[Via ILO] Insufficiently stamped agreements: can parties still seek interim relief in support of India-seated arbitrations?

[This post was originally published here as an update by International Law Office (ILO)] 

In 2019 a three-judge bench (full bench) of the Bombay High Court had to decide whether the courts can exercise their power to grant interim or ad interim reliefs under Section 9 of the Arbitration and Conciliation Act 1996 where the arbitration clause is contained in an agreement that is insufficiently stamped (Gautam Landscapes v Shailesh Shah).[1]

The full bench also had to decide whether the courts can exercise their power under Section 11 of the act to appoint an arbitrator in the same context. After detailed reasoning and legal analysis, the full bench answered both questions in the affirmative.

Shortly after the Bombay High Court’s decision in Gautam Landscapes, the Supreme Court was presented with the question of whether the courts can appoint an arbitrator under Section 11 of the act when the underlying agreement containing the arbitration clause is insufficiently stamped (Garware Wall Ropes v Coastal Marine Constructions).[2] In Garware the Supreme Court examined the issue largely in the context of the newly introduced Section 11(6A) of the act. After a detailed examination and analysis of the applicable provisions and previous decisions of the Supreme Court and some high courts, the apex court held that the courts cannot appoint an arbitrator on the basis of an arbitration clause if the agreement containing such clause is insufficiently stamped. The court concluded that such an arbitration clause does not exist in law.

The Supreme Court expressly overruled the Bombay High Court’s decision in Gautam Landscapes to the extent that it dealt with the powers of the courts under Section 11 of the act. However, the Supreme Court remained silent on the Bombay High Court’s decision concerning the courts’ powers under Section 9 of the act.

Landmark revived

The Supreme Court’s findings in Garware were largely based on its previous decision in SMS Tea Estates v Chandamari Tea.[3] In this decisionit was observed that the courts are precluded from acting on any part of an agreement which is deficient in stamp duty or penalty. Therefore, the courts cannot act on an arbitration clause to appoint an arbitrator.[4]

With the introduction of Section 11(6A) of the Arbitration and Conciliation Act, the courts were confined to the examination of the existence of an arbitration agreement – notwithstanding any judgment, decree or order of any court. On a plain reading of Section 11(6A) of the act, it could be assumed that SMS Tea no longer applied. In fact, several high courts expressly held so.[5]

To the disappointment of many, Garware held otherwise. The 246th Law Commission Report recommended a reevaluation of SBP and Co v Patel Engineering[6] and National Insurance v Boghra Polyfab[7] due to their wide interpretation of Section 11 of the act. The report did not comment on or even mention SMS Tea. As such, the Supreme Court held that Section 11(6A) of the act does not affect its decision in SMS Tea.[8]

The Supreme Court categorically clarified that when the underlying agreement containing an arbitration clause is insufficiently stamped, the arbitration clause cannot be said to exist. In doing so, the Supreme Court re-enforced the point that the expression “existence” in Section 11(6A) of the act must be understood to mean legal existence and not merely textual existence.

Imminent clash?

         Gautam Landscapes

Given that SMS Tea dealt only with Section 11 of the act, in Gautam Landscapes the Bombay High Court clarified that SMS Tea is not applicable insofar as the court’s powers under Section 9 of the act are concerned. It was also observed that the rights conferred under Section 9 are not akin to rights under a contract.[9] To invoke the court’s jurisdiction under Section 9 of the act, a party must establish the existence of an arbitration agreement and the fact that it is a party thereto.

The Bombay High Court observed that an arbitration clause is severable from its principal contract. Section 7(2) of the act provides that an arbitration clause can exist in a contract or a separate agreement. Section 16(1)(a) of the act provides that an arbitration clause, which forms part of the contract, will be treated as an agreement independently of the other terms of the contract. Accordingly, the lack of stamp duty on the principal contract cannot affect the arbitration clause.

Finally, the full bench emphasised that refusal of ad interim reliefs pending the arbitral proceedings may have drastic consequences and cause severe hardship to parties which may genuinely deserve protection from the court. A truly aggrieved party is likely to suffer irreparable damage and prejudice if it has to wait until the completion of stamping formalities.

          Garware
In Garware the Supreme Court observed that Section 7(2) of the act must be read in context. A ‘contract’ is defined as an agreement enforceable by law.[10] Where the arbitration clause is contained in an unstamped agreement, the underlying agreement is not enforceable as a contract until the requisite stamp duty or penalty is paid. Consequently, it was held that an arbitration clause/agreement also cannot ‘exist’ within the meaning of Sections 7(2) and 11(6A) of the act until the deficit duty and penalty are paid.

The Supreme Court relied on its previous decision in SBP to hold that the provisions and purport of Section 16(1)(a) of the act come into effect only when an arbitral tribunal is constituted. As such, this provision cannot be used to sever an arbitration clause from an unstamped agreement. Besides, the Stamp Act 1899 (and all its state variants) applies to the agreement as a whole – including all collateral parts. An arbitration clause cannot be bifurcated from an unstamped agreement so as to give it an independent existence in proceedings to appoint an arbitrator.

Where an agreement is unstamped, the court will give effect only to the provisions of a mandatory enactment in order to protect revenue. The courts are enjoined by the Stamp Act to first impound an agreement and ensure that the stamp duty and penalty are paid before the agreement as a whole can be acted on. Given the mandatory nature and force of the Stamp Act, in Garware the Supreme Court also rejected the argument that by raising a technical objection, a party’s legitimate claim may be defeated – especially where the challenging party itself was contractually responsible to pay the stamp duty.

Existential crisis

In Garware the Supreme Court relied on SBP[11] to hold that Section 16 of the act has full play only after the arbitral tribunal is constituted, without court intervention under Section 11.[12] For this reason, the doctrine of severability espoused by Section 16(1)(a) of the act cannot be used in determining existence of an arbitration agreement under Section 11 of the act.

The Supreme Court’s reliance on SBP may be problematic for the following reasons:

  • The observations in SBP are prima facie in nature and therefore may not form part of the rationale for the court’s decision.
  • As also noted in Garware, Section 11(6A) of the act was introduced to remedy the trouble caused by SBP and Boghra Polyfab. The non-obstante clause in Section 11(6A) has arguably overruled these judgments by legislative fiatTherefore, they may no longer apply.
  • According to the Statement of Object and Reasons for the Amendment Act, the amendment was intended to limit the court’s examination to the prima facie existence of an arbitration agreement.[13] Therefore, in an application under Section 11 of the act, the court’s finding on the existence of an arbitration agreement must be made on a prima facie basis. The arbitrators appointed by the court may then provide a final determination of the issue.
  • A tribunal can finally determine objections to its jurisdiction, including on the existence of the arbitration agreement. For this purpose, Section 16(1)(a) of the act provides that an arbitration clause, which forms part of a contract, will be treated as an agreement. However, when a court is determining the existence of the arbitration agreement, Section 16(1)(a) is not applicable, pursuant to Garware. This creates an anomalous situation, where the tribunal and court are using different standards to determine the same thing.

Given the Supreme Court’s interpretation of ‘contract’ in Garware, the courts can effectively examine every issue that affects the enforceability of an agreement containing an arbitration clause. For instance, parties may now resist the appointment of an arbitrator on the grounds that a contract is non-compliant with Section 10 of the Contract Act 1872. Such consequences are neither desirable nor compatible with the spirit of the act or the Statement of Object and Reasons for the Amendment Act.

Section 7(2) of the act states that an arbitration agreement may be in the form of an arbitration clause in a contract or a separate agreement. That said, can an arbitration agreement exist in another form?

Section 7(3) provides that an arbitration agreement must be in writing. Section 7(4) states that an arbitration agreement is in writing if it is contained in, among other things, a document signed by the parties. Arguably, an arbitration agreement can ‘exist’ in an arbitration clause contained in an unstamped document that is signed by the parties.

Protecting interests of revenue

There is no debate that an insufficiently stamped agreement must be impounded and submitted to the appropriate authority for adjudication. However, stamping authorities have no power to grant interim or ad interim reliefs for reliefs sought in the main dispute or arbitration. This is where Section 9 of the act plays a crucial role.

Given the circumstances, can the revenue’s interests be said to have been defeated – or even affected adversely – if the agreement is impounded by the arbitral tribunal after the court exercises its powers under Section 9 or Section 11 of the act?

Recent aftermath

Gautam Landscapes has been challenged before the Supreme Court.[14] Since no stay has been granted, it remains good law insofar as Section 9 of the act is concerned.

In IREP Credit Capital v Tapaswi Mercantile,[15] the respondent resisted a petition under Section 9 of the act on grounds that the underlying agreement was insufficiently stamped. It was observed that this issue was no longer res integra after Gautam Landscapes. In fact, another single judge of the Bombay High Court had also confirmed in Saifee Developers v Sanklesha Constructions[16] that the Supreme Court’s decision in Garware does not affect the court’s powers under Section 9 of the act.

Separately, in IREP, the Bombay High Court cautioned that it may not be permissible for respondents to frustrate an arbitration by merely raising such a claim, and that Garware should not be read to allow this kind of a defence without further specifics.[17] At a minimum, respondents must be able to show, if not the exact amount of stamp duty, what the agreement purports to do which would attract stamp duty and under what particular provision of the applicable stamp law. It was opined that the Supreme Court’s decision was not meant to arm dishonest borrowers to delay legitimate actions.

Comment

Section 11(6A) of the act was deleted by way of amendments in 2019. The underlying idea is to delegate the court’s function under Section 11 to arbitral institutions under the amended Section 11. These provisions have yet to be notified.

In Mayavti Trading v Pradyuat Deb Burman,[18] the Supreme Court clarified that the deletion of Section 11(6A) does not allow the courts to examine anything beyond the existence of the arbitration agreement.[19] However, there are no clear guidelines on the extent of an arbitral institution’s power and discretion while deciding an application under Section 11.

Does Mayavti apply to arbitral institutions? Can arbitral institutions or panels entertain any objections on stamping in an application for arbitrator appointment? Do arbitral institutions qualify as authorities under the Stamp Act which can impound a document? These are all questions that arbitration practitioners are asking, and rightly so.

Indian arbitration laws and procedures are still evolving and several issues such as those discussed above remain to be settled. Arbitration practitioners are hopeful that the legislation and the judiciary will work together to pave the way for a seamless arbitration process.

For further information on this topic please contact Kingshuk Banerjee or Ritvik Kulkarni at Khaitan & Co by telephone (+91 11 4151 5454) or email (kingshuk.banerjee@khaitanco.com or ritvik.kulkarni@khaitanco.com). The Khaitan & Co website can be accessed at www.khaitanco.com.

[1] 2019 (3) MhLJ 231.

[2] Civil Appeal 3631/2019 (Supreme Court); (2019) 9 SCC 209.

[3] (2011) 14 SCC 66.

[4] See Paragraph 19 of SMS Tea.

[5] Coastal Marine Construction and Engineering Limited v Gareware-Wall Ropes Limited, 2018 (3) MhLJ 22; Sandeep Soni v Sanjay Roy (Delhi HC); Damont Developers v Brys Hotels, judgment dated 6 September 2018 in Arbitration Petition 413/2017.

[6] (2005) 8 SCC 618.

[7] (2009) 1 SCC 267.

[8] See Paragraph 16 of Garware.

[9] See Paragraphs 65 and 67 of Gautam Landscapes.

[10] Section 2(h) of the Contract Act.

[11] See Paragraph 12 of SBP and Paragraph 15 of Garware:

Prima facie, it would be difficult to say that in spite of the finality conferred by sub-section (7) of Section 11 of the Act, to such a decision of the Chief Justice, the Arbitral Tribunal can still go behind that decision and rule on its own jurisdiction or on the existence of an arbitration clause. It also appears to us to be incongruous to say that after the Chief Justice had appointed an Arbitral Tribunal, the Arbitral Tribunal can turn round and say that the Chief Justice had no jurisdiction or authority to appoint the Tribunal, the very creature brought into existence by the exercise of power by its creator, the Chief Justice. (Emphasis added.)

[12] See Paragraph 15.

[13] See Clause (iv) of the Statement of Object and Reasons for the Amendment Act.

[14] SLP (C) 10232-10233 of 2019.

[15] Order dated 20 December 2019, passed in Commercial Arbitration Petition (Lodging) 1501/2019.

[16] Order dated 15 July 2019 passed in Commercial Arbitration Petition 1060/2019.

[17] See Paragraph 29.

[18] (2019) 8 SCC 714.

[19] See Paragraph 10 of Mayavti:

This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgment as Section 11(6A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment Duro Felguera, S.A. (supra) – see paras 48 & 59.

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