could not prevent the parties or the court, as the case may be, from appointing arbitrator(s).
- Lastly, if a party applied to the court for interim relief under Section 9 of the Arbitration and Conciliation Act, 1996, even if the court was informed that the agreement containing the arbitration clause was not duly stamped, it can still grant interim relief to the party.
But the Supreme court in N.N Global Mercantile Pvt. Ltd. found it prudent to refer to the question, “whether an arbitration agreement in an unstamped document is rendered enforceable in law” to a constitution bench.
In other words, the issue is still not settled and a final outcome from the Supreme Court will remove the ambiguity over this issue.
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