Dec 03,2020 | 10 min read

"Arbitration Clause in an unstamped Contract: Issue of Enforceability" By Harshavardhan Abburi

Introduction

It is understood that arbitration is a form of alternative dispute resolution (ADR), which, ideally outside the courts, is simply a way of settling disputes. It may be used to determine any particular rights-related conflict, but arbitration is also used to resolve contractual disputes in the context of international business transactions. In arbitration, by making the Arbitration Award, the dispute is resolved by one or more persons (as needed) called the adjudicator. An arbitration award legally binds all sides of the conflict and is enforceable in the courts.

An arbitration arrangement is a contract between two or more parties agreeing, without resorting to the Court, to settle a possible disagreement that might occur in the future. It may also be a traditional clause in a larger contract and serves as a condition for the option of arbitration. At the start of a business alliance, the arbitration agreement is mostly signed as preparation, and the written contracts will assist in resolving the conflicts.

This article attempts to highlight the problems that arise if specified under the Indian Stamp Act, an arbitration agreement in place is not stamped or has been inadequately stamped.

Issue of enforceability of arbitration clause in an unstamped contract

In Garware Wall Ropes Ltd vs Coastal Marine Constructions & Engineering Ltd, the question raised in the appeal before the Supreme Court was whether the previous judgment of the Supreme Court in the case of SMS Teas Estates (P) Ltd vs Chandmari Tea Co (P) Ltd (SMS Teas Estates) would continue to refer to the amendment of Section 11(6A) of the Arbitration and Conciliation (Amendment) Act 2015.

In SMS Teas Estates, the Supreme Court held that, if an arbitration agreement is created, the provisions of the Indian Stamp Act 1899 (Indian Stamp Act) require the judge to hear the application under Section 11. The question is whether section 11(6A), enacted by the Arbitration and Conciliation (Amendment) Act 2015, has removed the basis of that judgement in such a way that the stage at which the instrument is to be enforced is not that of the judge hearing the application under section 11, but that of the arbitrator appointed under section 11, as held in the judgement under appeal.

In the present case, on 10 April 2019, the Supreme Court held that the enforcement of Section 11(6A) in no way deals with or addresses the basis of the SMS Tea Estates judgment, which remains even after the amendment of Section 11(6A).' The reason for arriving at this judgment was that if it is not enforceable by statute, the agreement is unstamped/insufficiently stamped.

An unstamped Arbitration Agreement can’t be acted upon 

In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., the court held that the provisions of the Indian Stamp Act, 1899, where an arbitration clause is contained in an unstamped agreement, requires the judge hearing the application under section 11 to enforce the agreement and to ensure that the stamp duty and penalty (if any) are paid thereon before proceeding with the request under section 11. The question is whether section 11(6A), passed by the Arbitration and Conciliation (Amendment) Act 2015, has removed the basis of the judgement in such a way that, as specified in the judgement under appeal, the stage at which the instrument is to be applied is not that of a judge hearing the request under section 11, but that of an arbitrator appointed under section 11.

In the case of SBP Co Ltd. v. Patel Engineering, The situation regarding the handling of requests for the appointment of arbitrators has been identified. Before this judgment, it was determined that, under the terms of section 11, when nominating arbitrators, the courts act in an administrative capacity. The position was reversed by the Supreme Court's seven-judge bench, granting a judicial role to the courts in exercising those powers. Therefore, it was within the court's jurisdiction to preliminarily decide on its own jurisdiction to hear the appeal for arbitration and on the nature of a live argument, i.e. one that was not affected by the restriction.

In National Insurance Company Limited v. Boghara Polyfab Private Ltd., an attempt was made to delineate and categorize issues as per the point at which the request was made, vis-à-vis:

(i) Issues that the Chief Justice or his appointee should decide, e.g. Decisions concerning the jurisdiction and the legitimacy of a binding agreement on arbitration, 

(ii) Issues that he can also define, i.e. whether the parties' claims are tenable and whether the parties' claims are justifiable.

(iii) Issues to be left to the arbitral tribunal to decide which involve the substantive aspects and merits of the dispute which at the time of implementation of section 11, were expressly excluded from the court's jurisdiction.

Conclusion 

The Arbitration and Conciliation (Amendment) Bill, 2018 proposes that arbitral bodies may be nominated by the courts to select arbitrators and proposes the abolition of section 11(6-A) of the Act. In the case of an arbitration settlement contained in an unstamped contract, it is unclear what process an authorising authority would implement if the Bill comes into force.

There are a few takeaways in the discussions concerning the judgments provided by the Supreme Court in this case: (i) the court must not appoint the arbitrator until the agreement prescribed by the arbitration clause is duly stamped; (ii) the court must enforce the agreement for which appropriate stamp duty has not been paid and forward it to the applicable stamp authority for correction; (iii) the court must enforce the agreement on which appropriate stamp duty has not been paid and send it to the applicable stamp authority for correction.


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ABOUT THE AUTHOR


Harshavardhan Abburi

Experienced Associate with a demonstrated history of working in the law practice industry. Skilled in Corporate Law, Arbitration, Dispute Resolution, Legal Writing, and Trials. Strong professional with a B.Com LLB (Hons.) focused in 2010 from Gujarat National Law University and a J.D. from University of Toledo College of Law, Ohio, U.S.A.

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