Arbitration Clause in an Unstamped Instrument: A Missed Opportunity in Garware Wall Ropes Ltd.?- PART I

The Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd. [hereinafter ‘Garware’] had occasion to consider the effect of an arbitration clause in an unstamped instrument and the question as to who can impound the instrument. The Court held that unless the instrument is properly stamped, the arbitration clause cannot be acted upon.

The first part of the series examines the backdrop of the present issue, the impugned judgment of the Bombay High Court and the reasoning of the Supreme Court.

Backdrop of the Present Issue

Earlier, in M/s SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. (P) Ltd., [hereinafter ‘SMS Tea Estates’] the Supreme Court held that if the document is found to be not duly stamped, Section 35 of Stamp Act bars the said document from being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The court should then proceed to impound the document under section 33 of the Stamp Act and follow the procedure under sections 35 and 38 of the Stamp Act. This judgment was delivered at the time when the law laid down by the Constitution Bench of the Supreme Court in S.B.P. & Co. v. Patel Engineering [hereinafter ‘S.B.P. & Co.’] and its subsequent categorisation in National Insurance Co. Ltd. v. Boghara Polyfab [hereinafter ‘Boghara Polyfab’] governed the exercise of power under Section 11 of the Arbitration and Conciliation Act, 1996 [hereinafter ‘1996 Act’]. As per the aforesaid decisions, a judge deciding the Section 11 application was discharging a judicial function and consequently, he had to decide, to state the classification in Boghara Polyfab, as a first category issue, whether there is an arbitration agreement or not.

Subsequently, the 1996 Act was amended in 2015 by the Arbitration and Conciliation (Amendment) Act, 2015 [hereinafter ‘2015 Amendment’] and the decision in S.B.P. & Co. was legislatively overruled by the introduction of Sections 11 (6-A) and 11 (6-B) in the 1996 Act. Under Section 11 (6-A), the Supreme Court or, as the case may be, the High Court, while considering the application under Sections 11 (4) or (5) or (6) shall confine itself to the ‘examination of the existence of an arbitration agreement’. Further, to ensure speedy disposal of the Section 11 applications, a time limit of 60 days from the date of service of notice on the opposite party, was fixed as per Section 11 (13)

In this backdrop, the central issue that arose before the Supreme Court in Garware was that: whether in view of these amendments, does the decision in SMS Tea Estate still hold the field?

Impugned Judgment of the Bombay High Court

In the impugned judgment, Coastal Marine Construction and Engineering Ltd. v. Garware Wall Ropes Ltd., the learned Single Judge considered the effect of the 2015 Amendment and held that in view of the introduction of Section 11 (6-A) in the 1996 Act, and there being no dispute as to the existence of the arbitration agreement, the question of impounding the instrument can be considered by the Arbitrator. Relying on the decision in Hindustan Steel Ltd. v/s Messrs Dilip Construction Company, it was held that it is not as if once the Arbitrator is appointed, the respondent is precluded from raising the issue of stamping before the Arbitrator. The Arbitrator, if found that the document is insufficiently stamped, can always impound the same and send it to the necessary authorities under the Maharashtra Stamp Act, 1958 for adjudication. The learned Judge categorically held that the decision in SMS Tea Estates has lost its efficacy after the introduction of Section 11 (6-A).

The Judgment of the Supreme Court

The Supreme Court judgment begins its consideration of the issue by examining the legislative history behind the 2015 Amendment that introduced Section 11 (6-A) in the 1996 Act. The Court concludes that the amendment seeks to do away with the judgments in SBP & Co. and Boghara Polyfab and makes the inquiry under Section 11 confined to the existence of the arbitration agreement and leaves other issues open to the arbitrator.

It further notices that neither in the Statement of Objects and Reasons nor in the 246^th Report of the Law Commission [hereinafter ‘Law Commission Report’] is there any mention of SMS Tea Estates. This is for the very good reason that the Supreme Court or the High Court, while deciding a Section 11 application, does not, in any manner, decide any preliminary question that arises between the parties.

According to the Court, since the Indian Stamp Act applies to the agreement or conveyance as a whole, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. Independent existence of the arbitration clause is only in case of an unregistered agreement by virtue of proviso to Section 49 of the Registration Act. Thus, the introduction of Section 11(6-A) does not in any way get over the judgment in SMS Tea Estates.

The Court thereafter examines Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, 1872 and holds that an arbitration clause in an agreement would not exist when it is not enforceable by law. 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.

The next question that the Court considers is the meaning of the words “existence of an arbitration agreement” occurring in Section 11 (6-A). To answer this, the Court refers to its recent judgment in United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors., [hereinafter ‘Hyundai Engineering’] and holds that though an arbitration clause did exist, in law, its existence is fructified only when a specific event occurs- in the present context, when the agreement is duly stamped.

As a last argument, the respondent referred to Section 11 (13) of the Act which requires the Court dealing with a Section 11 application to dispose of the same within a period of 60 days from the date of service of notice on the opposite party, to contend that if the document is impounded at the stage of Section 11 application, the adjudication by the authorities under the Stamp Act, would exceed the period of 60 days. Adopting a harmonious construction of the 1996 Act and the Maharashtra Stamp Act, the Court fixed a time limit of 45 days to the Authority to adjudicate the issue regarding the stamp duty payable. Once this is done, the matter can be considered by the Court, which in turn will ensure that the Arbitrator can also decide the dispute within the time frame provided under Section 29-A of the 1996 Act.

R. HariKrishnan, (Alumnus, Dr. Ram Manohar Lohiya National Law University, Lucknow). The author is an Advocate practicing in the Kerala High Court. He can be contacted at rhkrishnan.1990@gmail.com

*Link to the second part of the blog.