Recently, in Damont Developers v Brys Hotels[i] (Damont Developers), the Delhi High Court appointed an arbitrator under Section 11 of the Arbitration and Conciliation Act 1996 (Arbitration Act) even though the memorandum of understanding (MoU) containing the arbitration clause was alleged to be insufficiently stamped.

The Delhi HC observed that it is well within an arbitrator’s jurisdiction to assess whether (i) an agreement is adequately stamped; and if not, (ii) to take such necessary steps,  including impounding the document, as prescribed by applicable law.

Along with Damont Developers, this post also traces the judicial treatment of this issue from the Supreme Court’s landmark decision in SMS Tea Estates Private Ltd. v. Chandmari Tea Company Private Ltd. [2011] to the re-calibrated interpretation thereof by the High Courts of Bombay and Delhi in Coastal Marine Construction and Engineering Limited v Gareware-Wall Ropes Limited [2018] and Sandeep Soni v Sanjay Roy & Ors. [2018] respectively.

Background

An arbitration clause/agreement, whilst retaining its independent and severable existence, may be embedded in different kinds of contracts. Enforceability of the main contract is often subject to compliance with other statutory requirements – such as the payment of registration fees and stamp duty.

If an insufficiently stamped document is produced before any person having authority to receive evidence, Section 33[ii] of the Indian Stamp Act 1899 (Stamp Act) mandates her to impound and send such document to the relevant stamping authority for adjudication. Further, Section 35[iii] clarifies that an insufficiently stamped document will not be registered, admitted into evidence, or can otherwise be acted upon unless the document is duly stamped. These statutory obligations bind both judges and arbitrators in relation to the proceedings before them.

Similarly, the Registration Act 1909 and the Transfer of Property Act 1882 require certain documents to be compulsorily registered. Section 49 of the Registration Act provides that such documents cannot inter alia be received as evidence of any transaction affecting any property comprised therein if they remain unregistered. However, the proviso to Section 49 states that an unregistered document can nevertheless be relied upon or received as evidence inter alia of any collateral transaction not required to be effected by a registered instrument.

Ghost of the landmark past

In SMS Tea, the Supreme Court was required to determine if an arbitrator can be appointed if the agreement containing an arbitration clause is unregistered and/or insufficiently stamped.

At the outset, the Apex Court noted that an arbitration clause is collateral to the main agreement and unrelated to its performance and validity. The arbitration clause will survive for the purpose of dispute resolution even if the contract suffers from a breach, repudiation or frustration, etc. These principles are espoused in Section 16 the Arbitration Act, which clarifies that “(i) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (ii) a decision by the Arbitral Tribunal that the contract is null an void shall not entail ipso jure the invalidity of the arbitration clause.”

The Court then observed that an arbitration agreement is not required to be registered. Even where the arbitration clause is found in an unregistered document, it was held that the arbitration clause is an agreement independent of the main agreement. Relying on the proviso to Section 49 of the Registration Act, the Supreme Court concluded that an arbitration agreement in an unregistered document can be acted upon for the collateral purpose of dispute resolution.

It would appear, therefore, that the arbitration agreement is entirely independent of the underlying contract. However, the Court reasoned that an invalidity which attaches itself to the main agreement – making it voidable – will also attach to the arbitration agreement if the reasons which make the main agreement voidable exist also in the making of the arbitration agreement. If a party raises any objection that the arbitration agreement is invalid, it was held that the court must first decide such objection before proceeding to appoint an arbitrator.

Unlike the proviso to Section 49 of the Registration Act, Section 35 of the Stamp Act offers no exception to the non-admissibility of an inadequately stamped document. Therefore, it was held that the court must impound a document found to be insufficiently stamped and cannot appoint an arbitrator unless the deficit duty is paid.

Turning point

In 2015, the Arbitration Act underwent a huge overhaul. In particular, section 11 was amended to include the following sub-section:

“(6A) 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.” (emphasis supplied)

The true purport of this amendment was clarified by the Supreme Court in Duro Felguera, S.A. v. Gangavaram Port Limited [2017]:

“The scope of the power under Section 11 (6) of the 1996 Act was considerably wide in view of the decisions in [SBP and Co. v. Patel Engineering Limited and Another, (2005) 8 SCC 618] and [National Insurance Company Limited v. Boghara Polyfab Private Limited, (2009) 1 SCC 267]. This position continued till the amendment brought about in 2015. After the amendment, all that the Courts need to see is whether an arbitration agreement exists – nothing more, nothing less. The legislative policy and purpose is essentially to minimize the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11 (6A) ought to be respected. (emphasis supplied)

What effect, if any, do Section 11(6A) and the Supreme Court’s edicts in Duro Fulguera have over the court’s power and obligation – as established in SMS Tea – to examine the main contract for payment of stamp duty before appointing an arbitrator?

In 2018, the effect of Section 11(6A) on SMS Tea were discussed by the Bombay High Court in Coastal Marine Construction and Engineering Limited v Gareware-Wall Ropes Limited (Coastal Marine) and the Delhi High Court in Sandeep Soni v Sanjay Roy & Ors. (Sandeep Soni).

Relying on Duro Fulguera, both courts held that insufficiency of stamp duty on the main contract cannot be an impediment in appointing an arbitrator under Section 11. It was observed that the arbitrator, upon her appointment, can deal with all questions of admissibility of any document – whether for insufficiency of stamp duty or otherwise. If found to be insufficiently stamped, the arbitrator may impound and send it to the appropriate authority for stamp adjudication.

The Bombay High Court also reiterated that stamping legislation is enacted “for the purposes of securing the revenue for the Government and not to arm a dishonest litigant with a technical defence”. A respondent cannot be allowed to frustrate and delay the arbitration proceedings by accepting a technical objection. Lastly, it was observed that the decision in SMS Tea has lost its efficacy after the introduction of Section 11(6A). Accordingly, the respective applications for appointment of arbitrator were allowed by the High Courts at Bombay and Delhi.

Crucially, the Bombay High Court further noted that the respondent – who raised the objection on stamp duty – was in fact contractually required to pay stamp duty on the parties’ agreement. Since the respondent itself had failed to pay its obligation to pay stamp duty, the court remarked that the respondent cannot take advantage of its own wrong and frustrate the arbitration agreement. If the court were to accept the objection, it would be only adding premium to the respondent’s dishonesty. The Court clarified, however, the aforesaid observations are only prima facie and subject to final consideration by the arbitrator appointed.

Damont Developers

Once again, in Damont Developers, the Delhi High Court was faced with a similar issue. This time, the parties had entered into an MoU which contained an arbitration clause. When disputes arose, the petitioner invoked arbitration and proposed the appointment of a retired Supreme Court judge to act as sole arbitrator. Since the respondent did not agree, the petitioner approached the Delhi High Court under Section 11 of the Arbitration Act.

The respondent objected that the MoU cannot be acted upon for any purpose since it is neither registered nor adequately stamped. On the other hand, the Petitioner argued that these are issues which must be considered by the arbitrator, and not by the Court in a Section 11 application. Relying on Coastal Marine and Sandeep Soni, the High Court agreed with the petitioner and appointed a sole arbitrator.

Concluding remarks

Section 11(6A) clearly reflects the Parliament’s definite intent to narrow the scope of judicial scrutiny in applications for arbitrator appointment. This is fortified by the fact that Section 11(6A) applies notwithstanding any judgment of any court. As such, the precedential value of SMS Tea has undergone a change due to the purport of the aforesaid provision.

Interestingly, however, the decision in Coastal Marine has been stayed by the Supreme Court in a special leave petition. Perhaps the Apex Court will take this opportunity to consider the decisions in SMS Tea, Coastal Marine, and Sandeep Soni to settle the post-amendment position on the underlying issues once and for all.

 

[i] ARB.P. 837/2018, decided on 7 March 2019

[ii] 33. Examination and impounding of instruments.

(1) Every person having by law or consent of parties authority to receive evidence, and every person in charge of a pubic office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.

(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain whether it is stamped with a stamp of the value and description required by the law in force in 1 [India] when such instrument was executed or first execution…”

[iii] 35. Instruments not duly stamped inadmissible in evidence, etc.No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped :

Provided that— (a) any such instrument 6 [shall] be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of any instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion; (emphasis supplied)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s