In the recent decision in Coastal Marine Construction and Engineering Limited v Garware-Wall Ropes Limited, the Bombay High Court held that in accordance with the 2015 amendment of Section 11 of the Arbitration and Conciliation Act 1996, the courts' responsibility to refer a dispute to arbitration is narrow and limited to examining the existence of an arbitration agreement. Further, the high court held that an unstamped document does not bar a dispute from arbitration.

Facts

The facts of this case are largely undisputed. Garware-Wall Ropes Limited (the respondent) was awarded a tender to install geotextile tube embankments with toe mounds in Odisha. The respondent sub-contracted the work to the Coastal Marine Construction and Engineering Limited (the petitioner) pursuant to an agreement dated 14 June 2013. The agreement, among other things, stipulated that all disputes would be settled by arbitration.

The petitioner alleged that as a repudiatory breach, the respondent had wrongfully terminated the sub-contract and proceeded to wrongfully encash the bank guarantees that were procured by the petitioner in favour of the respondent. When negotiations with the respondent failed, the petitioner commenced arbitration to resolve the disputes and accordingly proposed the name of an arbitrator. The respondent, on the other hand, objected to the invocation of arbitration and the appointment of the arbitrator.

It was under these circumstances that Section 11 of the act was invoked regarding the appointment of a sole arbitrator to decide the disputes and differences between the parties.

2015 amendment to Section 11

Section 11 of the act deals with the appointment of arbitrators. Subsection 6-A was inserted into Section 11 during the 2015 amendment. It reads as follows:

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.

In view of the above, the petitioner submitted that there was an arbitration clause in the agreement. Accordingly, there was no impediment on the court in invoking arbitration and referring the dispute to an arbitrator, as contemplated in the agreement.

Respondent's contentions

The respondent opposed the petitioner's submission on the following grounds.

Stamping of agreement The respondent argued that the agreement was unstamped; therefore, by appointing an arbitrator, the court would be acting on an unstamped document in violation of Sections 33 and 34 of the Maharashtra Stamp Act 1958. Further, as the contract was a 'works contract' – as defined by Article 63 of the Maharashtra Stamp Act and Section 30(f)(a) thereof – the obligation to pay stamp duty was on the person that received the contract – in this case, the petitioner.

Pre-arbitral agreed procedure According to the respondent, the invocation of arbitration was premature, as the petitioner had not followed the mandatory pre-arbitral agreed procedure prescribed by the arbitration agreement.

In support of its contentions, the respondent relied on several decisions, including the Supreme Court's 2011 decision in SMS Tea Estates Pvt Ltd v Chandmari Tea Company Pvt Ltd.

Petitioner's contentions

The petitioner countered the respondent's arguments and stated as follows.

Stamping of agreement The 2015 amendment to the act contemplates that while appointing an arbitrator, the courts must confine themselves to examining the mere existence of an arbitration clause and must not go into the issue of enforceability or validity of the agreement between the parties. Accordingly, the contention that the agreement required stamping did not affect the existence of the arbitration agreement between the parties.

Onus to pay stamp duty As per the clause titled "Royalties, Licenses, Mining Permits and other statutory requirements etc" in the agreement, the onus to pay all necessary levies, fees, taxes, duties and royalties was on the respondent. Therefore, the liability to pay the stamp duty, if any, was on the respondent.

Pre-arbitral agreed procedure According to the petitioner, it had complied with the pre-arbitral agreed procedure prescribed by the arbitration agreement and the respondent incorrectly contended that invocation of the arbitration was premature. The petitioner had, in fact, made several attempts to schedule a meeting for negotiation. However, as the respondent had failed to reply, there was no scope for amicable settlement.

Decision

At the outset, the Bombay High Court established that the petitioner was fully justified in invoking the arbitration clause as contained in the agreement and that this was not premature, as the petitioner had, on several occasions, contacted the respondent to explore the possibility of negotiations and amicable settlement.

The court relied on Paragraphs 28 to 33 of the 246th Report of the Commission on the Amendment to the Arbitration and Conciliation Act 1996 to understand the scope and nature of pre-arbitral judicial intervention and held that judicial intervention is restricted only to situations where the court or judicial authority finds that the arbitration agreement does not exist or is null and void.

As India had been ranked 178 out of 189 nations in contract enforcement, the court stated that urgent steps were required to facilitate:

  • the quick enforcement of contracts;
  • easy recovery of monetary claims;
  • the award of just compensation for damages suffered; and
  • a reduction in the pendency of court cases by hastening the process of dispute resolution through arbitration.

Reliance was placed on Duro Felguera, S A v Gangavaram Port Limited, a case in which the Supreme Court had considered Section 11 before and after its amendment. More specifically, the court had considered the effect of the change introduced to Section 11(6) by the newly added Section 11(6-A) and held that a court need only look into one factor – namely, the existence of an arbitration agreement.

To further assess whether an arbitration agreement exists, the court clarified that the only determining factor is whether the agreement contains an arbitration clause pertaining to the disputes which have arisen.

According to the court, the Stamp Act was enacted to secure revenue for the government, not to arm a dishonest litigant with a technical defence. In light of this, the court did not support the contention that disputes may not be referred to arbitration if the arbitration clause is contained in an unstamped document. The court observed that the issue of stamping could always be taken up by the arbitrator, once appointed.

On perusing the relevant clause in the agreement, the court agreed with the petitioner's contention that the respondent was liable to pay stamp duty. As such, the respondent could not take advantage of its own failure and frustrate the arbitration agreement between the parties.

The court further analysed the 2011 decision in SMS Tea Estates Private Limited (supra) which the respondent relied on and stated that while this decision, with regard to the stamping of a document, favoured the respondent, it had lost its efficacy after the 2015 amendment – particularly the introduction of Section 11(6-A).

Comment

In India, in addition to exercising their judicial functions, the Supreme Court and various high courts are entrusted with performing certain administrative functions.

One of these functions is to appoint arbitrators where the parties fail to do so, pursuant to an arbitration agreement between the parties. Prior to the 2015 amendment, this power was branded as a judicial power, instead of an administrative power, as the scope and nature of intervention in an arbitration was broad. In short, the courts could hold a detailed trial concerning whether an arbitration agreement exists between the parties and their task was not limited to making a prima facie determination of the same. This resulted in delays to the appointment of arbitrators and consequently a backlog of pending cases. This effectively defeated the reason why parties chose to resolve their disputes through arbitration – and not litigation – as in many cases there was little to no speedy disposal of cases.

In light of the above, the 2015 amendment – insofar as it pertains to the insertion of Section 11(6-A) – is a pro-arbitration development, as it constricts the courts' role, which may eventually lead to speedier disposal of cases.

The present judgment seems to have adopted a pro-arbitration approach, giving effect to the purpose for which the 2015 amendment was carried out. By way of this decision, the court has limited the scope of judicial intervention in the arbitral process and enumerated that courts must confine themselves to the administrative function of examining the existence of an arbitration clause and not adjudicate on the judicial issues of enforceability or validity of the agreement prior to appointing arbitrators.

This judgment has clarified the legal position in SMS Tea Estates Private Limited with regard to the amendment insofar as it deals with unstamped documents containing an arbitration clause. This, in effect, eliminates a technical defence taken by parties to delay the appointment of the arbitrators. By directing that the issue of an unstamped document containing an arbitration clause may be dealt with by the arbitrator once they have been appointed, the court has taken a step in the right direction to encourage the quick enforcement of contracts and a fair and just process to resolve disputes.

Finally, this judgment clarifies the position regarding the wording and intent of the Section 11 amendment and to that extent streamlines the process of appointing arbitrators. In future, in exercise of their administrative function under Section 11, the courts may consider designating certain expert persons or arbitral institutions to appoint arbitrators. This would eliminate the need for a judicial intermediary to appoint arbitrators, which may prove to be a further step towards pro-arbitration developments.

For further information on this topic please contact Chakrapani Misra, Ravitej Chilumuri or Saasha Malpani at Khaitan & Co by telephone (+91 11 4151 5454) or email (chakrapani.misra@khaitanco.com, ravitej.chilumuri@khaitanco.com or saasha.malpani@khaitanco.com). The Khaitan & Co website can be accessed at www.khaitanco.com.

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