Supreme Court Clarifies the Effect of Unstamped Arbitration Agreements: Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engineering Ltd. (2019)

Introduction

Date of the Judgment: April 10, 2019
Citation: 2019 INSC 332
Judges: R.F. Nariman, J. and Vineet Saran, J.

Can an arbitration agreement within an unstamped contract be enforced? This was the core question before the Supreme Court in a recent case. The Court had to determine whether an arbitration clause in an unstamped contract is valid and enforceable, or if the contract must first be properly stamped before arbitration can proceed. This judgment clarifies the interplay between the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899.

The Supreme Court bench comprising Justice R.F. Nariman and Justice Vineet Saran delivered the judgment. The majority opinion was authored by Justice R.F. Nariman.

Case Background

Garware Wall Ropes Ltd. (the appellant) and Coastal Marine Constructions & Engineering Ltd. (the respondent) entered into a sub-contract agreement on June 14, 2013. The sub-contract was for the installation of a geo-textile tubes embankment in Odisha. This agreement contained an arbitration clause.

Disputes arose between the parties, leading the appellant to terminate the sub-contract on January 2, 2015. Consequently, on July 20, 2016, the respondent invoked the arbitration clause by appointing Mr. Mihir Naniwadekar as the sole arbitrator. The appellant rejected this appointment, stating that the invocation of arbitration was premature.

The respondent then filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996, before the Bombay High Court on February 10, 2017, seeking the appointment of an arbitrator. The Bombay High Court allowed the petition on March 9, 2018, and appointed Mr. Naniwadekar as the sole arbitrator. The appellant then appealed to the Supreme Court.

Timeline

Legal Framework

The case revolves around the interpretation of the Arbitration and Conciliation Act, 1996, particularly Section 11(6A), and the Indian Stamp Act, 1899, as applicable in Maharashtra through the Maharashtra Stamp Act, 1958.

The relevant provisions of the Arbitration and Conciliation Act, 1996 include:

• ✓ Section 2(1)(b) defines “arbitration agreement” as an agreement referred to in Section 7.
• ✓ Section 7 defines an “arbitration agreement” as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship. It also specifies that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and that it must be in writing.
  
  “7. Arbitration agreement .—(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing.”
• ✓ Section 8 deals with the power to refer parties to arbitration where there is an arbitration agreement.
  
  “8. Power to refer parties to arbitration where there is an arbitration agreement .—(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
• ✓ Section 11(6A) states that the Supreme Court or the High Court, while considering an application for appointment of an arbitrator, shall confine itself to the examination of the existence of an arbitration agreement.
  
  “11. Appointment of arbitrators .—(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”
• ✓ Section 11(7) states that a decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Supreme Court or, as the case may be, the High Court or the person or institution designated by such court is final and no appeal including Letters Patent Appeal shall lie against such decision.
• ✓ Section 11(13) states that an application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such court, as the case may be, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.
• ✓ Section 16(1) allows the arbitral tribunal to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. It also 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.
  
  “16. Competence of arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”
• ✓ Section 45 deals with the power of a judicial authority to refer parties to arbitration when it comes to agreements referred to by the New York Convention of 1958.
  
  “45. Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (V of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

The relevant provisions of the Maharashtra Stamp Act, 1958, include:

• ✓ Section 33 mandates the examination and impounding of instruments by authorities if they are not duly stamped.
  
  “33. Examination and impounding of instruments .—(1) Subject to the provisions of section 32-A, every person having by law or consent of parties authority to receive evidence and every person in charge of a public office, except an officer of police or any other officer, empowered by law to investigate offences under any law for the time being in force, before whom any instrument chargeable, in his opinion, with duty, is produced or comes in the performance of his functions shall, if it appears to him that such instrument is not duly stamped, impound the same irrespective whether the instrument is or is not valid in law.”
• ✓ Section 34 states that instruments not duly stamped are inadmissible in evidence and cannot be acted upon unless the required stamp duty and penalty are paid.
  
  “34. Instruments not duly stamped inadmissible in evidence, etc .—No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer unless such instrument is duly stamped or if the instrument is written on sheet of paper with impressed stamp such stamp paper is purchased in the name of one of the parties to the instrument”

Arguments

Appellant’s Arguments:

• ✓ The appellant argued that the arbitration clause in the sub-contract was unenforceable because the sub-contract itself was not properly stamped. They relied on Sections 33 and 34 of the Maharashtra Stamp Act, which mandate that unstamped documents cannot be acted upon.
• ✓ They contended that the introduction of Section 11(6A) of the Arbitration and Conciliation Act, 1996, did not remove the requirement for a court to impound an unstamped document. The appellant argued that Section 11(6A) was introduced to limit the court’s role to examining the existence of an arbitration agreement and not its validity, as per the judgments in SBP & Co. v. Patel Engineering Ltd. [(2005) 8 SCC 618] and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. [(2009) 1 SCC 267].
• ✓ The appellant stated that the judgment in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66], which requires judicial authorities to impound unstamped instruments, continues to apply even after the introduction of Section 11(6A).

Respondent’s Arguments:

• ✓ The respondent argued that Section 11(6A) of the Arbitration and Conciliation Act, 1996, mandates that the court should only examine the existence of an arbitration agreement and not its validity. They distinguished between the “validity” and “existence” of an arbitration agreement, stating that the provisions of the Indian Stamp Act relate to the validity of an agreement and not its existence.
• ✓ The respondent contended that an arbitration agreement is independent of the contract in which it is contained. As long as the arbitration agreement exists in writing, the court should appoint an arbitrator and leave other preliminary issues to the arbitrator.
• ✓ The respondent also argued that the whole object of the amendment would be defeated if a mini-trial was conducted at the Section 11 stage, requiring impounding of the agreement containing the arbitration clause.
• ✓ The respondent relied upon Section 11(13) of the Arbitration and Conciliation Act, 1996, which requires the application under Section 11 to be disposed of within a period of 60 days from the date of service of notice, and that this would not be possible if questions relating to the Indian Stamp Act were to be decided at the Section 11 stage.
• ✓ The respondent argued that no prejudice would be caused if the arbitrator were to commence the arbitration and then impound the documents containing the arbitration clause by applying the Indian Stamp Act.
• ✓ The respondent also argued that, in the present case, it is the appellant who is to pay stamp duty under the Indian Contract Act, 1872, and therefore, cannot take advantage of its own wrong in not doing so.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. What is the effect of an arbitration clause contained in a contract which requires to be stamped?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• ✓ SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] – This case held that where an arbitration clause is contained in an unstamped agreement, the Judge hearing the Section 11 application must impound the agreement and ensure that stamp duty and penalty are paid. (Supreme Court of India)
• ✓ SBP & Co. v. Patel Engineering Ltd. [(2005) 8 SCC 618] – This case clarified that the power to appoint an arbitrator under Section 11 is judicial and not administrative and that the Chief Justice or the designated Judge will have the right to decide the preliminary aspects. (Supreme Court of India)
• ✓ National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. [(2009) 1 SCC 267] – This case further clarified the issues that the Chief Justice or his designate must decide in a Section 11 application. (Supreme Court of India)
• ✓ Konkan Railway Corporation Ltd. v. Mehul Construction Co. [(2000) 7 SCC 201] – This case held that the powers of the Chief Justice under Section 11(6) of the 1996 Act are administrative in nature. (Supreme Court of India)
• ✓ Konkan Railway Corporation Ltd. v. Rani Construction (P) Ltd. [(2002) 2 SCC 388] – This case reiterated the view that the powers of the Chief Justice under Section 11(6) of the 1996 Act are administrative in nature. (Supreme Court of India)
• ✓ Enercon (India) Ltd. & Ors. v. Enercon GmbH & Anr. [(2014) 5 SCC 1] – This case discussed the concept of separability of the arbitration clause from the underlying contract. (Supreme Court of India)
• ✓ Ashapura Mine-Chem Ltd. v. Gujarat Mineral Development Corporation [(2015) 8 SCC 193] – This case followed the principles laid down in Enercon (supra). (Supreme Court of India)
• ✓ Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729] – This case discussed the scope of power under Section 11(6) of the 1996 Act after the 2015 amendment. (Supreme Court of India)
• ✓ United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors. [2018 SCC OnLine SC 1045] – This case distinguished Duro Felguera (supra) and clarified that an arbitration clause is activated only if the insurer admits liability. (Supreme Court of India)
• ✓ Oriental Insurance Company Ltd. v. Narbheram Power and Steel (P) Ltd. [(2018) 6 SCC 534] – This case discussed the interpretation of arbitration clauses in insurance policies. (Supreme Court of India)
• ✓ Vulcan Insurance Co. Ltd. v. Maharaj Singh [(1976) 1 SCC 943] – This case discussed the interpretation of arbitration clauses in insurance policies. (Supreme Court of India)
• ✓ JMD Ltd. v. Celebrity Fitness India Pvt. Ltd. [(2019) SCC OnLine Del 6483] – This case was regarding the issue of stamp duty in arbitration. (Delhi High Court)
• ✓ B.D. Sharma v. Swastik Infra Estate Pvt. Ltd. & Ors. [(2018) SCC OnLine Del 13279] – This case was regarding the issue of stamp duty in arbitration. (Delhi High Court)
• ✓ Sandeep Soni v. Sanjay Roy [(2018) SCC OnLine Del 11169] – This case was regarding the issue of stamp duty in arbitration. (Delhi High Court)
• ✓ N.D. Developers Pvt. Ltd. v. Bharathi & Ors. [(2018) SCC OnLine Kar 2938] – This case was regarding the issue of stamp duty in arbitration. (Karnataka High Court)
• ✓ Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors. [Arb. Pet. No. 466 of 2017, decided on 04.04.2019] – This case was regarding the issue of stamp duty in arbitration. (Bombay High Court)
• ✓ Sri Venkataramana Devaru v. State of Mysore, [1958] SCR 895 – This case discussed the rule of harmonious construction. (Supreme Court of India)
• ✓ J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P., (1961) 3 SCR 185 – This case discussed the rule of harmonious construction. (Supreme Court of India)
• ✓ Chief Inspector of Mines v. Lala Karam Chand Thapar, (1962) 1 SCR 9 – This case discussed the rule of harmonious construction. (Supreme Court of India)
• ✓ Anwar Hasan Khan v. Mohd. Shafi, (2001) 8 SCC 540 – This case discussed the rule of harmonious construction. (Supreme Court of India)

Legal Provisions:

• ✓ Section 2(1)(b), Arbitration and Conciliation Act, 1996 – Definition of “arbitration agreement”.
• ✓ Section 7, Arbitration and Conciliation Act, 1996 – Definition of “arbitration agreement”.
• ✓ Section 8, Arbitration and Conciliation Act, 1996 – Power to refer parties to arbitration.
• ✓ Section 11(6A), Arbitration and Conciliation Act, 1996 – Examination of the existence of an arbitration agreement.
• ✓ Section 11(7), Arbitration and Conciliation Act, 1996 – Finality of decision on appointment of arbitrator.
• ✓ Section 11(13), Arbitration and Conciliation Act, 1996 – Time limit for disposal of application for appointment of an arbitrator.
• ✓ Section 16(1), Arbitration and Conciliation Act, 1996 – Competence of arbitral tribunal to rule on its jurisdiction.
• ✓ Section 45, Arbitration and Conciliation Act, 1996 – Power of judicial authority to refer parties to arbitration.
• ✓ Section 33, Maharashtra Stamp Act, 1958 – Examination and impounding of instruments.
• ✓ Section 34, Maharashtra Stamp Act, 1958 – Instruments not duly stamped inadmissible in evidence.
• ✓ Sections 2(a), 2(b), 2(g) and 2(h), Indian Contract Act, 1872 – Definition of proposal, acceptance, void agreement and contract.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66]*: The court upheld this judgment, stating that it continues to apply even after the amendment of Section 11(6A). The court reiterated that a judicial authority must impound an unstamped document.
• ✓ SBP & Co. v. Patel Engineering Ltd. [(2005) 8 SCC 618]*: The court acknowledged that this judgment was the reason for the introduction of Section 11(6A) to limit the court’s role in Section 11 applications.
• ✓ National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. [(2009) 1 SCC 267]*: The court acknowledged that this judgment was the reason for the introduction of Section 11(6A) to limit the court’s role in Section 11 applications.
• ✓ Konkan Railway Corporation Ltd. v. Mehul Construction Co. [(2000) 7 SCC 201]*: The court noted that this judgment was overruled by SBP & Co. (supra).
• ✓ Konkan Railway Corporation Ltd. v. Rani Construction (P) Ltd. [(2002) 2 SCC 388]*: The court noted that this judgment was overruled by SBP & Co. (supra).
• ✓ Enercon (India) Ltd. & Ors. v. Enercon GmbH & Anr. [(2014) 5 SCC 1]*: The court distinguished this case, stating that it pertained to a separate arbitration agreement and not an arbitration clause within a contract.
• ✓ Ashapura Mine-Chem Ltd. v. Gujarat Mineral Development Corporation [(2015) 8 SCC 193]*: The court held that this case followed Enercon (supra) and was inapplicable for the same reasons.
• ✓ Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]*: The court stated that this case did not answer the precise issue before the court and merely clarified the mischief that was sought to be remedied by the introduction of Section 11(6A).
• ✓ United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors. [2018 SCC OnLine SC 1045]*: The court relied on this case to emphasize that the existence of an arbitration agreement depends on the enforceability of the contract.
• ✓ Oriental Insurance Company Ltd. v. Narbheram Power and Steel(P) Ltd. [(2018) 6 SCC 534]*: The court relied on this case to emphasize that the existence of an arbitration agreement depends on the enforceability of the contract.
• ✓ Vulcan Insurance Co. Ltd. v. Maharaj Singh [(1976) 1 SCC 943]*: The court relied on this case to emphasize that the existence of an arbitration agreement depends on the enforceability of the contract.
• ✓ JMD Ltd. v. Celebrity Fitness India Pvt. Ltd. [(2019) SCC OnLine Del 6483]*: The court noted that this case was overruled by the present judgment.
• ✓ B.D. Sharma v. Swastik Infra Estate Pvt. Ltd. & Ors. [(2018) SCC OnLine Del 13279]*: The court noted that this case was overruled by the present judgment.
• ✓ Sandeep Soni v. Sanjay Roy [(2018) SCC OnLine Del 11169]*: The court noted that this case was overruled by the present judgment.
• ✓ N.D. Developers Pvt. Ltd. v. Bharathi & Ors. [(2018) SCC OnLine Kar 2938]*: The court noted that this case was overruled by the present judgment.
• ✓ Gautam Landscapes Pvt. Ltd. v. Shailesh Shah and Ors. [Arb. Pet. No. 466 of 2017, decided on 04.04.2019]*: The court noted that this case was overruled by the present judgment.
• ✓ Sri Venkataramana Devaru v. State of Mysore, [1958] SCR 895*: The court relied on this case to emphasize the principle of harmonious construction.
• ✓ J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P., (1961) 3 SCR 185*: The court relied on this case to emphasize the principle of harmonious construction.
• ✓ Chief Inspector of Mines v. Lala Karam Chand Thapar, (1962) 1 SCR 9*: The court relied on this case to emphasize the principle of harmonious construction.
• ✓ Anwar Hasan Khan v. Mohd. Shafi, (2001) 8 SCC 540*: The court relied on this case to emphasize the principle of harmonious construction.

Ratio Decidendi

The Supreme Court held that an arbitration agreement contained in an unstamped contract is not enforceable until the contract is properly stamped. The court emphasized that the Indian Stamp Act mandates that unstamped documents cannot be acted upon until the required stamp duty and penalty are paid. This requirement applies to the arbitration clause as well.

The Court also clarified that Section 11(6A) of the Arbitration and Conciliation Act, 1996, does not override the provisions of the Indian Stamp Act. The Court held that the judicial authority under Section 11 must impound the document and ensure stamp duty is paid before proceeding with the appointment of an arbitrator.

The Court also emphasized the principle of harmonious construction, stating that the Arbitration and Conciliation Act, 1996, and the Indian Stamp Act, 1899, must be read together to ensure that both are given effect.

Final Order

The Supreme Court set aside the order of the Bombay High Court dated March 9, 2018. The Court directed the Bombay High Court to impound the sub-contract agreement and send it to the concerned authority to determine the stamp duty and penalty payable. Once the document is duly stamped, the High Court was directed to proceed with the Section 11 application.

Flowchart of the Process

Summary Table

Implications

The judgment in Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engineering Ltd. has significant implications for arbitration proceedings in India. It clarifies that:

• ✓ An arbitration clause in an unstamped contract is not enforceable until the contract is properly stamped.
• ✓ Courts have a duty to impound unstamped documents and ensure that stamp duty is paid before proceeding with arbitration.
• ✓ Section 11(6A) of the Arbitration and Conciliation Act, 1996, does not override the provisions of the Indian Stamp Act.

This judgment emphasizes the importance of ensuring that all contracts, especially those containing arbitration clauses, are properly stamped. This will avoid delays and legal challenges in arbitration proceedings. It also highlights the need for parties to be aware of their obligations under the Indian Stamp Act.