-GUNJAN CHHABRA, Partner,
The question whether an unstamped contract, can be relied on, for the purpose of the Arbitration and Conciliation Act, 1996, has been one in the grey area. There have been several contradictory judgments on the subject.
The issue of a reliance placed on an unstamped contract for the purpose of Arbitration and Conciliation Act, 1996 came up recently before the Bench of Justices Rohinton Fali Nariman and Vineet Saran in April 2019, in the case of Garware Wall Ropes v Coastal Marine Constructions & Engineering 2019(6)SCALE250(Hereinafter referred to as “Garware case”, decided on April 10, 2019.
The Question which came up before the Hon’ble Supreme Court of India in the Garware case was as to what is the effect of an arbitration clause contained in an unstamped contract, which requires to be stamped.
This question was analyzed by the Hon’ble Supreme Court of India, especially in light of the Amendment brought about the Arbitration and Conciliation (Amendment) Act, 2015, by way of which Section 11(6A) was introduced in the Arbitration Act, 1996 by way of which the Court was now restricted in a Petition under Section 11 to only examine the “existence” of an Arbitration Agreement.
WHY WAS SECTION 11(6A) OF THE ARBITRATION AND CONCILIATION ACT, 1996 INTRODUCED
The answer to this question can be found by a simple review of the 246thLaw Commission Report, and the Statement of Objects and Reasons appended to the Arbitration & Conciliation (Amendment) Bill, 2015. A review of the same makes it evident, that the introduction of Section 11(6A) was necessitated as a result of various judgments by way of which the scope of Inquiry under a Section 11 Petition was greatly increased and the Court was required to make a full judicial inquiry into various factors before appointment of an arbitrator. These judgments being SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (2009) 1 SCC 267, were said to defeat the principle of kompetenz kompetenz, and minimal interference by Courts, owing to which introduction of Section 11(6A), making it incumbent upon the Courts to make a minimal enquiry under a Section 11 Petition, was necessitated.
However, both the 246thLaw Commission Report as well as Statement of Objects and Reasons, makes no reference whatsoever to whether the Court, in a Petition under Section 11, is required to ignore the effect of non-stamping of a document. Even otherwise the reasons behind the introduction of Section 11(6A) do not deal in any manner with the judgment of the Hon’ble Supreme Court of India, SMS Tea Estates. v. Chandmari Tea Co., (2011) 14 SCC 66(Hereinafter referred to as “SMS Tea Estates”), wherein the Hon’ble Apex Court had held that the Supreme Court or the High Court, before appointing an arbitrator under Section 11, is duty bound to ensure that the document is impounded and stamp duty and penalty (if any) is paid before the agreement (including the arbitration clause) can be acted upon.
THE DECISION OF THE COURT
The Hon’ble Supreme Court of India while rendering its decision paid heed to the following factors:-
- Section 7 (5) of the Arbitration and Conciliation Act, 1996 provides that the reference in a contract to a document containing an arbitration Clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make the arbitration Clause part of the contract. However, in terms of Section 2(h) of the Indian Contract Act, 1872, only an agreement which is enforceable by law is a contract. Furthermore, no agreement can be enforceable under law, which is required to be stamped, but is unstamped. In view thereof, the Apex Court held, that a bare reading of the above-cited provisions implies that since an arbitration clause in an unstamped agreement is not a contract, clause 7(5) does not come into play, and there is no valid and subsisting arbitration clause.
- Neither the 246thLaw Commission Report, nor the Objects and reasons of the Arbitration and Conciliation (Amendment) Act, 2015 provides for, or deal with the judgment and the law laid down in SMS Tea Estates. Owing to the same, the intent of Section 11(6A), cannot be for the Court to act upon an unstamped contract for the purpose of appointing an arbitrator under a Petition under Section 11.
- The Supreme Court also distinguished Enercon (India) Ltd. and Ors. v. Enercon GmbH and Anr. (2014) 5 SCC 1 andAshapura Mine-Chem Ltd. v. Gujarat Mineral Development Corporation, (2015) 8 SCC 193. In the said judgments, it was held that since Section 16 of the Arbitration and Conciliation Act, 1996 provides that arbitration clause forming part of a contract shall be treated as an agreement independent of such contract, and it is owing to this separability that the enforceability of the contract will not effect the validity of the arbitration clause. The Apex Court in the Garware caseheld that Enercon dealt with a case where the Arbitration Clause was separate from main contract, making it a case which falls under Clause 7(2), being a separate agreement, and as such does not apply to the present case.
Owing to the above factors, the Apex Court in Garware case, the Hon’ble Supreme Court held the following:-
- A Court in a Petition under Section 11, cannot rely on an unstamped document for appointing an arbitrator and needs to impound the document. In doing so, the Apex Court overruled the judgment of the Hon’ble Bombay High Court in Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors., (2019) SCC OnLine Bom 563 (Hereinafter referred to as “Gautam Landscapes).
- A Court in a Petition under Section 9, can rely on an unstamped document for granting interim relief, and in doing so, the Apex Court re-affirmed the decision in Gautam Landscapes,on this aspect alone.
ADWITYA LEGAL COMMENT
The Apex Court might have set to rest the controversy of relying on an unstamped document for the purpose of the Arbitration and Conciliation Act, 1996. However, the judgment of the Supreme Court is rather confusing and, we are unable to completely agree with the judgment owing to various factors:-
- The Apex Court did not decide the effect of the words, “notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitraton clause”, incorporated under Section 11(6A). if the legislature wanted to restrict the prohibition of examination to only two judgments, being SBP, and National Insurance, such a wide wording of “any other judgment, decree of order of any Court”, would not have been used by the legislature. The intent was to avoid a wide area of examination at the stage of a Section 11 Petition. This is the reason why a 60 day limitation period if also provided under Section 11(13) of the Act, for disposal of Section 11 Petitions. An examination and subsequent impounding of an unstamped document would definitely defeat the speedy disposal of a Section 11 Petition.
- The Apex Court did not decide the effect of a severability clause, present in each and every agreement. The Apex Court in the Garware case, held erroneously that Section 16 and the principle of Kompetenz Kompetenz comes into operation, only once an arbitration tribunal is constituted and not before. If such is the case, then Courts under Section 9 and Section 11 would be fit to decide all issues of disputes on merits until the Arbitral Tribunal is in place. Such a finding results in defeating the object of the entire Arbitration law in India.
- The Apex Court gave no reason or finding for distinguishing before a Section 11 Petition and a Section 9 Petition. Section 9 can only be filed by a party to an arbitration agreement within the meaning of Section 1(h) of the Arbitration and Conciliation Act, 1996. However, once the Court has held that for the purpose of Section 11, no arbitration agreement exists, then even for the purpose of Section 9, no arbitration agreement can said to exist in an unstamped document. Such a distinction by the Apex Court in the Garware case has no reasoning whatsoever.
- The Apex Court did not pay heed to Section 7(4)(a) of the Arbitration and Conciliation Act, 1996 which lays down that an arbitration agreement is in writing even if it is contained in a document signed by the parties. Even if the remaining contract between the parties is an unenforceable contract, it can still be considered as a document on which the parties have signed, and thus the arbitration clause would be valid.
- The Apex Court did not pay heed to the word “existence”used in Section 11(6A). The word existence is different from the word validity.Therefore, the arbitration clause, in view of being incorporated in an unenforceable contract, might not be valid, but it cannot be said that it is not in existence at all.
- The Apex Court has, without any basis, distinguished the Enercon case, in which a coordinate bench of the Apex Court had given a contrary finding. If the Apex Court, in the Garware case, had a contrary view than the Bench in the Enercon case, ideally it was a fit case to be referred to a larger Bench. We say this especially in view of the fact that the Enercon casewas argued by Hon’ble Justice Nariman himself, who forms part of the quorum of the Garware case. However, without placing such a reference, a contrary finding was given.
Thus, in our view, although the Hon’ble Supreme Court’s verdict, does set to rest the controversy, it cannot be said that we are in absolute agreement with the same.