India: The Curious Case Of An Unstamped Agreement: Reference To Arbitration

By way of a recent decision pronounced on 25 January 2022¹, the Hon'ble Supreme Court of India ("SCI") has attempted to provide much-needed clarity on the issue of 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. While in N. N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd, (2021) 4 SCC 379 ("N.N. Global") the SCI held that such arbitration agreements are indeed enforceable, the benches in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 ("SMS Tea Estates") and Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd. (2019) 9 SCC 209 ("Garware Wall Ropes") had previously arrived at a diametrically opposite conclusion. The judgment in Garware Wall Ropes was upheld by the SCI in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 ("Vidya Drolia") (three- judge bench). As N.N. Global was also a three-judge bench, the issue was resultantly referred to a five-judge bench for determination.

The divergent stands taken by different benches of the SCI are summarized hereinunder:

What followed was a period of uncertainty concerning the fate of arbitration clauses contained in unstamped or insufficiently stamped agreements during the pendency of the reference of this issue before a Constitution Bench of five judges of the SCI. Being cognizant 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 Intercontinental Hotels Group (India) Pvt. Ltd. and another v. Waterline Hotels Pvt. Ltd 2022 SCC Online SC 83 ("Intercontinental Judgment") 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, however 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.

The present 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. The present article seeks to analyse the impact of the Intercontinental Judgment on matters which 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 existence of an arbitration agreement contained in an unstamped or insufficiently stamped document was dealt with in SMS Tea Estates wherein 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 that 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 relies on SMS Tea Estate wherein 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 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 does not contain any such exception, an unstamped/insufficiently stamped document cannot be the basis for invocation of 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 is noticed that it was the legislative intent to restrict the court's scope of examination to whether there exists an arbitration agreement or not. Further, Section 11(13) of the A&C Act calls for an expeditious disposal of such applications within 60 (sixty) 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 - 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 - 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.

Subsequent to 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, 2019 SCC OnLine Bom 563 ("Gautam Landscapes"), considered the following issues microscopically:

1. Whether the Court can grant relief under Section 9 of the A&C Act for an unstamped or insufficient stamped document containing the arbitration agreement?
2. Considering the insertion of Section 11(6A) to the A&C Act, could 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 is limited only to applications under Section 11 of A&C Act and therefore, carries 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 is only a fiscal statute and it cannot be used to arm recalcitrant respondents with technical objections. The observations of the Bombay High court highlighted a pro-arbitration perspective, wherein the court clearly identifies 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 reading 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 reference to arbitration if the document is unstamped or insufficiently stamped.

N.N. Global decision

The N.N Global judgment overruled Garware Wall Ropes and consequently allowed reference to arbitration even in cases where the document containing the arbitration agreement was unstamped or insufficiently stamped. The Court by doing so adopted a pro-arbitration approach, putting India at the same pedestal as international arbitration hubs across the world.

The SCI in the case of N.N Global placed heavy reliance on the UNCITRAL Model Law and the doctrine of severability. The Court noticed that Section 3 of 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 as being 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 cognizant 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 Supreme Court in NN Global and Vidya Drolia, the Court in N.N Global decided to make a reference of this issue to a 5 judge Constitutional Bench to finally decide the controversy.

The position after N.N Global

Before the Intercontinental Judgment, the interpretation given by N.N. Global to unstamped or insufficiently stamped agreements came up for consideration before the Hon'ble Delhi High Court on various occasions.²

The Hon'ble Delhi High court while referring the disputes to arbitration, agreed with the law laid down in the N.N Global and therefore held that the Court has the authority to make reference to arbitration even if the underlying agreement was unstamped or insufficiently stamped. The court also held that the arbitration agreement is independent and distinct from the underlying substantive contract in which it is 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 Judgment

Intercontinental Hotels Group (India) Pvt. Ltd and Intercontinental Hotels Group (Asia-Pacific) Pvt. Ltd (collectively, "IHG") had approached the SCI under Section 11(6) of A&C Act seeking 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 contains the arbitration agreement, was an unstamped document. Relying on Garware, WHPL contended that an agreement which is not duly stamped cannot be relied on or acted upon unless the unstamped document is impounded, and the applicable stamp duty and penalty is assessed and paid.

IHG submitted that since they have paid the requisite stamp duty, the SCI should appoint a sole arbitrator. This was objected to by WHPL on the ground that IHG had failed to pay proper stamp duty as per law.

The SCI observed that Courts had very limited jurisdiction under Section 11(6) of the A&C Act, which is limited to examining issues relating to existence of the arbitration agreement. Therefore, the Court should not entertain questions of arbitrability / validity inasmuch as these are 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:

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 same is a question which is to be decided at a later stage.

However, the court carved out an exception to this, and while relying on N.N. 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 arbitrator(s).

Analysis

The primary objective of the Indian Stamp Act, 1899 (or corresponding State enactments) is to generate revenue for the government and subsequently, such documents become admissible as evidence. However, any insufficiency in relation to payment of stamp 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 which can be entertained at a later stage. The Court also noted that in a case where the documents are unstamped to begin with, the court would have looked into the concerns raised in N.N Global. However, curiously, this observation does not relate back to the SCI's judgment in N.N Global. Reflecting on the observations of the SCI in N.N Global, it is noticed 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 aforesaid finding: (i) stamping or absence thereof is a curable defect; and (ii) 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 the above, it would appear that the Intercontinental Judgment has added another layer of ambiguity by contemplating a distinction based on N.N. Global between agreements which are completely unstamped and agreements which are insufficiently stamped. It is pertinent to note that no such distinction was carved out in the case of N.N. Global and the SCI's reliance thereon appears to be misplaced.

It is quite apparent from the Intercontinental Judgment that the SCI is trying to enforce the doctrine of severability of arbitration agreement from the substantive contract enshrined under Section 16 of the A&C Act and reinforce the principle of minimal judicial interference provided under Section 5 of the A&C Act. Further, 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 N.N. Global is likely to cause further confusion and this judgment may be misinterpreted by unscrupulous litigants 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 5 judge bench of the SCI renders a final and conclusive decision on the enforceability of an arbitration clause contained in unstamped or insufficiently stamped agreement.

Footnotes

1. Intercontinental Hotels Group v. Waterline Hotels Pvt. Ltd. 2022 SCC OnLine SC 83

2. 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

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