Sep 26,2020 | 04 min read

Arbitration Clause In An Unstamped Contract: Issue Of Enforceability

By Samar Inam Khan &  Co-Author - Dolly Chouhan

An arbitration clause is an indispensable feature of any contract because it lays down the conditions and rules of when and where the mode of arbitration will be used to solve conflicts rather than going to the court. Arbitration is a dispute resolution mechanism has several benefits as compared to conventional litigation to resolve a matter within a specific time frame. The time taken by a court of law to solve any dispute is much more when compared to arbitration. Therefore, it is an efficient method of dispute resolution. In fact, parties after reaching a consensus-ad-idem, reduce their terms of oral understanding in the form of a written contract containing an arbitration clause, whose terms thereof, sets out the rights and obligations of the parties which ultimately bind and govern their relationship inter-se. 

The principles laid down in the traditional case of M/s. SMS Tea Estates Private Limited vs. M/s. Chandmari Tea Co. Private Limited. and reinforced in the case of Black Pearls Hotels Private Limited vs. Planet M. Retail Limited referred to an arbitration clause is contained in an unstamped agreement, the provisions of Indian Stamp Act would require the judge to impound the Agreement and upon payment of full Stamp Duty, decide any application under Section 11(6) of the act and while dealing with section 35 of the said act the Hon’ble Court held that the Court cannot act upon such an agreement without it being impounded and duly stamped.

In fact, delay in decision making would lead to parties facing trials which would further delay the process and defeat the principal objective. Therefore, in order to resolve this issue, an amendment was made in the contract act to accommodate unstamped articles a new provision, i.e. Section 11(6A)was introduced and inserted in the Act of 1996. The objective behind the insertion of the said provision was to curtail and limit the powers of the court while dealing with an application under Section 11, which were otherwise of wide amplitude. The inquiry was restricted to the ‘existence’ of the arbitration agreement between the parties.

This conundrum was revisited through the case of Garware Wall Ropes v Coastal Marine Constructions & Engineering in which the apex court’s decision in SMS Tea Estates despite the 2015 Amendment to section 11 of the 1996 Act was upheld. The Hon'ble Supreme Court held that an agreement only becomes a ‘contract’ if it is enforceable, and it is not enforceable unless it is duly stamped. The Supreme Court clarified 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 contract or conveyance so as to give it an independent existence. An arbitration clause can be provided with an independent existence only for certain limited purposes, for instance, where the document was not duly registered, as held in SMS Tea Estates. It reversed many decisions of the Bombay, Delhi and Karnataka HC in which the 2015 amendment was upheld and it was laid that objections, as to stamp duty, could be decided by the arbitrator, who could, if necessary, impound the document and direct payment of stamp duty and penalty. These judgments are no longer considered good law.

Recently in another case, that of M/s. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities & Ors. vs. M/s. Bhaskar Raju & Brothers & Ors. While addressing the issue of an application under Section 11 of the Act, and relying upon the judgment rendered in the case of M/s. SMS Tea Estate. The Hon'ble Supreme Court held that an arbitration clause embodied in an unstamped arbitration agreement cannot be relied upon and the same needs to be impounded mandatorily in the manner as set out in Section 38 of the Stamp Act, 1899 regardless of there being any objection in that regard or not. It was further held that if the said instrument is adequately stamped then the same can be relied and acted upon and the hon’ble judge in the Bombay HC case of Saifee Developers vs. Sanklesha Constructions held that the court’s power under section 9 of the act does not get affected by the Garware wall ropes case.

Enforceability:

The Bombay H.C recently held in the case of Gautam Landscapes Private Limited Vs Shailesh Shah and Ors, 2018. stated that a Court could consider a document containing an arbitration agreement while contemplating an application under Sections 9 or 11 (6) of the 1996 Act, notwithstanding that the document was unstamped or insufficiently stamped. Similarly, in the case of Garware Wall Ropes v Coastal Marine Constructions & Engineering it held that in case an unstamped arbitration agreement existed it will be impounded by an arbitrator assigned under section 11 of the arbitration act and not be a judge. 

WEBLIOGRAPHY

Definition of Arbitration | Arbitration


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ABOUT THE AUTHOR


Samar Inam Khan

Advocate & Arbitrator since 2003

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