Is unstamped Arbitration Agreement enforceable? SC holds question being pending before larger Bench will not hinder arbitration proceedings unless issue indicates existence of deadwood

Supreme Court: While addressing the issue related to jurisdiction of Court under Section 11(6) of the A&C Act, the 3-judge Bench comprising of N.V. Ramana*, CJ., Surya Kant and Hima Kohli, JJ., reiterated that Courts could adjudicate to ‘cut the deadwood’, i.e. not a debatable issue.

Since the respondent had challenged the validity of Arbitration contract for it being unstamped which was already pending before a larger Bench in a different case, the Bench opined,

“…until the larger Bench decides on the interplay between Sections 11(6) and 16– the Courts should ensure that arbitrations are carried on, unless the issue before the Court patently indicates existence of deadwood.”

Factual Matrix

The dispute in the instant case was in nature of international commercial arbitration between the petitioner companies, Intercontinental Hotels Group (India) Pvt. Ltd. and Intercontinental Hotels Group (Asia Pacific) Pvt Ltd, subsidiaries of a British multinational hotel. The respondent-Waterline Hotels Pvt. Ltd., an Indian company engaged in hospitality sector entered into a Hotel Management Agreement (HMA) with the petitioners for renovating the existing infrastructure in accordance with the brand standards established by the IHG group.

The petitioners further alleged that the respondent failed to pay the requisite fee which it was contractually bound to under the HMA and as of 12-10-2018, the respondent owed the petitioners a sum amounting to USD 6,18,719, excluding interest for the late payment as provided under Clause 21.3 of the HMA.

It was when the respondent unilaterally terminated the HMA without any legal basis by handing over the management of the hotel to Miraya, that the petitioners invoked Section 9 of the Arbitration Act seeking interim relief before the High Court of Karnataka. Consequently, the High Court directed the respondent not to evict the petitioners from the premises without due process of law until further orders. Subsequently, alleging that the respondent had not been sincere in complying with the order and had taken steps to frustrate the aforesaid interim order, the petitioners invoked Arbitration under clause 18.2 of HMA.

Interestingly, the respondent stated that the notice of arbitration was defective and was not curable since the purported HMA, which contains the arbitration agreement, was an unstamped document. The reliance was placed by the respondent on Garware Wall Ropes Ltd. v Coastal Marine Constructions and Engineering Ltd., (2019) 9 SCC 209 to contend that an agreement which is not duly stamped cannot be relied on or acted upon unless the unstamped document is impounded, and the applicable stamp duty and penalty is assessed and paid.

Affect of Non-payment of Stamp Duty on Validity of Arbitration Agreement

The Bench noted that in N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd., (2021) 4 SCC 379, the Supreme Court had doubted the proposition as held in Garware Wall Ropes’s case, and was of the opinion that the utility of the doctrine of separability overrides the concern under the respective Stamp Acts and that any concerns of non-stamping or under stamping would not affect the validity of the arbitration agreement. Therefore, the Bench had referred the issue for authoritative settlement by a Constitution Bench.

In Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, the Supreme Court had clearly expounded that Courts had very limited jurisdiction under Section 11(6) of the Act. The only narrow exception carved out was that Courts could adjudicate to ‘cut the deadwood’. Ultimately the Court held that the watch word for the Courts is ‘when in doubt, do refer’.

Hence, the Bench opined that until the larger Bench decides on the interplay between Sections 11(6) and 16 the Court should ensure that arbitrations are carried on, unless the issue before the Court patently indicates existence of deadwood. The Bench remarked,

“Although we agree that there is a need to constitute a larger Bench to settle the jurisprudence, we are also cognizant of time sensitivity when dealing with arbitration issues. All these matters are still at a pre-appointment stage, and we cannot leave them hanging until the larger Bench settles the issue.

Whether the HMA was properly stamped?

Noticeably, the petitioners had themselves attempted to self adjudicate the required stamp duty and had paid a stamp duty of Rs 2,200/, describing the HMA as a “bond”. On 10-06-2020, the petitioners further purchased 11 estamps for Rs. 200/each, describing the HMA as an ‘agreement’ under article 5(j). Therefore, it falls upon the Court, under the stamp act to review the nature of the agreement in order to ascertain the stamp duty payable.

Further, in order to ascertain whether adequate stamp duty had been paid in terms of the Karnataka Stamp Act, the Court would have to examine the nature of the substantive agreement, the nature of the arbitration agreement, and whether a separate stamp fee would be payable for the arbitration agreement at all. Since it was undisputed that stamp duty had been paid, the Bench opined that whether it be insufficient or appropriate was a question that maybe answered at a later stage as this court cannot review or go into that aspect under Section 11(6). The Bench added,

“If it was a question of complete non stamping, then this court, might have had an occasion to examine the concern raised in N. N. Global (supra), however, this case, is not one such scenario.”

Insufficient Stamping; whether a deadwood and clearly indicative of an unworkable arbitration agreement?

After perusal of Clause 22.1 of the HMA, the Bench noted that the respondent was under an obligation to ensure that the agreement would be legally valid in India. Therefore, the Bench opined that if such an obligation was undertaken by the respondent, the extent to which the petitioners could rely on the respondent’s warranty was clearly a debatable issue.

Further, it was also a matter of adjudication whether the respondent could have raised the issue of validity of the arbitration agreement/substantive contract in view of the warranty. Hence, observing that the aforesaid issues were not deadwood, the Bench opined that the issues whether the respondent was estopped from raising the contention of unenforceability of the HMA or the issue whether the HMA was insufficiently or incorrectly stamped, could be finally decided at a later stage.

Verdict

In the backdrop of above, the Bench held that if was apposite to refer the matter to arbitration, in terms of Clause 18.2 of the arbitration agreement. Accordingly, Justice A.V. Chandrashekara, a former Judge of the High Court of Karnataka was appointed as a sole arbitrator to adjudicate the issues. The parties were directed to take steps to convey the order to the SIAC to proceed in terms of the SIAC rules.

[Intercontinental Hotels Group (India) Pvt. Ltd. v. Waterline Hotels Pvt. Ltd., 2022 SCC OnLine SC 83, decided on 25-01-2022]


*Judgment by: Chief Justice N.V. Ramana


Kamini Sharma, Editorial Assistant has put this report together

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