Penalty cannot be imposed for insufficient stamping of arbitral award at execution stage: Karnataka High Court

The Karnataka High Court recently held that penalties under the Karnataka Stamp Act cannot be imposed on “insufficiently stamped” arbitral awards at the stage of enforcement or execution of such awards. [Shakeel Pasha and ors v. M/s City Max Hotels].“The concept of imposing penalty on an insufficiently stamped instrument cannot be applied to an arbitral award in an execution proceedings,” stated the Court’s judgment dated July 28.Justice Sachin Shankar Magadum added that it was agonising to learn that, owing to such obstacles, many decree holders are unable to enjoy the fruits of an arbitral award, even if they make it to the stage of execution.“The decree holder is virtually compelled to go through so much struggle to execute what has already been granted in his favour after a hard and arduous battle,” the judge observed..Notably, the Court also flagged the need for more clarity in the law as to the stage at which the arbitral award ought to be stamped, if it all.Justice Magadum, in fact, questioned whether an arbitral award should be made subject to stamp duty. He raised doubts as to whether an arbitral award can be treated as an “instrument”, in a true sense, to which the Stamp Act should be applied.Arbitral awards are treated as a decree, only by way of a legal fiction for the limited purpose of enabling its enforcement, he observed. While so, there appeared no literature explaining the basis for subjecting an arbitral award to stamp duty, the judge added..The Court further noted that it is not the Arbitration and Conciliation Act of 1996 that mandates parties to pay stamp duty on arbitral awards. Rather, it is the State’s Stamp Act which requires the payment of stamp duty, failing which the award may be impounded or held to be inadmissible in courts. “The question of whether the arbitral award falls within the definition of 'instrument' as stipulated under the Stamp Act, in the first place, and should it even be subjected to stamp duty needs consideration at the hands of the Court,” the Court proceeded to hold..Another anomalous area flagged by the judge was whether the insufficient stamping of an arbitral award can be a ground to challenge the award under Section 34 of the Arbitration Act.“Unless there is an amendment to Section 31(1) of the Act of 1996, mandating award to be duly stamped and compulsory registration wherever it is required, this anomaly will continue,” the Court said.In any case, the judge said that at present, given the interplay of the Stamp Act and the Arbitration Act, “it is evident that an award cannot be acted upon by the court unless it is duly stamped.”The Court, however, cautioned execution courts from imposing penalties under the Stamp Act on decree holders at the stage of enforcing the arbitral award.“Unless Rules are framed and a mechanism is brought into force indicating that how arbitral award needs stamping and at what point of time it needs stamping before the same is set in execution, the executing courts have to bear in mind the valuable rights accrued to a decree holder and therefore, the executing courts should not impose penalty under Sections 33 and 34 of the Karnataka Stamp Act to an arbitral award,” the Court said..The Court was dealing with a case where an execution court had imposed a penalty on a decree holder of the arbitral award, on the ground that the award was insufficiently stamped. The stamp duty levied, meanwhile, was the rate prevailing when the petition was moved by the decree holder to enforce the award.The High Court criticised the execution court on both counts.Citing the Supreme Court’s verdict in M Anasuya Devi And Anr vs. M Manik Reddy, the High Court reiterated that the stamp duty payable on the “instrument” was the duty payable when the instrument (the award) was signed.The Court added that the executing court’s decision to impose a penalty of ten times the stamp duty as “not at all sustainable.” It also noted that since the arbitral award was not tendered as “evidence” or for the purpose of adjudication, there was no need for impounding the same.The judge added that such an approach would also negatively impact the push for opting arbitration as an alternate dispute mechanism. He opined that there is a need for quicker enforcement mechanisms in India when it comes to arbitration-related litigation, in the absence of which the trust and confidence in arbitration would "surely wither away with time."“If the party who resorts to arbitration has to incur more expenses, then, he would be discouraged from invoking the remedy by way of arbitration, thus defeating the principle object of the Legislature encouraging parties to resort to arbitration,” the Court added..Unstamped arbitration agreement not legally valid: Constitution Bench of Supreme Court holds by 3:2 majority.Advocate Manu Prabhakar Kulkarni appeared for the decree holder, City Max Hotel, while the judgment debtors were represented by advocate Manu K..[Read Judgment]