Advani LawExperts Corner


Introduction


 

The Arbitration and Conciliation Act, 1996 (the A&C Act) is based on the 1985 UNCITRAL Model Law on International Commercial Arbitration, the enactment of the A&C Act signified the inception of the effort being made by the Indian legislature to bring India closer to the modern and pro-arbitral renaissance that was being spearheaded by the western world. Section 16 of the A&C Act embodies the sacrosanct doctrine of kompetenz-kompetenz which gives primacy to the Arbitral Tribunal to rule on its own jurisdiction including objections pertaining to the existence or validity of the arbitration agreement.

Although, Section 16 gives the express power to the Arbitral Tribunal to decide all issues pertaining to its own jurisdiction comprising an array of preliminary issues, it is silent as to what these preliminary issues include. The pertinent question that has warranted tremendous scholarly discourse by prominent practitioners in the global arbitral fraternity is whether the issue of limitation is one of jurisdiction or an adjudication on merits of the claim and whether this decision could be made by the Arbitral Tribunal under Section 16 of the A&C Act.

 

The present article will analyse two recent decisions of the Supreme Court of India where the Court has delivered conflicting opinions as to whether limitation constitutes a jurisdictional issue. The authors will conclude by suggesting a way forward until the controversy is conclusively settled by the judgment of a larger Bench of the Supreme Court.

 


The Controversy


The pertinent question of whether the decision of an Arbitral Tribunal on whether the claim of the claimant is barred under the law of limitation is an interim order or an interim award came up before the Division Bench of the Supreme Court comprising Nariman and Sinha, JJ. in Indian Farmers Fertilizer Coop. Ltd. v. Bhadra Products[1] (Indian Farmers). The Court was confronted with a case where the respondent had invoked arbitration and the Tribunal considered it appropriate to decide whether the claimant’s claim was barred by the law of limitation at first as a preliminary issue before traversing into the merits of the dispute. The arbitrator held that the claimant’s claim was not barred by the law of limitation. Aggrieved by the aforesaid interim decision of the arbitrator, the petitioner preferred an application filed under Section 34 of the A&C Act before the trial court styling it as the “first partial award”. The trial Judge held that the arbitrator’s decision did not constitute an award and dismissed the petition. Aggrieved by this judgment, the petitioner preferred an appeal to the High Court of Orissa wherein the High Court concurred with the findings of the trial court thereby dismissing the appeal proceedings. When the matter reached the Supreme Court, the Court at the outset had to decide whether the petition filed under Section 34 was maintainable. The Court realised that this could be determined by ascertaining whether the decision of the arbitrator on the issue of limitation constituted an interim award under Section 2(1)(c) r/w Section 31(6) and therefore assailable before the Court under Section 34 or whether the issue of limitation was one of jurisdiction and fell within the ambit of Sections 16(2) and (3) and therefore assailable before the Court only under the recourse envisaged under Section 37(2)(a) of the A&C Act. In the light of the aforesaid conundrum, the Court in Indian Farmers[2] framed the following issues:

 

(i) Whether an award on the issue of limitation can first be said to be an interim award?

(ii) Whether a decision on a point of limitation would go to jurisdiction and therefore be covered by Section 16?

 

The Court in Indian Farmers[3] began its reasoning with a conjoint reading of Sections 2(1)(c) and 31(6) observing that an arbitral award includes an interim award while noting that the A&C Act does not define an interim award. The Court was then constrained to rely on the wordings of Section 31(6) wherein it observed that the legislature had given the express power to the Arbitral Tribunal to make an interim award with respect to any matter on which it may make a final arbitral award. The Court relied on Section 32(1) to hold that there can be more than one interim award prior to the final award which could conclusively determine some issues between the parties.

 

The Court in Indian Farmers[4] relied on the wordings embodied in Section 47 of the English Arbitration Act, 1996 (English Arbitration Act) as it throws some light on what constitutes an interim award under English law. Relying on Section 47 of the English Arbitration Act, it was observed that a preliminary issue that affected the whole claim would expressly be the subject-matter of an interim award under the English Arbitration Act. It is pertinent to note that the Court stressed on the fact that the English Arbitration Act advisedly does not use the expression interim or partial so as to make it clear that the award covered by Section 47 of the English Arbitration Act would be a final determination of the particular issue arising from the dispute between the parties.

 

The Court in Indian Farmers[5] in order to augment its ratio went on to rely on an earlier decision of the Supreme Court that laid emphasis on what characteristics were required to constitute an interim award under the Indian arbitral regime. The Court relied on the decision in Satwant Singh Sodhi v. State of Punjab[6] (Satwant Singh) wherein an interim award in respect of one particular item was made by the arbitrator and the Court was confronted with whether such an award could be made a rule of the court. In Satwant Singh[7] it was held that an interim award which finally determines the rights of the parties with respect a certain claim and one which could not be readjudicated again could validly be made a rule of the court. Applying the dictum in Satwant Singh[8], the Court in Indian Farmers[9] held that as the issue of limitation was a final determination with respect to a part of the claim and was one which could not be readjudicated again it therefore validly constituted an interim award under Section 31(6) of the A&C Act. The Court in Indian Farmers[10] also relied on the dictum of the Supreme Court in the famous case of McDermott International Inc. v. Burn Standard Co. Ltd.[11] (McDermott International) wherein the Court has held that a partial award or an interim award is a final award on matters covered therein made at an intermediate stage of the arbitral proceedings. Relying on the above authorities, the Court in Indian Farmers[12] has held that a final decision of the arbitrator on the issue of limitation is an interim award within meaning of Section 2(1)(c) r/w with Section 31(6) and by virtue of being an award, it was capable of being challenged under Section 34 of the A&C Act.

 

Moving on to the second issue, as to whether the issue of limitation would fall within the ambit of Section 16 warranted a lengthy consideration by the Court. While answering this question in the negative, the Court after discussing the rationale of the doctrine of kompetenz-kompetenz relied on the corresponding provisions in Sections 30 and 31 of the English Arbitration Act. After carefully examining the wordings of the said provisions, it held that the doctrine of kompetenz-kompetenz connoted that the term “jurisdiction” under Section 16 only encompassed reference to three particular determinations:

(i) As to whether there is the existence of a valid arbitration agreement.

(ii) Whether the Arbitral Tribunal is properly constituted.

(iii) Matters submitted to arbitration should be in accordance with the arbitration agreement.

To further inquire whether limitation converged with jurisdiction, the Court relied on the decision of the Constitution Bench in Ittyavira Mathai v. Varkey Varkey[13] (Varkey Varkey) where the Constitution Bench interpreted the connotation jurisdiction wherein it laid down that a court has jurisdiction over the subject-matter pertaining to the case and the parties. It further held that it is true that courts are bound to rule while correctly applying the law, it is true that courts have been susceptible to making errors. The Court in Varkey Varkey[14] concluded that in spite of the fact that a court might have erred in coming to its conclusion it does not tantamount that the court has acted outside its jurisdiction.

 

More importantly, the Court in Indian Farmers[15] vehemently concurred with the findings of the Supreme Court in NTPC Ltd. v. Siemens Atkeingesellchaft[16] (NTPC) wherein it was held that when no question of jurisdiction has been addressed by the arbitrator in its findings, a party cannot disguise it to be one of jurisdiction falling within the ambit of Sections 16(2) and (3) so as to enable it to file an appeal under the recourse contemplated by Section 37(2). The Court in NTPC[17] observed that the appropriate recourse is for the aggrieved to prefer an application under Section 34 against the partial award and thereafter it could prefer an appeal under Section 37. Supplementing the opinion of the Court delivered at first by Mathur, J. in NTPC[18], Balasubramanyan, J. when discussing the ambit of jurisdiction under Section 16 laid down that when an Arbitral Tribunal finds that the claim was not maintainable for other valid reasons or that the claim was barred by the law of limitation it tantamounted to an adjudication by the Arbitral Tribunal on the merits of the claim and therefore would be assailable under Section 34 of the A&C Act.

 

Ultimately, the Court in Indian Farmers[19] relying on the above authorities held that the award passed by the arbitrator was an interim award, which being an arbitral award could be challenged by preferring an application under Section 34 and not Section 37. The Court held that the issue of limitation does not fall within the ambit of the Arbitral Tribunal’s jurisdiction under Section 16 and therefore the drill of Sections 16(5) and (6) need not be followed.

 

At this juncture it is important to study the controversy that has arisen in contemporary arbitral jurisprudence with regard to whether the issue of limitation falls within the Arbitral Tribunal’s power to rule on its own jurisdiction. A Coordinate Bench of the Supreme Court comprising Malhotra and Rastogi, JJ. in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.[20] (Uttarakhand Purv Sainik) had to consider the ambit and scope of the newly inserted Section 11(6-A) in the light of the 2015 Amendment of the A&C Act. The Court in Uttarakhand Purv Sainik[21] observed that insertion of Section 11(6-A) marked a significant departure from the opinion of the 7-Judge Constitution Bench in SBP & Co. v. Patel Engg. Ltd.[22] (SBP & Co.) where many threshold issues could be decided by the Court. The Court observed that in view of the non obstante clause in Section 11(6-A), the decision in SBP & Co.[23] stood legislatively overruled on that point. Moreover, the Court in Uttarakhand Purv Sainik[24] laid down its opinion on the scope and ambit of Section 16 as to what constitutes an issue of jurisdiction wherein it relied on the decision in ITW Signode (India) Ltd. v. CCE[25] (ITW Signode). In ITW Signode[26] a Bench of three Judges held that the issue of whether a claim was time barred under law of limitation is a jurisdictional issue.

 

It is interesting to note what the Court in Uttarakhand Purv Sainik[27] has discerned from the dictums in Indian Farmers[28] and NTPC[29], as the Court relied on the same in coming to the conclusion that the issue of limitation is one of jurisdiction and falls within the ambit of the doctrine of kompetenz-kompetenz under Section 16. It is needless to say that Court has wrongly imported and applied the dictums in Indian Farmers[30] and NTPC[31] to the question that had arisen before it under Section 11(6-A) and has arrived at such an anomalous outcome.

 

Adding to the controversy, in a recent judgment of the Bombay High Court in C. Shamsuddin v. Now Realty Ventures LLP[32] (C. Shamsuddin), G.S. Patel, J. was confronted with opining on the scope of jurisdiction of the Court at the pre-reference stage in an application filed under Section 11. The Bombay High Court in C. Shamsuddin[33] considered the interplay between Sections 11 and 16 and while relying on the decisions of the Supreme Court in Indian Farmers[34] and Uttarakhand Purv Sainik[35] held that the issue of limitation should be decided by the Arbitral Tribunal under Section 16. It is our opinion that the Court in C. Shamsuddin[36] appears to have been left astray by following the ruling in Uttarakhand Purv Sainik[37] which erred in applying the decision in Indian Farmers[38].


Conclusion


It is evident that the decisions in Uttarakhand Purv Sainik[39] and C. Shamsuddin[40] suffer from the infirmity of incorrectly construing and applying the decision in Indian Farmers[41]. It is our opinion that the decision in Indian Farmers[42] was cogent, succinct and in consonance with contemporary pro-arbitral jurisprudence. It is also without doubt that the clarity brought about by the decision in Indian Farmers[43] was long awaited by the arbitral fraternity. The decision also gave sufficient clarity to litigants that the appropriate remedy is to file an application under Section 34 before the appropriate court in the event that one of them is aggrieved by the decision of the arbitrator on the issue of limitation. It is our opinion that the laudable effort of Nariman, J. in Indian Farmers[44] to settle ambiguity has been obscured by the ruling in Uttarakhand Purv Sainik[45] and has left the scope and ambit of the doctrine of kompetenz-kompetenz in dubiety. It is in our opinion that the present conundrum warrants cognizance by a larger Bench of the Supreme Court at the earliest possible opportunity, in order to prevent another series of conflicting judgments and also to bring about consonance between decisions of the leading High Courts.

 

It is a settled canon of law in India that where there are conflicting decisions of concurrent Benches of the Supreme Court, it is for the subordinate courts to follow the judgments which appears to have laid down the law more emphatically and accurately in the correct scenario having regard to the issue being dealt with by the court together with proper consideration of the factual matrix. In light of the above, it is our opinion that the decision in Indian Farmers[46] appears to have accurately and with adequate reasoning answered the questions with respect to the issues framed and is in the context of Section 16 rather than the decision in Uttarakhand Purv Sainik[47] that appears to have wrongly imported the decision in Indian Farmers[48] to the context of Section 11.

 

The decision in Uttarakhand Purv Sainik[49] has evidently obscured the essence of the underlying rationale in Indian Farmers[50] whilst erring by disregarding the nuanced difference between limitation and jurisdiction. It is our opinion that decision in Indian Farmers[51] correctly distinguished limitation as being a defect pertaining to the claim or right of a party to approach the court for reliefs whereas jurisdiction is a defect pertaining the power of the adjudicating authority to take cognizance of a claim based on other statutory considerations. Therefore, we suggest that the decision in Indian Farmers[52] be considered as the correct position of law in this regard. It is also recommended that the High Courts follow the decision in Indian Farmers[53] rather than Uttarakhand Purv Sainik[54] in order to prevent another series of conflicting decisions and to provide certainty to the arbitral fraternity thereby fostering the landscape for arbitration in India.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

[1] (2018) 2 SCC 534.

[2] (2018) 2 SCC 534.

[3] (2018) 2 SCC 534.

[4] (2018) 2 SCC 534.

[5] (2018) 2 SCC 534.

[6] (1999) 3 SCC 487.

[7] (1999) 3 SCC 487.

[8] (1999) 3 SCC 487.

[9] (2018) 2 SCC 534.

[10] (2018) 2 SCC 534.

[11] (2006) 11 SCC 181.

[12] (2018) 2 SCC 534.

[13] (1964) 1 SCR 495 : AIR 1964 SC 907.

[14] (1964) 1 SCR 495 : AIR 1964 SC 907.

[15] (2018) 2 SCC 534.

[16] (2007) 4 SCC 451.

[17] (2007) 4 SCC 451.

[18] (2007) 4 SCC 451.

[19] (2018) 2 SCC 534.

[20] (2020) 2 SCC 455.

[21] (2020) 2 SCC 455.

[22] (2005) 8 SCC 618.

[23] (2005) 8 SCC 618.

[24] (2020) 2 SCC 455.

[25] (2004) 3 SCC 48.

[26] (2004) 3 SCC 48.

[27] (2020) 2 SCC 455.

[28] (2018) 2 SCC 534.

[29] (2007) 4 SCC 451.

[30] (2018) 2 SCC 534.

[31] (2007) 4 SCC 451.

[32] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[33] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[34] (2018) 2 SCC 534.

[35] (2020) 2 SCC 455.

[36] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[37] (2020) 2 SCC 455.

[38] (2018) 2 SCC 534.

[39] (2020) 2 SCC 455.

[40] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[41] (2018) 2 SCC 534.

[42] (2018) 2 SCC 534.

[43] (2018) 2 SCC 534.

[44] (2018) 2 SCC 534.

[45] (2020) 2 SCC 455.

[46] (2018) 2 SCC 534.

[47] (2020) 2 SCC 455.

[48] (2018) 2 SCC 534.

[49] (2020) 2 SCC 455.

[50] (2018) 2 SCC 534.

[51] (2018) 2 SCC 534.

[52] (2018) 2 SCC 534.

[53] (2018) 2 SCC 534.

[54] (2020) 2 SCC 455.

Advani LawExperts Corner

 

Introduction

 

The seminal judgment of the 3-Judge Bench of the Supreme Court of India in Vidya Drolia v. Durga Trading Corpn.[1] (Vidya Drolia) has been instrumental in settling many controversies that have existed in Indian arbitral jurisprudence since the commencement of the Arbitration and Conciliation Act, 1996 (the Act). The judgment of the Supreme Court has addressed multiple issues concerning the interpretation of the various facets of the arbitration agreement that have time and time again been obscured by obsolete and conflicting jurisprudence. The Court found it appropriate to recalibrate the Indian position of arbitrability and therefore has holistically articulated the fourfold test to determine subject-matter arbitrability supplementing the rights test laid down in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[2](Booz Allen). The Court has also held the ratio in Booz Allen as per incuriam with regard to the arbitrability of the tenancy disputes governed by the Transfer of Property Act, 1882. The judgment has also laid emphasis on the scope of judicial interference when the courts are seized of an application made under Sections 8 and 11 of the Act. The Court while delivering its opinion in this regard has conclusively outlined the scope of judicial inquiry that is to be conducted to determine the existence and validity of the arbitration agreement. The Court in its reasoning has extensively relied on the 246th Report of the Law Commission of India and has noted the importance of giving effect to the intention of the legislature that is evident from the series of amendments made to the Act in recent years. The opinion of the Supreme Court pertaining to the scope of judicial inquiry at the time of deciding an application under Sections 8 and 11 and the appealability of the orders under the provisions of the Act is within the purview of the present article.

 

The Prima Facie Test

 

The Supreme Court laid extensive reliance on its earlier decisions while simultaneously noting the lack of their precedential value in the light of the legislative amendments made to the Act in recent years. The Court has propounded a prima facie test in order to determine the existence of an arbitration agreement by holding that the courts must refer parties to arbitration unless they find that prima facie no valid arbitration agreement exists. The Court has reiterated that this prima facie examination is only to weed out ex facie non-existent arbitration agreements, invalid arbitration agreements and that on rare occasions the courts could consider non-arbitrability contentions. It must also be kept in the mind that the Court’s findings must be based on and limited to a summary presentation of documents rather an extensive appreciation of evidence.

 

The Court has also reiterated the importance of strictly adhering to the words in the erstwhile Section 11(6-A) of the Act and has also stated that its omission in 2019 has not changed the restrictive examination of the courts at the referral stage. Augmenting its ratio, the Court also placed reliance by elucidating the rationales of the sacrosanct doctrines of separability and kompetenz-kompetenz that give primacy to the Arbitral Tribunal to determine all questions pertaining to the validity and existence of the arbitration agreement. The Court also departed from its earlier position and has held that arbitrability is for the arbitrator to decide in accordance with the power enshrined in Section 16 of the Act. The Court has held while the principle of kompetenz-kompetenz gives the Arbitral Tribunal primacy to decide issues of non-arbitrability, they still have the final word as the courts can take a second look when deciding an application for setting aside under Section 34 of the Act. Finally, the Court in Vidya Drolia[3] has held that the scope of judicial inquiry at the time of deciding applications under Sections 8 and 11 is identical and the said sections are complementary in nature.

 

It is interesting to note, that although the Supreme Court has confined its inquiry to ascertain prima facie whether a valid arbitration agreement exists to compel parties to arbitrate, it has distinguished validity and existence as two separate corollaries to assess the enforceability of an agreement in law. It is true that many jurisdictions recognise the dichotomy between the formal and substantive validity of the arbitration agreements, it is in my opinion that the assessment of the substantive validity in terms of the requirements under the Contract Act, 1872 would not be feasible on a summary perusal of documents and would in fact require an extensive appreciation of evidentiary proceedings. The Court has pre-empted such a situation and has therefore held that when the Court cannot come to a conclusion on the validity of the arbitration agreement applying the prima facie test, it must stop any further inquiry and must refer the parties to arbitration. The judgment of the Court in Vidya Drolia[4] has summed up this approach as “when in doubt, do refer”.

 

It is also pertinent to note that this opinion of the Court in Vidya Drolia[5] is based on the findings of the another decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[6] (Garware). However, a coordinate Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[7] has expressed dissent with the opinion of the Court in Garware[8] that was affirmed in Vidya Drolia[9] and has accordingly referred the question to a Constitution Bench. Therefore, until this question is settled by the Constitution Bench the opinion of the Court regarding the dichotomy of existence and validity of the arbitration agreement in Vidya Drolia[10] is of uncertain precedential value.

 

Appealability and Conclusion

 

After analysing the above proposition, it is clear that the Supreme Court in Vidya Drolia[11] has vehemently laid down that the scope of judicial inquiry under Sections 8 and 11 of the Act is identical and extremely restrictive. Although the Court has brought the ambit of inquiry under Sections 8 and 11 at par by reading the prima facie test into both provisions, it has erred by failing to take cognizance of an inconsistency between the said sections with regard to the appealability of orders passed under these sections. From a conjoint reading of Section 8(1) with Section 37(1)(a) and Sections 11(6) and (6-A) with Section 11(7) of the Act it appears that an anomaly has arisen. It will be seen that an order passed under Section 8 that refuses to refer parties to arbitration is appealable under Section 37(1)(a), whereas a similar order passed under Section 11(6) read with Section 11(6-A) whether referring the parties or refusing to refer parties to arbitration is barred from an appeal by virtue of the strict rule in Section 11(7).

 

It is needless to say that this outcome is undesirable and is contrary to the true spirit of the ratio laid down by the Court in Vidya Drolia[12]. The legislature has followed the recommendations of the Law Commission of India and has carried out amendments to the Act but has not brought about the desired consistency between Sections 11(7) and37 of the Act. It is my opinion that such a lacuna could be used by recalcitrant parties, as they are likely to resort to dilatory tactics by filing mala fide Section 11 applications. Through this medium, these parties would attack the existence and validity of the arbitration agreement and would therefore pray for an order refusing to refer the parties to arbitration. By virtue of Section 11(7) of the Act that order would not be appealable. Such an outcome defeats the legislature’s policy to promote arbitration as the preferred method for dispute resolution arising from commercial contracts and is evidently not in conformity with the due process of law.

 

However, the Supreme Court in a recent judgment in Pravin Electricals (P) Ltd. v. Galaxy Infra and Engg. (P) Ltd.[13] (Pravin Electricals) has noted this inconsistency and has expressed its concern in relation to what has been laid down in Vidya Drolia[14]. The Court in Pravin Electricals[15] has invited the attention of the legislature to this conundrum by making an observation stating that Parliament might need to have relook at Sections 11(7) and 37 in order to bring the orders passed under Sections 8 and 11 at par on appealability. Therefore, until the legislature steps in and fixes this loophole the uncertainty will prevail.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

 

[1] (2021) 2 SCC 1.

[2] (2011) 5 SCC 532.

[3] (2021) 2 SCC 1.

[4] Ibid.

[5] Ibid.

[6] (2019) 9 SCC 209.

[7] 2021 SCC OnLine SC 13.

[8] (2019) 9 SCC 209.

[9] (2021) 2 SCC 1.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] 2021 SCC OnLine SC 190.

[14] (2021) 2 SCC 1.

[15] 2021 SCC OnLine SC 190.

Advani LawExperts Corner

 Introduction

Nearly after a decade the Indian arbitration regime has come in consonance with the western world and settled the long due controversy on stamping of arbitration agreement. A Bench comprising of Dr Justice D.Y. Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[1] has held that since the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the commercial contract, would not invalidate the arbitration clause, or render it unenforceable, since it has an independent existence of its own.

Existence and Validity: Finding of Garware Ropes Referred to A Larger Bench

 

At the outset, the Court first addressed the issue regarding validity of an arbitration agreement in an unstamped agreement extensively in the two landmark judgments, namely, SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (SMS Tea Estates)[2] and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[3] (Garware Ropes). The Supreme Court in SMS Tea Estates[4] observed that an arbitration clause is independent of the other terms of the contract and held that

 

(i) an unstamped arbitration agreement cannot be acted upon; and

(ii) an arbitration agreement would be invalid where the contract is voidable at the option of a party.

Further, in 2019 the Supreme Court while deciding the case of Garware Ropes[5] again reverted to the position taken in 2011 in SMS Tea Estates[6] which held that an arbitration clause contained in a contract would exist as a matter of law only if the underlying contract is duly stamped. Garware Ropes[7] also held that it is not possible to bifurcate the arbitration clause contained in the arbitration agreement so as to give it an independent existence.

In the instant case, the Court held that Garware Ropes[8] does not lay down the correct position of law by opining that “existence” and “validity” are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.

 

The Court overruled the decision of Garware Ropes[9] and gave a clear and reasonable finding that that an arbitration agreement is distinct and independent from the underlying substantive contract and once the arbitration agreement is held to have an independent existence, it can be acted upon, irrespective of any technical defects.

 

Despite the coherent ruling given by the Supreme Court, the decision in Garware Ropes[10] was affirmed by a three-Judge Bench of the Supreme Court in Vidya Drolia v. Durga Trading Corpn.[11] at para 92 of the judgment. The Court in instant case specifically held that the finding in Garware Ropes[12] is erroneous and has rightly referred the issue “whether non-payment of stamp duty on commercial contract will invalidate an arbitration agreement” to the Constitution Bench for an authoritative determination.

 

Scheme of the Stamp Act, 1899

Before analysing the findings of the Court, it is important to note that the aim of the Stamp Act is to secure the revenue of the State.  To briefly highlight, Section 33 casts a statutory obligation on every person empowered by law to examine the instrument presented before them, and ascertain whether the instrument is duly stamped, failing which the relevant authority can impound the instrument and direct the parties to pay the requisite stamp duty along with a penalty of five rupees or ten times the amount of the proper duty or of the deficient portion thereof and obtain an endorsement from the Collector concerned.

 

Section 35 of the Stamp Act operates as a bar to an unstamped instrument being admitted in evidence or being acted upon. Furthermore, Section 40 of the Stamp Act provides the procedure for instruments which have been impounded, and sub-section (1) of Section 42 requires the instrument to be endorsed after it is duly stamped by the Collector concerned before expiration of one month from the date of impounding. Section 42(2) provides that after the document is duly stamped, it shall be admissible in evidence, and may be acted upon.

 

In the present case, the Supreme Court held that on a harmonious reading of the provisions of the Stamp Act with the Arbitration and Conciliation Act, 1996, it is suggested that even if the underlying contract was not sufficiently stamped, the arbitration agreement, which survives independently shall not be rendered invalid in law. Upon curing the defects as prescribed above the document would be admissible in evidence and could be acted upon.

Interplay between Stamp Act and Arbitration and Conciliation Act

 

Given that an arbitration agreement is distinct and independent from the underlying substantive contract and the same can be acted upon once the technical defects are cured, it is important to determine which authority would exercise the power of impounding the instrument in a case where the substantive contract contains an arbitration agreement.

 

  1. Cases where arbitrator is appointed by parties’ consent: In such a case, the arbitrator is obligated by Section 33 of the Stamp Act. This section casts a statutory obligation on every person empowered by law to examine the instrument presented before him, and ascertain whether the instrument is duly stamped, failing which the arbitrator can impound the instrument, and direct the parties to pay the requisite stamp duty (and penalty, if any), and obtain an endorsement from the Collector concerned.
  1. Applications under Section 11:In such a case, the relevant court, while exercising jurisdiction under Section 11, would impound the substantive contract which is either unstamped or inadequately stamped, and direct the parties to cure the defect before the arbitrator/tribunal can adjudicate upon the contract.
  1. Applications under Section 8: In such a case, the judicial authority will make the reference to arbitration. However, in the meanwhile, the parties would be directed to have the substantive contract stamped in accordance with the provisions of the relevant Stamp Act, so that the rights and obligations emanating from the substantive contract can be adjudicated upon.
  1. Applications under Section 9: When it is brought to the attention of the court that the substantive contract is not duly stamped under a Section 9 petition, the court would grant ad interim relief to safeguard the subject-matter of the arbitration. However, the substantive contract would then be impounded, and the party concerned be directed to take the necessary steps for payment of the requisite stamp duty, within a time-bound period. The Full Bench of the Bombay High Court in Gautam Landscapes (P) Ltd. v. Shailesh S. Shah[13] also held that the Court may grant any interim or ad interim reliefs in an application under Section 9 of the Arbitration and Conciliation Act when a document containing arbitration clause is unstamped or insufficiently stamped.

After analysing the above provisions of the Stamp Act along with the provisions of the Arbitration and Conciliation Act, the Court clearly held that non-payment of stamp duty on the substantive contract would not invalidate the main contract as this is a deficiency which is curable on the payment of the requisite stamp duty at any prescribed stage.

 

Conclusion

This judgment reaffirms the position given in Section 7 of the Arbitration and Conciliation Act, 1996 that requires an arbitration agreement to be in black and white in order for it to be enforceable. It is opined that Garware Ropes[14] might have hampered the arbitration mechanism from the start by expanding the extent of judicial interference in the appointment of arbitrators, as well as delaying the issuance of interim relief, effectively declaring the arbitration process null and void. However, this lacuna has been now rectified by the judiciary and a pro- arbitration stance has been taken by the Court.

 

More importantly, a requirement of stamping of an arbitration agreement would have aided in delay in the dispute resolution mechanism in India and hence we look forward to the Constitution Bench reaffirming this decision as such decisions are being lauded in the arbitration fraternity.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Tariq Khan, Principal Associate at Advani & Co.

††† Mahi Mehta, Associate at Advani & Co.

 

[1] 2021 SCC OnLine SC 13.

[2] (2011) 14 SCC 66.

[3] (2019) 9 SCC 209.

[4] (2011) 14 SCC 66.

[5] (2019) 9 SCC 209.

[6] (2011) 14 SCC 66.

[7] (2019) 9 SCC 209.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] (2021) 2 SCC 1 : 2020 SCC OnLine SC 1018.

[12] (2019) 9 SCC 209.

[13] 2019 SCC OnLine Bom 563 : (2019) 3 Mah LJ 231.

[14] (2019) 9 SCC 209.