Unstamped agreements cannot trigger arbitration

By Karthik Somasundram and Sneha Jaisingh, Bharucha & Partners
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Can an arbitration stipulation in an unstamped or unregistered agreement be enforced? The Supreme Court had settled this issue in the SMS Tea Estates (2011) case. It held that an arbitration stipulation is not invalidated on account of non-registration of a compulsorily registerable document under the Registration Act, 1908. A proviso to section 49 of the Registration Act permitted unregistered documents to be received as evidence for collateral arrangements such as arbitration stipulation.

arbitration
Karthik Somasundram
Partner
Bharucha & Partners

However, section 35 of the Indian Stamp Act, 1899 (act), prohibited courts from receiving unstamped or inadequately stamped documents as evidence unless it was remedied by impounding and paying the deficient duty and penalty. The Supreme Court ruled that provisions of the act are intended to protect revenue and, therefore, mandatory and the deficiency in stamp duty affects the arbitration clause and cannot be given effect unless rectified at the outset. In case an arbitral tribunal was constituted without court intervention, the arbitrator is mandated to impound the document and give effect to the mandatory provision of the act.

A similar issue came up for the consideration of the Supreme Court in Garware Wall Ropes v Coastal Marine Constructions & Engineering Ltd (2019), following an appeal from a Bombay High Court order. Coastal Marine had invoked arbitration to challenge the termination of a sub-contract awarded by Garware and an arbitral tribunal was constituted despite Garware’s objection that the agreement containing the arbitration stipulation was inadequately stamped under the Maharashtra Stamp Act, 1958. The ruling in the SMS Tea Estates case was not followed despite provisions under the stamp act and the Maharashtra stamp act being similar with respect to the treatment of inadequately stamped documents.

arbitration
Sneha Jaisingh
Managing associate
Bharucha & Partners

Defending Bombay High Court’s judgment, Coastal Marine argued that pursuant to insertion of section 11(6-A) in the Arbitration and Conciliation Act, 1996 (act), in 2015, the ruling in SMS Tea Estates was no longer the law. Section 11(6-A) had restricted the scope of examination for the determination of the existence of an arbitral stipulation while constituting an arbitral tribunal.

Further, section 16 of the act empowered the arbitral tribunal to determine the validity and existence of an arbitral stipulation and the arbitral tribunal could give effect to the mandatory provisions of the stamp act.

The issue before the Supreme Court was whether the ruling in the SMS Tea Estates case continued to hold after the insertion of section 11(6-A) in the act. The impetus for this amendment was traced to the 246th Report of the Law Commission (report), which had recommended the section.

The report, commissioned to address delays plaguing the arbitral process, had recognized that delays in commencement of arbitration contributed to the ineffectiveness of the process. The report had recommended restricting scrutiny by judicial authorities to the existence of an arbitration stipulation and leaving all other preliminary issues to the arbitral tribunal.

Section 11(6-A) was inserted to limit the scope of the court’s examination to determine the existence of an arbitration stipulation notwithstanding any judgment, decree or order of any court in the past. However, neither the report nor the amendment to the act had sought to change the position of law as held by the SMS Tea Estates judgment.

The court rejected Coastal Marine’s argument that the scope of examination under section 11(6-A) was restricted to determine the existence of arbitral stipulation and the non-stamping or inadequate stamping only affected the validity of the document and not the existence of the stipulation. The Supreme Court ruled that an unstamped document would not come into existence as a matter of law unless the document was impounded and appropriately stamped.

Relying on the judgment in the United India Insurance (2018) case, the Supreme Court ruled that mere presence of an arbitration stipulation in an agreement did not result in its existence as a matter of law, for the purposes of scrutiny under section 11 (6-A) of the act. Similarly, by sections 2(g) and (h) of the Indian Contract Act, 1872, an agreement becomes a contract only when it is valid and enforceable.

The Supreme Court issued guidelines directing the authority to adjudicate the duty and penalty within 45 days of receiving impounded documents under the stamp act. This would ensure disposal of applications within 60 days and commencement of arbitral proceedings.

Karthik Somasundram is a partner and Sneha Jaisingh is a managing associate at Bharucha & Partners.

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