An arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped

The Hon’ble Supreme Court on 10 April 2019 in Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd. (Civil Appeal No. 6361/2019) ruled that when the Supreme Court or the High Court when considers an application under Section 11(4) to 11(6) under Arbitration and Conciliation Act, 1996 (Act or Arbitration Act) and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act, 1899 (Indian Stamp Act) to first impound the agreement or conveyance and see that stamp duty is paid before the agreement can be acted upon.

Thus, held that an arbitration clause that is contained in a contract would not “exist” as a matter of law until the contract is duly stamped.

Facts in brief:

The respondent filed a petition under Section 11 of the Arbitration Act. The Bombay High Court allowed the Section 11 petition and appointed an arbitrator. The appellant challenged the same in the present appeal before the Supreme Court.

Issues before the Court:

The question before the Supreme Court was the effect of an arbitration clause contained in a contract which was not stamped.

This itself involved another question – whether the judgment of the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] was still valid or not?

  • In SMS Tea Estate, the issue before the Supreme Court was whether an application under Section 11 of the Act can be rejected on the ground that the arbitration agreement was contained in a lease deed which was not sufficiently stamped.
  • Referring to Sections 33 and 35 of the Indian Stamp Act, the Supreme Court had ruled in that case that unless the stamp duty and penalty due on the instrument is paid, the Court cannot act upon the instrument, which means it cannot act upon the arbitration agreement also which is part of the instrument.

However, Section 11(6A) was introduced in the Arbitration Act by way of 2015 amendment. Hence, the question was whether Section 11 (6A) removed the basis of this judgment, so that the stage at which the instrument is to be impounded is not by the Judge hearing the Section 11 application, but by an arbitrator who is appointed under Section 11.

Decision:

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

The Court held that introduction of Section 11(6A) in the Act by way of 2015 amendment does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates v. Chandmari Tea Co. (P) Ltd. , which continues to apply even after the amendment.

SMS Tea Estates has taken account of the mandatory provisions contained in the Indian Stamp Act and held them applicable to judicial authorities, which would include the Supreme Court and the High Court acting under Section 11.

A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty is paid before the agreement, as a whole, can be acted upon.

Further, the Court held that the judgments contained in JMD Ltd. v. Celebrity Fitness India Pvt. Ltd., 2019 SCC OnLine Del 6483, B.D Sharma v. Swastik Infra Estate Pvt. Ltd., 2018 SCC OnLine Del 13279, Sandeep Soni v. Sanjay Roy, 2018 SCC OnLine Del 11169, and N.D Developers Pvt. Ltd. v. Bharathi, 2018 SCC OnLine Kar 2938  have not declared the law correctly, and are consequently, overruled.

Further, the Court also held that the recent Bombay High Court judgment (Full bench decided on 04.04.2019 ) in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors by Full Bench, has incorrectly decided on unstamped instrument.

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