16 Jun 2019

Author: Pranav Narsaria (Law Student at GNLU, Gandhinagar)

In SMS Tea Estates[i](“SMS Tea Estates”), the Supreme Court held that if an arbitration clause is contained in a document which is not duly stamped, such an arbitration clause cannot be acted upon. Further, the Supreme Court held that while hearing an application under section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) the judge must first impound the insufficiently stamped document and only once the defect with respect to the stamp duty is cured, the court shall proceed further with the application.

Thereafter, the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”) introduced section 11 (6-A) in the Act, which limits the role of the court while determining an application for appointment of an arbitrator such that, “the Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (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.”

In this backdrop, the question which arose for determination before the Supreme Court in Garware Wall Ropes[ii]was whether the court is now precluded from impounding an insufficiently stamped instrument while determining an application under section 11 of the Act given its limited role in the constitution of the tribunal. We reflect upon the findings of the Supreme Court in its recent decision.

[i]SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66.

[ii]Garware Wall Ropes vs. Coastal Marine Constructions & Engineering Ltd.,2019 SCC OnLine SC 515

GARWARE WALL ROPES v.  COASTAL MARINE CONSTRUCTIONS & ENGINEERING LTD.

Disputes arose between Garware Wall Ropes Ltd. (“Appellant”) and Coastal Marine Constructions & Engineering Ltd.(“Respondent”).The Respondent invoked the arbitration clause contained in thesub-contract agreement (“Contract”) andthe Appellant resisted invocation of arbitration on the basis that the reference to arbitration was premature. Thereafter, the Respondent filed an application under section 11 of the Act before the Bombay High Court for the appointment of an arbitrator and through an Order dated 9 March 2018(“Order”), the Bombay High Court appointed the Ld. Sole Arbitrator. Aggrieved by the Order, the Appellant filed a special leave petition before the Supreme Court.

FINDINGS OF THE SUPREME COURT

The question which arose for consideration before the Supreme Courtwas whether SMS Tea Estates has been done away with in view of the language of section 11 (6-A) of the Act which includes the words “notwithstanding any judgment, decree or order of any Court”.

The Supreme Court examined the 246^th Law Commission Report (“Report”) and the Statement of Objects and Reasons appended to the Arbitration and Conciliation Bill, 2015 and found that the court shall now “confine itself to the examination of the existence of an arbitration agreement and leave all other preliminary issues to be decided by the arbitrator”. The Supreme Courtnoted that neither the Report nor the Statement of Object and Reasons referred to SMS Tea Estates.

Mandatory provisions of the Stamp Act are applicable to courts under section 11 of the Act

The Supreme Court perused SMS Tea Estateswherein it had determined the validity of an arbitration clause contained in a lease deed which was neither stamped under the Indian Stamp Act, 1899 (“Stamp Act”) nor registered under the Registration Act, 1908 (“Registration Act”) read with the Transfer of Property Act, 1882. Narrowing down its examination to the effect of an arbitration agreement contained in an unstamped lease deed, the Supreme Court had held that in case an arbitration agreement is found in a document which is not duly stamped, pursuant to section 35 of the Stamp Act such document cannot be acted upon and “consequently, even the arbitration clause therein cannot be acted upon”.

In the present case, the Supreme Court concluded that the Amendment Act does not “get over” the basis of SMS Tea Estates as the said decisionheld mandatory provisions of the Stamp Act applicable to judicial authorities,and judicial authorities include the Supreme Court and the Bombay High Court acting under section 11 of the Act.

Arbitration clause cannot be bifurcated to give it an independent existence when the contract is insufficiently stamped

The Supreme Court referred to SMS Tea Estates wherein it noted that the provisions of the Stamp Act did not allow the courtto distinguish the main agreement from the arbitration agreement and therefore,any court would have to ensure that the agreement is sufficiently stamped before proceeding with the appointment of an arbitrator under Section 11 of the Act.

In the present case, the Supreme Court reaffirmed thatthe Stamp Act applies to the agreement as a whole and it is not possible to bifurcate the arbitration clause contained in such an agreement to give it an independent existence.

An arbitration clause must be contained in a contract which is enforceable by law

In view of sections 7(2) read with 11(6-A) of the Act and section 2(h) of the Indian Contract Act, 1872 (“Contract Act”), the Supreme Court held that “when an arbitration clause is contained ‘in a contract’, it issignificant that the agreement only becomes a contract if it isenforceable by law”.Referring to the Stamp Act, the Supreme Court held that an agreement which is not duly stamped does not become a valid contract as it is not enforceable in law.  In the circumstances, the Supreme Court held that an insufficiently stamped contract is unenforceable and the arbitration clause contained in such an unenforceable contract would not “exist”.

Section 16 of the Act does not come into play

The Supreme Court observed that Section 16 of the Act would come intoplay only when the tribunal was constituted without intervention of the court under Section 11 of the Act.

Court lays down guidelines to assist in compliance of time limits set out under section 11 (13) of the Act

The Supreme Court addressed the issues of conflict in timelines which may arise if the courts impound contracts under section 11 of the Act. Pursuant to section 11(13) of the Act, an application under section 11 of the Act shall be disposed within 60 days. Thus, if the court impounds the document containing the arbitration clause under sections 33 and 34 of the Maharashtra Stamp Act (which are in parimateriato the provisions under the Stamp Act), difficulties may arise in complying with the timelines under section 11 (13) of the Act.

The Supreme Court applied the doctrine of harmonious construction and held that in case a document is unstamped, the court shallimpound such a documentand hand it over to the stamp authority to adjudge the matter within 45 days. Thereafter, once the stamp duty has been determined and duly paid, either party could bring the matter back to court and the court would then expeditiously dispose of the matter under section 11 of the Act.

CONCLUSION AND ANALYSIS

The Supreme Court set aside the Order and remitted the matter to the Bombay High Court to dispose the same in accordance with its judgment.

As set out above, the Supreme Court has concluded that an arbitration clause contained in a contract which is not duly stamped does not “exist” for the purposes of section 11 (6-A) of the Act till the defect in stamp duty is cured. Further, the court acting under section 11 of the Act shall impound such contract and ensure that the applicable stamp duty and penalty is paid before it proceeds to determine the application under section 11 of the Act.

Prior to this decision of the Supreme Court, afull bench of the Bombay High Court in Gautam Landscapes[i]had taken a contrary view. The Supreme Court has overruled Gautam Landscapes to the extent that it held that before passing a final order in an application under section 11 of the Act,  the court need not await the adjudication of the stamp authorities when the document objected to is insufficiently stamped in light of section 11(6-A) of the Act.  The Supreme Court further observed that JMD Ltd., B.D. Sharma, Sandeep Soni, and N.D Developers[ii]had alsoincorrectly declared the law on the issue and therefore, it has overruled the said decisions.

The Supreme Court has settled the issue that arose after the Amendment Act and overruled the contradictory decisions of various courts in the country. In view of this judgment, the Supreme Court has clearly taken a step towards ensuring that the fiscal provisions of the Stamp Act are strictlyenforced.

[i]Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors.,2019 SCC OnLineBom 563

[ii]JMD Ltd. v. Celebrity Fitness India Pvt. Ltd., (2019) SCC OnLine Del 6483; B.D. Sharma v. Swastik Infra Estate Pvt. Ltd. &Ors., (2018) SCC OnLine Del 13279; Sandeep Soni v. Sanjay Roy, (2018) SCC OnLine Del 11169; N.D. Developers Pvt. Ltd. v. Bharathi &Ors., (2018) SCC OnLine Kar 2938.