Introduction
SMS Tea Estates and Garware Wall Ropes decisions
NN Global decision
Position after NN Global
Intercontinental judgment
Comment
By way of a recent decision pronounced on 25 January 2022,(1) the Supreme Court of India (SCI) has attempted to provide much-needed clarity on the issue of the enforceability of an arbitration clause contained in an unstamped or insufficiently stamped agreement.
The court's jurisdiction to adjudicate issues at the pre-appointment stage has been the subject matter of numerous cases before the SCI as well as various high courts in India. Different benches of the SCI have rendered conflicting decisions on this issue. In NN Global Mercantile (P) Ltd v Indo Unique Flame Ltd (NN Global),(2) the SCI held that such arbitration agreements are indeed enforceable, but the benches in SMS Tea Estates (P) Ltd v Chandmari Tea Co (P) Ltd (SMS Tea Estates)(3) and Garware Wall Ropes Ltd v Coastal Marine Construction & Engineering Ltd (Garware Wall Ropes)(4) had previously arrived at a diametrically opposite conclusion. The judgment in Garware Wall Ropes was upheld by a three-judge bench of the SCI in Vidya Drolia v Durga Trading Corporation (Vidya Drolia).(5) As NN Global was also a three-judge bench, the issue was referred to a five-judge bench for determination.
The divergent approaches taken by different benches of the SCI are summarised as follows.
| Judgment | Date of judgment | Bench strength | Held |
SMS Tea Estates | 20 July 2011 | Two judges | An unstamped arbitration clause in an agreement that was compulsorily registrable or chargeable to stamp duty could not be the basis for the appointment of an arbitrator. |
Garware Wall Ropes | 10 April 2019 | Two judges | SMS Tea Estates upheld. |
Vidya Drolia | 14 December 2020 | Three judges | Garware Wall Ropes upheld. |
NN Global Mercantile | 11 January 2021 | Three judges | An arbitration agreement would not be rendered invalid, unenforceable or non-existent, even if the substantive contract was not admissible in evidence or could not be acted upon on account of non-payment of stamp duty. The issue was referred to a larger bench. |
What followed was a period of uncertainty concerning the fate of arbitration clauses contained in unstamped or insufficiently stamped agreements during the period of the referral of this issue to a constitution bench of five judges of the SCI. Being cognisant of time-sensitivity when dealing with arbitration issues and the fact that several matters were languishing at a pre-appointment stage, the SCI observed in the recent Intercontinental Hotels Group (India) Pvt Ltd and another v Waterline Hotels Pvt Ltd(6) that such cases cannot be left hanging until the larger bench settles the issue. While on the one hand the Intercontinental judgment must be commended for providing some clarity on this aspect and being in line with India's pro-arbitration stance, on the other hand, the judgment does leave room for some doubt insofar as the enforceability of arbitration clauses contained in unstamped or insufficiently stamped agreements is concerned.
This article seeks to trace the jurisprudence on the issue of the enforceability of arbitration clauses contained in unstamped or insufficiently stamped agreements from SMS Tea Estates to the recent Intercontinental judgment. It seeks to analyse the impact of the Intercontinental judgment on matters that are at a pre-appointment stage pending a conclusive pronouncement on this issue by a five-judge bench of the SCI.
SMS Tea Estates and Garware Wall Ropes decisions
The question of the existence of an arbitration agreement contained in an unstamped or insufficiently stamped document was dealt with in SMS Tea Estates. The SCI held that an unstamped arbitration clause in an agreement that is compulsorily registrable or chargeable to stamp duty cannot be the basis for the appointment of an arbitrator. This was based on the reasoning that an agreement which is compulsorily registrable or chargeable to stamp duty cannot be taken into evidence or relied upon for any purpose under the Indian Stamp Act 1899.
SMS Tea Estates was confirmed by Garware Wall Ropes. Garware Wall Ropes relied on SMS Tea Estates, where it was argued that a reading of section 16(1) of the Arbitration and Conciliation Act 1996 (A&C Act) with section 49 of the Registration Act 1908 suggests that even unregistered documents of immovable property can be admitted into evidence, and that section 16 of the A&C Act provides that the arbitration agreement is independent of the substantive commercial contract. However, the SCI finally concluded that, since the Indian Stamp Act 1899 contains no such exception, an unstamped or insufficiently stamped document cannot be the basis for invoking arbitration.
It must be noted that the judgment in SMS Tea Estates was rendered prior to the coming into force of the 2015 amendment to the A&C Act. This amendment introduced section 11(6A) and section 11(13) to the A&C Act. On a bare reading of section 11(6A) of the A&C Act, it seems that it was the legislative intent to restrict the court's scope of examination to whether an arbitration agreement exists. Further, section 11(13) of the A&C Act calls for an expeditious disposal of such applications within 60 days. Both these sections reinforced the legislative intent behind the 2015 amendment – minimal interference and speedy disposal by courts in arbitration proceedings.
Section 11(6A) of the A&C Act says the following:
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.
Section 11(13) of the A&C Act states that:
An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such Court, as the case may be, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.
Following the 2015 amendment, a full judge bench of the Bombay High Court in the case of Gautam Landscapes Pvt Ltd v Shailesh S Shah and Vijay Sharma v Vivek Makhija (Gautam Landscapes),(7) considered the following issues microscopically:
- Can the court grant relief under section 9 of the A&C Act for an unstamped or insufficiently stamped document containing the arbitration agreement?
- Considering the insertion of section 11(6A) to the A&C Act, can the courts now appoint an arbitrator regardless of the insufficient stamp duty or an unpaid stamp duty?
The Bombay High Court, while considering the first question, opined that the finding in SMS Tea Estates was limited only to applications under section 11 of the A&C Act and therefore carried no precedential value with respect to applications under section 9 of the A&C Act. Quite interestingly, on the second issue, the Bombay High Court opined that the Indian Stamp Act 1899 was only a fiscal statute and could not be used to arm recalcitrant respondents with technical objections. The observations of the Bombay High Court highlighted a pro-arbitration perspective, where the court clearly identified the urgency in arbitration matters and how a failure to appoint an arbitrator could lead to irreparable loss and injury to the affected party.
It is also relevant to note that the above ratio in Gautam Landscapes was considered by the SCI in Garware Wall Ropes. On a harmonious interpretation of the amendments made in the A&C Act along with the provisions under the Maharashtra Stamp Act 1958, the SCI in Garware Wall Ropes partly overruled the judgment in Gautam Landscapes on the ground that there cannot be any referral to arbitration if the document was unstamped or insufficiently stamped.
The NN Global judgment overruled Garware Wall Ropes and consequently allowed referral to arbitration even in cases where the document containing the arbitration agreement was unstamped or insufficiently stamped. The SCI, by doing so, adopted a pro-arbitration approach, putting India on the same pedestal as international arbitration hubs across the world.
The SCI, in the case of NN Global, placed heavy reliance on the United Nations Commission on International Trade Law Model Law and the doctrine of severability. The Court noticed that section 3 of the Maharashtra Stamp Act 1958 did not mandate that arbitration agreements have to be stamped. The Court discarded the findings in SMS Tea Estates and Garware Wall Ropes and held that non-payment of stamp duty will not render the arbitration agreement non-existent. Applying a harmonious construction between the provisions of the Indian Stamp Act 1899 and the A&C Act, the Court noted that the view in Garware Wall Ropes was erroneous and the fate of the reference to arbitration cannot be tied to the substantive contract.
The Court went further and held that non-payment or deficiency of stamp duty is a curable defect. However, the Court was cognisant of the fact that the findings of Garware Wall Ropes was upheld in Vidya Drolia, which was a bench of equal strength. In light of the conflicting views taken by the SCI in NN Global and Vidya Drolia, the Court in NN Global decided to make a referral of this issue to a five-judge constitutional bench to finally decide the controversy.
Before the Intercontinental judgment, the interpretation given by NN Global to unstamped or insufficiently stamped agreements came up for consideration before the Delhi High Court on various occasions.(8)
The Delhi High Court, while referring the disputes to arbitration, agreed with the law laid down in NN Global and therefore held that the court has the authority to make a referral to arbitration even if the underlying agreement was unstamped or insufficiently stamped. The Delhi High Court also held that the arbitration agreement was independent and distinct from the underlying substantive contract in which it was embedded. For the purpose of appointment of the arbitral tribunal, and resolution of disputes arising with reference to any unstamped and insufficiently stamped document, the arbitration agreement would remain unaffected.
Intercontinental Hotels Group (India) Pvt Ltd and Intercontinental Hotels Group (Asia-Pacific) Pvt Ltd (collectively known as IHG) had approached the SCI under section 11(6) of the A&C Act seeking the appointment of a sole arbitrator in view of the disputes that had arisen under the hotel management agreement (HMA) with Waterline Hotels Pvt Ltd (WHPL).
WHPL resisted the petition under section 11 of the A&C Act on the ground that the HMA, which contained the arbitration agreement, was an unstamped document. Relying on Garware Wall
IHG submitted that since they had paid the requisite stamp duty, the SCI should appoint a sole arbitrator. WHPL objected on the ground that IHG had failed to pay proper stamp duty as set out in law.
The SCI observed that courts had very limited jurisdiction under section 11(6) of the A&C Act, which was limited to examining issues relating to the existence of the arbitration agreement. Therefore, the court should not entertain questions of arbitrability or validity as these were matters to be adjudicated upon by arbitrators.
Recognising the "time-sensitivity when dealing with arbitration issues", the SCI in the context of a petition under section 11 of the A&C Act held as follows:
23 . . . All these matters are still at a pre-appointment stage, and we cannot leave them hanging until the larger Bench settles the issue. In view of the same, this Court - until the larger Bench decides on the interplay between Sections 11(6) and 16 - should ensure that arbitrations are carried on, unless the issue before the Court patently indicates existence of deadwood.
On the issue of enforceability of an arbitration clause contained in an unstamped or insufficiently stamped agreement, the SCI held that it is not permissible for a court hearing a petition under section 11 of the A&C Act to determine the sufficiency of stamp duty payable on any agreement and the question was one to be decided at a later stage.
However, the SCI carved out an exception to this, and, while relying on NN Global, held that if it is a question of complete non-stamping of an agreement, then a court "might" have an occasion to examine such an issue under a petition under section 11 of the A&C Act seeking appointment of an arbitrator.
The primary objective of the Indian Stamp Act 1899 (or corresponding state enactments) is to generate revenue for the government and, consequently, such documents become admissible as evidence. However, any insufficiency in relation to payment of stamp duty is not to be looked into while the court is exercising their jurisdiction under section 11 of the A&C Act and the limited scope of the provision only allows them to prima facie examine the existence of an arbitration agreement.
The SCI, by way of the Intercontinental judgment, has highlighted that whether stamp duty is inadequately paid or otherwise is a question that can be entertained at a later stage. The SCI also noted that, in a case where the documents are unstamped to begin with, the court would have looked into the concerns raised in NN Global. However, curiously, this observation does not relate back to the SCI's judgment in NN Global. Reflecting on the observations of the SCI in NN Global, it can be noted that the SCI was of the opinion that an inadequately stamped or non-stamped agreement (making no distinction between the two) will not render the arbitration agreement non-existent. The SCI provided the following justification for its finding:
- stamping or the absence thereof is a curable defect; and
- the doctrine of severability enshrined under section 16 of the A&C Act provides that the arbitration agreement is separate from the substantive contract.
In view of this, it would appear that the Intercontinental judgment has added another layer of ambiguity by contemplating a distinction based on NN Global between agreements that are completely unstamped and agreements that are insufficiently stamped. It is pertinent to note that no such distinction was carved out in the case of NN Global and the SCI's reliance on it appears to be misplaced.
It is quite apparent from the Intercontinental judgment that the SCI is trying to enforce the doctrine of severability of the arbitration agreement from the substantive contract enshrined under section 16 of the A&C Act and to reinforce the principle of minimal judicial interference provided under section 5 of the A&C Act. Further, the SCI's efforts to ensure that technical prerequisites do not defeat the arbitration agreement entered into by the parties are commendable. However, as mentioned above, the distinction made by the SCI in the Intercontinental judgment on the basis of NN Global is likely to cause further confusion and this judgment may be misinterpreted by unscrupulous litigants and used to renege on their obligations arising out of an arbitration clause contained in an unstamped or insufficiently stamped agreement. In the absence of any rational basis for such a distinction, the present issue will be finally laid to rest only once the five-judge bench of the SCI renders a final and conclusive decision on the enforceability of an arbitration clause contained in an unstamped or insufficiently stamped agreement.
For further information on this topic please contact Sahil Narang, Dhritiman Roy or Ayushman Kacker at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
Endnotes
(1) Intercontinental Hotels Group v Waterline Hotels Pvt Ltd 2022 SCC online SC 83.
(8) IMZ Corporate Pvt Ltd v MSD Telematics Pvt Ltd 2021 SCC online Del 3016, Bhagwati Devi Gupta v Star Infratech Private Limited 2021 SCC online Del 3995, Tejswi Impex Pvt Ltd v R-Tech Promoters Pvt Ltd 2021 SCC online Del 3870.