Supreme Court of India: Whether The Court While Considering An Application For The Appointment of An Arbitrator Needs To First Impound An Unstamped Instrument Containing The Arbitration Clause And Ensure That Stamp Duty Is Paid Before Appointing The Arbitrator?

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As per the law settled by the Supreme Court of India in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66, where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 (Indian Stamp Act) requires the Judge hearing the application for the appointment of an arbitrator under Section 11(6) of the Indian Arbitration Act (1996 Act) to impound the agreement and ensure that stamp duty and penalty (if any) are paid thereon before proceeding with the application.

But the Amendment Act, 2015 introduced Section 11(6A) to the 1996 Act, by which the Court is now to confine itself to the examination of the existence of an arbitration agreement while considering an application for the appointment of an arbitrator.

In the case of Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd. decided on 10 April 2019, the Supreme Court dealt with the issue of whether Section 11(6A) has removed the basis of SMS Tea judgment, so 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.

The Supreme Court inter alia held that the introduction of Section 11(6A) has not changed the law laid down by the Supreme Court in SMS Tea in this regard. Detailed case analysis given below:

Factual Matrix

The dispute arose out of a construction sub-contract assigned by the Appellant to the Respondent. In view of the dispute, the Respondent appointed an arbitrator in terms of the arbitration clause contained in the sub-contract which was unstamped. This appointment was unacceptable to the Appellant which resulted in Respondent filing an application for the appointment of an arbitrator by the High Court. This application was allowed, and an arbitrator was appointed to adjudicate the dispute.

The High Court while deciding the application for the appointment of an arbitrator held that the impoundment of the unstamped sub-contract is in the domain of the arbitrator who is appointed and not the Judge while deciding the application for the appointment of an arbitrator by the virtue of Section 11(6A) of the Amendment Act, 2015 while inter alia provides that the Judge while considering such application is only obliged to consider the existence of an arbitration agreement nothing more than that. In the instant case, the issue before the Court was whether the Amendment Act, 2015 has removed the basis of SMS Tea which was decided in the present proceedings.

Applicable Legal Principles

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

In this case, the disputes between the parties sought to be adjudicated related to a lease deed whereby the respondent before the Supreme Court granted a lease of two estates to the appellant for a term of 30 years. As on the date of its execution, the said deed of lease was not only compulsorily registrable the same was also chargeable to stamp duty. However, the said deed was neither registered nor stamped. Thus, when the appellant before the Supreme Court filed an application under Section 11 of 1996 Act for the appointment of an arbitrator enforcing the arbitration agreement contained in the said deed of lease. It was held that the said deed of lease being not duly stamped and therefore, Section 35 of the Stamp Act was clearly applicable. Consequently, the Supreme Court upheld the decision of the Gauhati High Court dismissing the said application under Section 11 of the Act.

The ratio laid down by this case was that the inadequacy of stamp duty mandates impounding of such unstamped document and requires the concerned authority to proceed in accordance with Section 35 and 38 of the Stamp Act, for payment of proper stamp duty and penalty, if any, before the matter is taken up for appointment of an arbitrator.

Section 11(6A), 11(7), and 11(13) of the Act

“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.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Supreme Court or, as the case may be, the High Court or the person or institution designated by such court is final and no appeal including Letters Patent Appeal shall lie against such decision.

(13) An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such court, as the case may be, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.

Parties Contentions

The Appellant contended

  • that the equivalent provisions of the Indian Stamp Act under the Maharashtra Stamp Act, 1958 requires judicial authorities to impound such unstamped instruments which cannot be admitted in evidence or cannot be acted upon until duly stamped;
  • that SMS Tea continues to apply even after the introduction of Section 11(6A) by the Amendment Act, 2015 by which the Court is now to confine itself to the examination of the existence of an arbitration agreement;

The Respondent contended

  • that the object of the Amendment Act, 2015, in introducing Section 11(6A), was to confine the Court hearing the application for the appointment of an arbitrator to examination of the existence of an arbitration agreement and nothing more;
  • that the provisions of the Indian Stamp Act are a fiscal measure intended merely to collect revenue and, if at all, will go to “validity” of an arbitration agreement and not to its “existence”. Therefore, so long as it is in writing, and therefore, exists in fact, the Court hearing the application for the appointment of an arbitrator is to appoint an arbitrator and thereafter leave all other preliminary issues to the arbitrator;
  • that the application under Section 11 ought to be disposed of within a period of 60 days from the date of service of notice, and that this would not be possible if questions relating to the Indian Stamp Act were to be decided at the Section 11 stage.

Judgement

The Court held

  • that while considering any application for the appointment of an arbitrator under Section 11(4) to 11(6), the Court has to confine itself to the examination of the existence of an arbitration agreement and leave all other preliminary issues to be decided by the arbitrator. But a close look at Section 11(6A) would show that when the Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon;
  • 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 conveyance so as to give it an independent existence;
  • the independent existence that could be given for certain limited purposes when it comes to an unregistered agreement or conveyance;
  • therefore, the introduction of Section 11(6A) does not, in any manner, deal with or get over the basis of the judgment in SMS Tea, which continues to apply even after the amendment of Section 11(6A);
  • that an arbitration clause in an agreement would not exist when it is not enforceable by law (i.e. when it is not a ‘contract’ since an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped). Thus, the arbitration clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped.

Court further suggested that one reasonable way of harmonising the provisions contained in the Maharashtra Stamp Act, which is a general statute insofar as it relates to safeguarding revenue, and Section 11(13) of the 1996 Act, which applies specifically to speedy resolution of disputes by appointment of an arbitrator expeditiously, is by declaring that while proceeding with the Section 11 application, the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Maharashtra Stamp Act, who will then decide issues qua payment of stamp duty and penalty (if any) as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the instrument.

As soon as stamp duty and penalty (if any) are paid on the instrument, any of the parties can bring the instrument to the notice of the High Court, which will then proceed to expeditiously hear and dispose of the Section 11 application. This will also ensure that once a Section 11 application is allowed and an arbitrator is appointed, the arbitrator can then proceed to decide the dispute within the time frame provided by Section 29A of the 1996 Act.

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