AN ARBITRATION CLAUSE CONTAINED IN AN UNSTAMPED OR DEFICIENTLY
STAMPED AGREEMENT | NOT ENFORCEABLE
Introduction:
The Supreme Court has recently in Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited answered the question of whether an arbitration clause contained in an agreement which is not stamped or inadequately stamped, can be acted upon for the appointment of arbitrator under Section 11 of the Arbitration & Conciliation Act 1996 (``Arbitration Act``)?
Facts of the Case:
The respondent entered into a sub-contract with the appellant for installation of geo-textile tubes embankment with toe mount at village Pentha in Odisha for protection against coastal erosion. The sub-contract contained an arbitration clause in Annexure III of the agreement. Soon thereafter disputes arose between the parties and the appellant terminated the sub-contract. The respondent thereafter wrote to the appellant stating that in terms of the arbitration clause contained in the sub-contract, notice for appointment of an arbitrator was given to one Mr Naniwadekar to be appointed as the sole arbitrator. The appellant opposed this notice stating that the appointment of arbitrator pursuant to the sub-contract was premature.
The respondent filed a petition under Section 11 of the Arbitration Act in the Bombay High Court and the same was allowed appointing Mr Naniwadekar as the sole arbitrator. The present appeal was filed against this impugned order of the Bombay High Court.
Supreme Court`s Decision:
The Supreme Court in SMS Tea Estate v. Chandmari Tea Company has held that where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 require the judicial authority hearing the section 11 petition to first impound the agreement and ensure that stamp duty and penalty (if any) are paid thereon before proceeding with the Section 11 petition.
However, the Bombay High Court was of the opinion that by the insertion of Sec 11 (6A) under the Arbitration Amendment Act, 2015 (``Amendment Act``), the SMS Tea Estate judgement had been negated and the agreement in question had to be impounded by the arbitrator appointed under section 11 and not by the judge hearing the section 11 petition.
The Supreme Court overturned this decision of the Bombay High Court stating that ``when an arbitration clause is contained `in a contract`, it is significant that the agreement only becomes a contract if it is enforceable by law.`` Accordingly, under the Indian Stamp Act, 1899 an agreement does not become a contract unless it is duly stamped and hence an arbitration clause in an agreement would not exist when it is not enforceable by law.
The Supreme Court further went on to apply the doctrine of harmonious construction of statutes citing various judgments for the same. In conclusion, it held that Sec 11 (13) of the Amendment Act deals with appointment of arbitrator expeditiously and has to be harmoniously construed with section 33 and 34 of the Maharashtra Stamp Act. It came to a conclusion that the stamp authorities should try to adjudicate upon the issue of payment of stamp duty within a period of 45 days and the judge hearing the section 11 petition thereafter must dispose of the petition expeditiously. This, according to the Supreme Court gives effect to both the statutes and upholds the natural principles of justice.
The Supreme Court has recently in Garware Wall Ropes v. Coastal Marine Constructions and Engineering Limited answered the question of whether an arbitration clause contained in an agreement which is not stamped or inadequately stamped, can be acted upon for the appointment of arbitrator under Section 11 of the Arbitration & Conciliation Act 1996 (``Arbitration Act``)?
Facts of the Case:
The respondent entered into a sub-contract with the appellant for installation of geo-textile tubes embankment with toe mount at village Pentha in Odisha for protection against coastal erosion. The sub-contract contained an arbitration clause in Annexure III of the agreement. Soon thereafter disputes arose between the parties and the appellant terminated the sub-contract. The respondent thereafter wrote to the appellant stating that in terms of the arbitration clause contained in the sub-contract, notice for appointment of an arbitrator was given to one Mr Naniwadekar to be appointed as the sole arbitrator. The appellant opposed this notice stating that the appointment of arbitrator pursuant to the sub-contract was premature.
The respondent filed a petition under Section 11 of the Arbitration Act in the Bombay High Court and the same was allowed appointing Mr Naniwadekar as the sole arbitrator. The present appeal was filed against this impugned order of the Bombay High Court.
Supreme Court`s Decision:
The Supreme Court in SMS Tea Estate v. Chandmari Tea Company has held that where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 require the judicial authority hearing the section 11 petition to first impound the agreement and ensure that stamp duty and penalty (if any) are paid thereon before proceeding with the Section 11 petition.
However, the Bombay High Court was of the opinion that by the insertion of Sec 11 (6A) under the Arbitration Amendment Act, 2015 (``Amendment Act``), the SMS Tea Estate judgement had been negated and the agreement in question had to be impounded by the arbitrator appointed under section 11 and not by the judge hearing the section 11 petition.
The Supreme Court overturned this decision of the Bombay High Court stating that ``when an arbitration clause is contained `in a contract`, it is significant that the agreement only becomes a contract if it is enforceable by law.`` Accordingly, under the Indian Stamp Act, 1899 an agreement does not become a contract unless it is duly stamped and hence an arbitration clause in an agreement would not exist when it is not enforceable by law.
The Supreme Court further went on to apply the doctrine of harmonious construction of statutes citing various judgments for the same. In conclusion, it held that Sec 11 (13) of the Amendment Act deals with appointment of arbitrator expeditiously and has to be harmoniously construed with section 33 and 34 of the Maharashtra Stamp Act. It came to a conclusion that the stamp authorities should try to adjudicate upon the issue of payment of stamp duty within a period of 45 days and the judge hearing the section 11 petition thereafter must dispose of the petition expeditiously. This, according to the Supreme Court gives effect to both the statutes and upholds the natural principles of justice.
MHCO COMMENT:
The basic objective of the Amendment Act was to avoid unwanted delays
and for the speedy disposal of arbitration proceedings. This judgement
of the Supreme Court comes as a surprise as it goes against the basic
notion of arbitration law that an arbitration clause is a separate and
distinct agreement from the agreement that it is in. The adjudication of
the stamp authorities may take much more than 45 days, which would
cause unnecessary delays hence rendering section 11(13) useless.
It will also be a challenge for the courts now to adjudicate the question of interim reliefs under section 9 of the Arbitration Act as regards unstamped agreements or deficiently stamped agreements. What is certain from this judgment of the Supreme Court is that instruments must be stamped at the very inception to avoid unwarranted hardships and delays in the future.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
It will also be a challenge for the courts now to adjudicate the question of interim reliefs under section 9 of the Arbitration Act as regards unstamped agreements or deficiently stamped agreements. What is certain from this judgment of the Supreme Court is that instruments must be stamped at the very inception to avoid unwarranted hardships and delays in the future.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
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