Arbitrator Can Be Appointed Only If Contract Is Sufficiently Stamped: Supreme Court

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Supreme Court of India delivered a landmark judgment and settled that even after the 2015 Amendment, Arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 can be appointed only if the requisite stamp duty has been paid in full.

Brief Facts

Appellant sub-contracted the work for the installation of a geotextile tube embankment with toe mound at village Pentha in Odisha for protection against coastal erosion. The dispute arose between the parties and the appellant terminated the contract. Respondent proposed the name of an arbitrator which was rejected by the appellant. Respondent thereafter moved a section 11 petition for appointment of an arbitrator in the Bombay High Court which was allowed. Aggrieved by this judgment, Appellant moved to the Supreme Court.

Issue

The main Issue before the bench was What is the effect of an arbitration clause contained in a contract which requires to be stamped especially after the addition of section 11(6A) by 2015 Amendment in the 1996 Act.

Arguments Raised

Counsel for Petitioner relying on section 33 and 34 of the Maharashtra Stamp Act 1958 and SMS Tea Estates Pvt. Ltd v. Chandmari Tea Co. Pvt. Ltd. argued that judicial authorities have to impound instruments which cannot be acted upon until duly stamped continues to be valid law even after the addition of section 11(6A) to the 1996 Act. Section 11(6A) does not interfere with the provisions of the Indian Stamp Act at all.

Counsel for Respondent, on the other hand, argued that after the introduction of section 11(6A) courts in section 11 petition have to confine itself to the examination of the existence of arbitration agreement. Indian Stamp Act’s provisions are a fiscal measure intended to collect revenue and goes to the validity of the agreement. She argued that the arbitration agreement is an independent agreement as long as it is in writing. The whole object of the amendment will be nullified if the courts look into preliminary matters at the time of deciding section 11 petition. Furthermore, It was also argued that no prejudice would be caused to either party if the arbitrator was appointed and he impounded the instrument until the stamp duty was paid. Last but not least it was also argued that according to the law it was the appellant who was supposed to pay the stamp duty he cannot be forced to take advantage of his own wrong.

Verdict

The division bench of Supreme Court after listening to both the sides, examining the relevant provisions and case laws held that arbitrator can be appointed under section 11 only if the instrument is duly stamped. In this case, Bombay High Court erred in appointing an arbitrator under section 11. Furthermore, Division Bench observed that a closer look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. It is important to remember 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 agreement or conveyance so as to give it an independent existence. The position of law is the same even after the amendment of the 1996 Act.

Deciding the same issue using different logic Bench held that an agreement becomes contract only if it is enforceable by law and under Indian Stamp Act an agreement becomes contract only if stamp duty has been paid and it becomes enforceable. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law.

In light of the above, Supreme Court remanded the matter back to Bombay High Court which will impound the instrument and sent it to the relevant authority which will decide the relevant stamp duty and thereafter decide section 11 petition.

This case is a very good example which shows that law to be given effect has to be constructed harmoniously.

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