India - Invoking Arbitration Agreements In Unstamped Documents – Course Correction From The Garware Wall Ropes’ Judgment.

Legal News & Analysis - Asia Pacific - India - Dispute Resolution

17 February 2021
 

What happened in the Garware Wall Ropes’ Judgment?
 

In our earlier article,[1] we had discussed the decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Construction & Engineering Ltd. (“Garware Judgment”).[2] We had remarked that much was left to be done to strike a balance between arbitration law, stamping law and the equitable rights of litigants. We had analysed how the Garware Judgment took a narrow view on invoking arbitration agreements in unstamped documents, in holding that an arbitration could not be invoked in case of an arbitration agreement forming a part of an unstamped document, until the defect of non-stamping was rectified. It held that before proceeding under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the Court ought to impound the document and send it for collection of stamp duty dues. This also meant that neither the parties, nor the Court could appoint an arbitrator till the requisite stamp duty was paid.
 

Applying this analysis of the Garware Judgment in respect of applications under Section 11 of the Arbitration Act, it could be argued that even an application for interim relief under Section 9 of the Arbitration Act would not be decided until the document containing the arbitration clause was impounded and the appropriate stamp duty was paid. The Garware Judgment potentially increased hindrances for the arbitration mechanism at the initial stage itself by increasing the scope of judicial interference in connection with the appointment of arbitrators and could have also had the effect of delaying the grant of interim relief, thereby rendering the arbitration process nugatory.
 

What has changed since then?
 

A recent judgment by a three-judge bench of the Supreme Court, on January 11th, 2021, in N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others (“Global Mercantile Judgment”),[3] revisited the findings in the Garware Judgment. The Supreme Court clarified that the doctrine of severability was introduced to ensure that technical lapses in the underlying agreement (such as non-payment of stamp duty) did not take away from the parties’ intention to arbitrate, in contrast to what the Court had held in the Garware Judgment.
 

The Supreme Court in the Global Mercantile Judgment further held that non-payment of the stamp duty on the document containing the arbitration agreement did not prevent the arbitration agreement from being enforced. However, it clarified that the adjudication of the rights and obligations under the document would not proceed till the parties complied with the mandatory provisions of the stamp laws. The Supreme Court directed the document containing the arbitration clause to be impounded after referring the case to arbitration, and the party invoking the arbitration clause was directed to pay the stamp duty. The party invoking the arbitration clause was also allowed to proceed to file for interim relief to protect and preserve the subject matter of the dispute under Section 9 of the Arbitration Act.
 

What does this mean for you?
 

Arbitration - What does it mean for you
 

According to the Supreme Court in the Global Mercantile Judgment, pending the payment of the stamp duty on a document containing the arbitration clause:
 

  • Disputes could be referred to arbitration: The judicial authority could refer the dispute to arbitration under Section 8 of the Arbitration Act. However, in the meanwhile, the parties would need to ensure that the document containing the arbitration clause gets appropriately stamped, so that the rights and obligations emanating from the document could be adjudicated upon.
     

  • Arbitrator(s) could be appointed: An insufficiently stamped document, containing the arbitration clause, could not prevent the parties or the Court, as the case may be, from appointing arbitrator(s). However, the document containing the arbitration clause would be impounded and the parties would be required to pay the requisite stamp duty before the arbitration tribunal could commence with the adjudication of disputes.
     

  • Interim relief is available: If a party filed an application under Section 9 of the Arbitration Act for an interim relief, even if the Court were informed that the document containing the arbitration clause was not duly stamped, it could grant ad-interim relief to safeguard the subject-matter of the arbitration. However, the document containing the arbitration clause would then be impounded and the concerned party would be directed to take necessary steps for the payment of the requisite stamp duty, in accordance with the provisions of the relevant stamp laws, within a time-bound period.
     

So, is the issue settled? – Not quite!
 

The three-judge bench of the Supreme Court in the Global Mercantile Judgment has diverged from the view taken in the Garware Judgment, which had been affirmed in Vidya Drolia and Ors. v. Durga Trading Corporation,[4] also decided by a coordinate bench of similar strength. Accordingly, the Supreme Court in the Global Mercantile Judgment found it prudent to refer the question, “whether an arbitration agreement in an unstamped document containing the arbitration agreement is rendered unenforceable in law”, to a Constitution bench.
 

There is no doubt that the Global Mercantile Judgment is a welcome judgment. It is a step towards making India an arbitration-friendly jurisdiction. The Supreme Court has recognised that mere technicality of non-payment of the stamp duty, which although forms an important part of the states’ revenue, cannot precede the enforcement of an arbitration agreement or act as a defence against the party invoking arbitration.
 

(An almost) Conclusion
 

Section 16 of the Arbitration Act gives statutory recognition to the doctrine of separability, which means that an arbitration clause or arbitration agreement is distinct and separate from the principal contract. Section 16 (1) (a) of the Arbitration Act states that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract”.
 

The Arbitration Act draws this principle from the UNCITRAL Model Law on International Commercial Arbitration, 1985. This Model Law also emphasises on this concept of separability since it is an extremely essential part of the autonomy of the parties to the arbitration proceedings and the concept of minimal judicial interference. Therefore, the Supreme Court in the Global Mercantile Judgment has given complete effect to the intention of the legislature in stating that an arbitration agreement, which does not need to be stamped to be enforceable, is not unenforceable even where it forms part of an unstamped document.
 

In reality, there are many instances where the stamp duty remains unpaid in commercial contracts. Often, the stamp duty is not paid unless parties find it necessary to do so. Some commercial contracts are concluded over email where no stamp duty is paid, however, the agreements are liable to be formalised and the stamp duty paid.
 

India ranks 63 in the ‘Ease of Doing Business Rankings’ published by the World Bank, and ranks 163 under the parameter of ‘Enforcing Contracts’. Streamlining and speeding-up the dispute resolution mechanism is vital for businesses to consider India as a viable option for investments. Due to the delays in getting justice through normal Court processes, arbitration gained preference, and for further advancement of arbitration as a preferred method of dispute resolution, it is the need of the hour that narrow technical views, which could create hurdles in the advancement of arbitration, be discarded. Building India into an arbitration-friendly nation would eventually lead to increased business investment sentiments. The Garware Judgment could have made businesses question whether to elect arbitration as a mode of dispute resolution or not.
 

As the situation stands today, the hurdles caused by the Garware Judgment in invoking arbitration, appointment of arbitrator and/ or seeking interim relief have been done away with, till such time that the Constitution bench finally puts the issue to rest.
 

 

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For further information, please contact:

 

Simran Aggarwal, Partner, Cyril Amarchand Mangaldas

[email protected]
 

[1]      https://corporate.cyrilamarchandblogs.com/2020/01/invoking-arbitration-agreements-in-unstamped-documents-a-case-comment-on-gareware-wall-ropes-v-coastal-marine-constructions-engineering/.

[2]      (2019) 9 SCC 209.

[3]      Civil Appeal Nos. 3802 – 3803 of 2020 (Arising out of Special Leave Petition (Civil) Nos. 13132 – 13133 of 2020).

[4] Civil Appeal No. 2402 of 2019