Stamping of an Arbitration Agreement, a confusion-filled Saga

1. The confusion

14 December 2020, the Hon’ble Supreme Court in Vidya Drolia [2(d)] vide a three-bench judgement reaffirmed the view taken in Garware Wall Ropes [2(c)] wherein it was held that existence and validity being intertwined with each other, an arbitration agreement would not exist if it is illegal or does not satisfy the mandatory legal requirements for it to be enforceable, one of which is the payment of stamp duty.

However, on 11 January 2021, a three-judge bench of the Hon’ble Supreme Court, in N.N. Global [2(e)] contradicted that since an arbitration agreement is an independent contract, it cannot be invalidated merely by an insufficiently stamped main contract.

Given that the previous judgment was also pronounced by a three-member bench, the SC referred the issue to a larger bench to render the verdict.

- Issue before the five Judge Bench.

Whether the statutory bar contained in Section 35 of the Indian Stamp Act, 1899 applicable to instruments chargeable to Stamp Duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract?

2.????History?

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

??????????????????????????????????????????????i.????Issues

(I)????????????Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable?

(II)??????????Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable?

?????????????????????????????????????????????ii.????Facts

The appellant and respondent entered into an unregistered lease deed for two tea estates, which the respondent claimed to be invalid under the Transfer of Property Act, Registration Act, and Indian Stamp Act. The appellant's application for arbitration was dismissed by the High Court based on the non-registration of the lease deed. The appellant appealed to the Supreme Court challenging this decision.

iii.????Verdict by Justice R.V. Raveendran and Justice A.K. Patnaik

If a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer. Therefore, having regard to the proviso to section 49 of the Registration Act read with section 16(1)(a) of the Act, an arbitration agreement in an unregistered but compulsorily registrable document can be acted upon and enforced for the purpose of dispute resolution by arbitration.

If the document is not properly stamped, it should be impounded and dealt with in the manner specified in section 38 of the Stamp Act. The court cannot act upon such a document or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in section 35 or section 40 of the Stamp Act, the document can be acted upon or admitted in evidence, thereby valid and enforceable before the examining authority.

b.???Addition of Section 11(6) [2018 Amendment to the 1996 Act]

The Arbitration and Conciliation (Amendment) Bill 2018 was passed by the Lok Sabha on 10 August, 2018. The proposed amendments in the bill were based on the recommendations of the High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India (the so-called 'Srikrishna Committee'), formed and chaired by Justice B N Srikrishna, a former Supreme Court judge.

The recommendations aimed to facilitate:

·??????the quick and effective resolution of commercial disputes through arbitration; and

·??????the effective conduct of international and domestic arbitrations.

In this context, the Srikrishna Committee recommended that Section 11 be amended to provide that the appointment of arbitrators under the section shall be done only by arbitral institutions designated by the court (in case of international commercial arbitrations) or the High Court (in case of all other arbitrations for such purpose), without the courts being required to determine the existence of an arbitration agreement, thereby further diluting the role of the courts under Section 11 of the 1996 Act.

Section 11 (6A) Act mandates that the Court in a Section 11 proceeding should confine its examination to the existence of the arbitration agreement.

c.????Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., [(2019) 9 SCC 209].

??????????????????????????????????????????????i.????Issue

What is the effect of an arbitration Clause contained in a contract which requires to be stamped?

?????????????????????????????????????????????ii.????Facts

The appeal involves a sub-contract between the Appellant and the Respondent for the installation of a geo-textile tubes embankment. Disputes arose, leading to the termination of the sub-contract by the Appellant. The Respondent appointed an arbitrator, which the Appellant deemed premature. The Respondent filed a petition under Section 11 of the Arbitration and Conciliation Act before the Bombay High Court, which appointed the arbitrator. The Appellant argues that the judgment in SMS Tea Estates remains applicable despite the introduction of Section 11(6A) to the Act

iii.????Verdict by Justice R.F. Nariman and Justice Vineet Saran

The introduction of Section 11(6A) does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates, which continues to apply even after the amendment of Section 11(6A). In the facts of the case, it is clear that 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.

Under a 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 Stamp Act, 1958. That Authority will then decide issue qua payment of stamp duty and penalty 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 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.

d.???Vidya Drolia v. Durga Trading Corporation, [(2021) 2 SCC 1].

??????????????????????????????????????????????i.????Issue

(I) Arbitrability of a dispute under Transfer of Property,

(II) Scope and power of determination under Section 8 and Section 11

?????????????????????????????????????????????ii.????Facts

An appeal challenging the legal ratio expressed by a Division Bench of the Supreme Court in Natraj Studios vs. Navrang Studios (2017) 10 SCC 706 that landlord-tenant disputes which are governed by the provisions of the Transfer of Property Act are non-arbitrable based on the ground that such would be opposed to public policy.

In brief, Natraj Studios ruled that on broader consideration of public policy, the licensee-landlord dispute was exclusively triable by Small Causes Court as per the statute governing it. While, Booz Allen & Hamilton Inc. v SBI Home Finance Limited & Ors (2011) 5 SCC 532 ruled that tenancy matters that are governed by special laws under which the tenant enjoys statutory protection, only the specified court under that statute has jurisdiction

iii.????Verdict by Justice N.V. Ramona, Justice Sanjeev Khanna and Justice Krishna Murray

It observed that landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to the inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration.

The court at the referral stage would apply the prima facie The scope of the court to examine the prima facie validity of an arbitration agreement includes the following issues whether the arbitration agreement:

(I)????????????was in writing?

(II)??????????was contained in an exchange of letters, telecommunication etc.?

(III)???????were the core contractual ingredients fulfilled?

·??????????On rare occasions, whether the subject matter of the dispute is arbitrable?

e.????N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited [(2021) 4 SCC 379] [Round 1].

??????????????????????????????????????????????i.????Issue

Whether an arbitration agreement would be enforceable if it was present in an agreement which was unstamped and unenforceable under the relevant Stamp Act.

?????????????????????????????????????????????ii.????Facts

Respondent 1, received a work order from KPCL for coal washing and furnished a bank guarantee through Respondent 2, SBI, in favor of KPCL. Subsequently, Petitioner entered into a sub-contract with Petitioner for coal transportation. The sub-contract included an arbitration agreement in Clause 10.

Disputes arose under the main contract, leading to the invocation of the bank guarantee by KPCL. Additionally, Indo Unique invoked the bank guarantee provided by the Petitioner under the sub-contract.

The Mumbai High Court in Writ Petition rejected the Nagpur HC’s Commercial Court's findings and held that a valid arbitration agreement existed between the parties. It allowed the application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act). The High Court further ruled that the alleged fraudulent invocation of the bank guarantee could be resolved through arbitration. It also determined that the contention of the arbitration agreement being unenforceable due to the unstamped sub-contract could be raised during the filing of an application under Section 11 of the Act or before the Arbitral Tribunal.

iii.????Verdict by Justice Dr Dhananjaya Y Chandrachud), Justice Indu Malhotra, and Justice Indira Banerjee.

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. We have seen how, under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration Clause in an agreement would not exist when it is not enforceable by law. This is also an indicator that SMS Tea Estates has, in no manner, been touched by the amendment of Section 11(6A).

Even if the main contract was bad for it was unstamped or insufficiently stamped, the arbitration clause could be enforced.

The defect on insufficiency of stamp could be cured as provided in the Stamp Act, and therefore, it could not be said that an unstamped or insufficiently stamped instrument did not exist in the eye of the law.

The failure to stamp a document, did not affect the validity or unenforceability of the document, but it merely rendered the document inadmissible in evidence.

3.????Arguments before the Five Bench

The issue of stamping can be looked into at the very threshold, by the Court in the exercise of Section 11(6A), when the consideration with respect to appointment of an arbitrator is undertaken. In sum and substance, an instrument would exist in law only when it is enforceable. When the Court under Section 11(6A) is considering the existence of the arbitration agreement it can examine the issue of non-stamping or inadequate stamping. Section 33 of the Indian Stamp Act it would be mandatory for the authority at the first instance to impound the instrument.

The Amicus countered the argument that the unstamped/ unduly stamped instrument ought to be impounded at the very threshold and submitted that it might not be strictly correct. He argued that a Court exercising power under Section 11(6A) is not a Court as defined in Section 2(1)(e) of the Arbitration and Conciliation Act. It is averred that the Court under Section 2(1)(e) is the ‘authority to receive evidence’. Moreover, it was emphasised that in some sense, under Section 11(6A) the Court is to only form a prime facie opinion.

The doctrine of Kompetenz-Kompetenz implies that the Tribunal has the competence to determine and rule on its own jurisdiction, including objections with respect to the existence, validity and scope of the arbitration agreement. The doctrine has evolved over time to minimise the intervention of courts at the pre-reference stage, and reduce unmeritorious challenges raised on the jurisdiction of the Arbitral Tribunal. The effort must be to facilitate an unhindered and smooth passage for an application seeking reference to arbitration. In other words, unless patently void, the facet of subject-matter arbitrability should be left to the Arbitral Tribunal.

3A.????Dissenting View (Justice Rastogi and Justice Roy)

Non-stamping or insufficient stamping of the substantive instrument would not render the arbitration agreement unenforceable. Stamp deficiency being a curable defect would not render the arbitration agreement void.

The examination of the stamping and impounding may not be done at the threshold, i.e., at the pre-referral stage under Section 11. As per the minority view the copy or certified copy of the arbitration agreement whether unstamped or insufficiently stamped, at the pre-reference stage, is an enforceable document for the appointment of the arbitrator. It also noted that deciding on the stamp duty at the threshold also stalls the process, leading to procedural complexity and delay in litigation before the Courts.

Clarified that a certified copy can be produced at the Section 11 stage only if it clearly indicates the stamp duty paid. If the same is not mentioned, the Court should not act on the said certified copy.

3B.????Majority View (Justice Joseph, Justice Bose and Justice Ravi Kumar)

Upheld the view taken in SMS Tea Estates; that in para 22 and 29 in Garware Wall Ropes and Vidya Drolia to the extent it follows Garware Wall Ropes.

?

The Court at the Section 11(Arbitration and Conciliation Act) stage is bound to examine the instrument and if found to be unstamped or insufficiently stamped the instrument is to be impounded at this stage itself.

"An instrument which is exigible to stamp duty may contain an arbitration clause and which is not stamped cannot be said to be a contract enforceable in law within the meaning of S. 2(h) of the Contract Act and is not enforceable under S 2(g) of the Contract Act”.

"An arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act attracts stamp duty and which is not stamped or insufficiently stamped cannot be acted upon in view of Section 35 of the Stamp Act unless following impounding and paying requisite duty.

The provisions of Section 33 and the bar under Section 35 of the Stamp Act...would render the arbitration agreement contained in a such instrument as being non-existent in law until the instrument is validated under the Stamp Act.”

4.????The Way forward?

The scheme of the Stamp Act precludes any authority (Court or public authority) from acting upon/ giving effect to an unstamped/ insufficiently stamped agreement it is not fathomable to conclude that such agreement would constitute enforceable agreements. Such an agreement would not be enforceable till it is validated as per the procedure provided under the Stamp Act as it would not exist in law till then. Sections 2(j) and 2(g) of the Contract Act which renders an unenforceable contract to be void.

The court while delivering the judgment held that no instrument chargeable with duty under the Stamps Act shall be admitted in evidence or acted upon unless it is properly stamped according to Section 35 of the Stamps Act. This includes any arbitration agreements made in accordance with the 1996 Arbitration and Conciliation Act. If the agreement is not stamped or insufficiently stamped, it is not valid and enforceable. The additional time spent in determining the issue of stamping at the courts even prior to the reference to arbitration would most certainly add to the time and cost spent by the parties in dispute.

Going forward, parties will have to be mindful of the payment of stamp duty as required under the Stamp Act.

An unstamped instrument, of which the arbitration clause is a part of, cannot be allowed to be used as it would amount to establishing a collateral transaction, considering the arbitration agreement has an independent existence from the main contract.

5.????Questions unanswered.?

a.????Will there be guidelines?

The Judgement unlike Garware Wall Ropes and Vidya Drolia lacks certain guidelines that would permit the courts to not engage in a mini-trial for determining the sufficiency of stamping prior to referring the matter to arbitration.

b.???Interim reliefs?

There is no clarity on how parties are required to act in case they wish to seek urgent interim reliefs or emergency awards and the treatment meted out to arbitration agreements which may not necessarily be in the form of a contract as understood under the Stamp Act.