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The Supreme Court yesterday 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.
Thus, when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6) under Arbitration and Conciliation Act, 1996 (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.
The judgment was rendered by a Bench of Justices Rohinton Nariman and Vineet Saran.
The Court also made it clear 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. [(2011) 14 SCC 66], which continues to apply even after the amendment.
Further, the Court also held that the recent Bombay High Court judgment in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors decided one question incorrectly.
The case before the Supreme Court was an appeal from a judgment of Bombay High Court.
It arose out of a sub-contract given by the appellant to the respondent. The sub-contract agreement contained the arbitration clause. Disputes arose between the parties and the appellant terminated the sub-contract.
As a result, the respondent wrote to the appellant stating that as disputes and differences had arisen between the parties, notice was given of appointment of advocate Mihir Naniwadekar as sole arbitrator. The appellant replied stating that the appointment of Naniwadekar as the sole arbitrator was not acceptable as the invocation of arbitration in pursuance of the agreement is premature.
The respondent, therefore, 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.
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. was still valid or not?
In the above case, the Supreme Court had held that where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act require the Judge hearing the Section 11 application to impound the agreement and ensure that stamp duty is paid before proceeding with the Section 11 application.
However, Section 11(6A) was introduced in the Arbitration Act by way of 2015 amendment. Section 11(6A) provides that the Supreme Court or the High Court, while considering any application under subsections (4), (5) or (6) of Section 11 shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.
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.
The Court was confronted with the question as to whether the decision in SMS Tea Estates was done away with by the expression “notwithstanding any judgment, decree or order of any Court” contained in Section 11(6A).
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.
The Court, in its judgment in the current case, observed that neither in the Statement of Objects and Reasons of the 2015 Amendment Act nor in the Law Commission Report is there any mention of SMS Tea Estates. This, the Court held, is for the very good reason that the Supreme Court or the High Court, while deciding a Section 11 application, does not, in any manner, decide any preliminary question that arises between the parties.
The Supreme Court or the High Court is only giving effect to the provisions of a mandatory enactment. 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.
The Court also made it clear that the Indian Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence.
Thus, the Court concluded that the introduction of Section 11(6A) does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates, which continues to apply even after the amendment.
The Court also proceeded to look at the issue from a slightly different and simpler angle.
When an arbitration clause is contained “in a contract”, the agreement only becomes a contract if it is enforceable by law. Under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the Arbitration Act and Section 2(h) of the Contract Act, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law.
This was also an indicator that SMS Tea Estates has, in no manner, been touched by Section 11(6A).
Correctness of previous judgments
Having arrived at the conclusion, the Court then analysed the correctness of various judgments in this regard.
One of the important judgments the court considered was Duro Felguera, S.A. v. Gangavaram Port Ltd., [(2017) 9 SCC 729]. In this judgment, the Supreme Court had held that after the 2015 amendment, all that the courts need to see is whether an arbitration agreement exists—nothing more, nothing less. The legislative policy and purpose are to minimise the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6A) ought to be respected, the Court had held in that case.
The Court, however, ruled that the above judgment does not deal with the issue in the current case. In fact, in another judgment in United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors., [2018 SCC OnLine SC 1045], the Duro Felguera judgment was distinguished.
In United India Insurance what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did “exist” in the policy, it would not exist in law when one important fact is introduced, namely, that the insurer has not admitted or accepted liability.
Likening it to the present case, the Supreme Court stated that the arbitration clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped.
The argument that Section 11(6A) deals with “existence”, as opposed to Section 8, Section 16, and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court’s understanding of the expression “existence” in United India Insurance Co., the Court held.
Interestingly, the Supreme Court also took note of the recent Bombay High Court judgment in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors., [Arb. Pet. No. 466 of 2017].
In this case, two questions were considered by the Court.
The first question was answered in the affirmative by Bombay High Court while the second question had been answered in the negative.
However, the answer to question (2) being contrary to the current judgment was, therefore, held to be incorrectly decided.
Read the judgment below.