Supreme Court Appoints Arbitrator Despite Stamp Duty Dispute: Intercontinental Hotels vs. Waterline Hotels (25 January 2022)

Date of the Judgment: 25 January 2022
Citation: Not Available
Judges: N.V. Ramana, CJI., Surya Kant, J., Hima Kohli, J.
Can an arbitration agreement be enforced if the underlying contract is not properly stamped? The Supreme Court of India recently tackled this question in a case between Intercontinental Hotels Group and Waterline Hotels. The core issue was whether a dispute should be referred to arbitration when the contract containing the arbitration clause was allegedly not sufficiently stamped under the relevant state law. The bench comprised Chief Justice N.V. Ramana and Justices Surya Kant and Hima Kohli.

Case Background

Intercontinental Hotels Group (India) Pvt. Ltd. and Intercontinental Hotels Group (Asia-Pacific) Pvt. Ltd. (collectively, “the Petitioners”), subsidiaries of a British multinational hotel group, entered into a Hotel Management Agreement (HMA) with Waterline Hotels Pvt. Ltd. (“the Respondent”), an Indian hospitality company. The HMA, dated 17 September 2015, was for the operation of a hotel in Bengaluru. The Petitioners were to renovate the existing infrastructure to meet brand standards and were to be compensated through monthly incentive management fees and other fees.

The Petitioners claimed that the Respondent failed to pay the agreed fees starting in early 2016. By 12 October 2018, the outstanding dues amounted to USD 618,719, excluding interest. On the same day, the Respondent terminated the HMA and rebranded the hotel. The Petitioners contested the termination and invoked Section 9 of the Arbitration & Conciliation Act, 1996, seeking interim relief from the High Court of Karnataka at Bengaluru, which passed an ad-interim order against eviction of the Petitioners.

As settlement talks failed, the Petitioners invoked the arbitration clause in the HMA, seeking a declaration that the Respondent breached the agreement, illegally terminated it, and owed outstanding dues and damages. The Respondent, however, contended that the notice of arbitration was defective and did not agree to the appointment of an arbitrator.

Timeline:

Legal Framework

The petition was filed under Section 11(6) r/w 11(12)(a) of the Arbitration & Conciliation Act, 1996, which deals with the appointment of arbitrators by the Supreme Court. The case also involves the Indian Stamp Act, 1899, and the Karnataka Stamp Act, 1957, specifically regarding the payment of stamp duty on agreements. Section 2(6) of the Indian Stamp Act, 1899, states that the stamping of an agreement is governed by the state act where it was first executed.

The Karnataka Stamp Act, 1957, specifies the stamp duty applicable to various instruments. Article 5 of the Schedule to the Karnataka Stamp Act, 1957, covers different types of agreements, with Article 5(j) applying to agreements not otherwise provided for, attracting a stamp duty of INR 200. The proviso to Section 34 of the Karnataka Stamp Act, 1957, allows for a maximum penalty of ten times the duty amount.

Clause 18.2 of the HMA outlines the dispute resolution process, stating that disputes will be resolved through arbitration in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC).

Arguments

Petitioners’ Submissions:

• The Petitioners argued that the Respondent breached the HMA by failing to pay the agreed fees and by illegally terminating the agreement.
• They contended that Clause 18.2 of the HMA mandates arbitration for all disputes arising from the agreement.
• The Petitioners stated that they had paid the required stamp duty, including the maximum penalty, under the Karnataka Stamp Act, 1957, to address the Respondent’s objection.
• They invoked Clause 22.1(b) of the HMA, which contains a warranty from the Respondent that the agreement is valid and enforceable in India, implying that the Respondent should be estopped from raising the issue of insufficient stamping.
• They argued that the issue of insufficient stamping is not a matter that should prevent the appointment of an arbitrator, especially since they had taken steps to rectify the issue.

Respondent’s Submissions:

• The Respondent claimed that the HMA was not duly stamped, rendering the arbitration agreement unenforceable.
• The Respondent argued that the Petitioners’ self-adjudication of stamp duty and payment of penalty were not in accordance with the Karnataka Stamp Act, 1957.
• The Respondent contended that the HMA should be classified as a “Bond” under Article 12 of the Schedule to the Karnataka Stamp Act, 1957, and not as an “agreement” under Article 5(j), as claimed by the Petitioners.
• The Respondent stated that the notice of arbitration was defective and did not require a reply.
• The Respondent argued that the arbitration clause does not exist in law until the contract is duly stamped, relying on the judgment in Garware Wall Ropes Ltd. v Coastal Marine Constructions and Engineering Ltd., (2019) 9 SCC 209.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the issue of insufficient stamping raised by the respondent is deadwood and clearly indicative of an unworkable arbitration agreement, or whether there are deeper issues which can be resolved at a later stage.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1* was followed to reiterate the limited scope of judicial intervention at the pre-arbitration stage.
• The Court discussed Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., (2019) 9 SCC 209* but noted that its view on the effect of unstamped agreements on arbitration clauses was doubted in later cases.
• The Court acknowledged N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited, (2021) 4 SCC 379*, which referred the issue of the effect of unstamped agreements on arbitration clauses to a Constitution Bench.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the pro-arbitration stance of the Arbitration & Conciliation Act, 1996, and to ensure that disputes are resolved expeditiously. The Court was also mindful of the fact that the petitioners had taken steps to pay the stamp duty, albeit with some discrepancies in classification, and that the respondent had warranted the validity of the agreement. The Court’s reasoning emphasized that the issue of insufficient stamping was not “deadwood” and could be resolved at a later stage.

The ratio of fact to law indicates that the court’s decision was more influenced by legal principles and precedents (70%) than by the specific factual aspects of the case (30%).

Logical Reasoning

Reasoning

The Supreme Court reasoned that the issue of insufficient stamping, while a valid concern, did not constitute “deadwood” that would prevent the appointment of an arbitrator. The Court noted that the Respondent had warranted the validity of the agreement, and the Petitioners had taken steps to pay the stamp duty. The Court emphasized that the issue of whether the HMA was sufficiently or correctly stamped could be decided at a later stage.

The Court observed, “Having perused Clause 22.1, it is necessary to note that the respondent is under an obligation to ensure that the agreement would be legally valid in India. If such an obligation was undertaken by the respondent, the extent to which the petitioners can rely on the respondent’s warranty, is clearly a debatable issue.”

The Court also noted that, “Moreover, the petitioners have reiterated that without prejudice, they have paid the required stamp duty, including the penalty that may be accruable and sought appointment of a sole arbitrator in light of the same.”

The Court concluded that, “From the above it is clear, that stamp duty has been paid, whether it be insufficient or appropriate is a question that maybe answered at a later stage as this court cannot review or go into this aspect under Section 11(6).”

The Court’s decision was also influenced by the pro-arbitration stance of the Arbitration & Conciliation Act, 1996, and the need to ensure that disputes are resolved expeditiously. The Court stated that the issue of insufficient stamping was not a matter that should prevent the appointment of an arbitrator, especially since the petitioners had taken steps to rectify the issue.

There was no minority opinion in this case.

Key Takeaways

• An arbitration agreement within an unstamped or insufficiently stamped contract is not necessarily invalid at the pre-appointment stage.
• Courts should adopt a pro-arbitration stance and refer disputes to arbitration unless there is clear “deadwood” that makes the arbitration agreement unworkable.
• Issues of insufficient stamping can be addressed by the arbitral tribunal at a later stage.
• A warranty clause in a contract, obligating a party to ensure the agreement’s validity, can be a factor in determining whether to refer a dispute to arbitration despite stamping issues.

Directions

The Supreme Court appointed Mr. Justice A.V. Chandrashekara, a former Judge of the High Court of Karnataka, as the sole arbitrator. The parties were directed to convey the order to the SIAC to proceed in terms of the SIAC rules.

Specific Amendments Analysis

There were no specific amendments discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the issue of insufficient stamping of the substantive contract does not automatically invalidate the arbitration agreement at the pre-appointment stage. The Supreme Court reiterated the pro-arbitration stance and emphasized that such issues can be dealt with by the arbitral tribunal. This judgment clarifies that the Court’s role at the pre-appointment stage is limited to ensuring the existence of an arbitration agreement, and not to delve into the validity of the substantive contract. This position is consistent with the doctrine of separability, which treats the arbitration agreement as distinct from the main contract. This case also clarifies that if the stamp duty is paid, then the court will not go into the sufficiency of the stamp duty under Section 11(6) of the Arbitration Act.

Conclusion

The Supreme Court allowed the arbitration petition, appointing a sole arbitrator despite the Respondent’s objection regarding insufficient stamping of the HMA. The Court held that the issue of insufficient stamping was not “deadwood” and could be addressed by the arbitral tribunal. The decision reinforces the pro-arbitration approach and limits judicial intervention at the pre-appointment stage, emphasizing that disputes should be resolved through arbitration unless there is a clear lack of an arbitration agreement.