On February 14, 2020, the Hon’ble Supreme Court in ‘Dharmaratnakara Rai Bahadur Arcot Narainswamy v Bhaskar Raju’ reported in 2020 SCC Online SC 183, has once again held that when a lease deed or any other instrument is relied upon as containing an arbitration agreement, the Court, at the outset, is required to consider whether the document is properly stamped or not. It has been held that, even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue.
While deciding on this issue, the Hon’ble Supreme Court relied upon an earlier decision in the case of ‘SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited’ reported in (2011) 14 SCC 66 wherein, the question before the Court was whether it can act upon an arbitration agreement in an unregistered (but compulsorily registerable) instrument which is not duly stamped. The Court in SMS Tea Estates (supra) examined two provisions of the Stamp Act, 1899 (“Stamp Act”) (i) Section 33 – which casts a duty upon every court before whom an unregistered instrument chargeable with duty is produced, to examine the instrument in order to ascertain whether it is duly stamped and (ii) Section 35 – which states that unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the instrument, which means that it cannot act upon the arbitration agreement also which is part of the instrument. The Court held that unless the stamp duty which is due in respect of the instrument is paid, the Court cannot act upon the instrument. Thus the Court cannot act upon the arbitration agreement also which is part of the instrument.
The decision of SMS Tea (supra) was relied and followed by the Hon’ble Supreme Court in yet another case in ‘Garware Wall Ropes Limited v Coastal Marine Constructions and Engineering Limited’ reported in 2019 SCC Online SC 515, wherein a judgment of the Hon’ble Bombay High Court was challenged. The Hon’ble Bombay High Court had appointed an arbitrator under Section 11 of the Arbitration & Conciliation Act, 1996 (“the Act”) on the basis of an unstamped document. The Hon’ble Bombay High Court was of the opinion that if Respondent was liable to pay stamp duty, and it has not been paid, the Respondent cannot take advantage of its own wrong and frustrate the arbitration agreement between the parties. More importantly, the decision of the Hon’ble Bombay High Court was based on the understanding that post the amendment of the Act in 2015, and the insertion of Section 11(6-A) (which categorically states that the Court, whilst appointing an arbitrator, must confine itself to the examination of the existence of an arbitration agreement), the Court ought not go into the issue of enforceability or validity of the agreement. The preliminary issues regarding validity would be decided by the arbitrator. The decision of the Hon’ble Bombay High Court was overturned by the Hon’ble Supreme Court yet again relying on the decision of SMS Tea (supra). The Hon’ble Supreme Court held that when an arbitration clause is contained in an unstamped agreement, the Court hearing the Section 11 application is required to first consider the provisions of Stamp Act and ensure stamp duty and penalty has been paid. By doing so, the Court does not, in any manner, deal with the preliminary questions that arises between the parties. The Court is only giving effect to the mandatory provisions of the Stamp Act.
The law is now very clear that the parties cannot knock the Court doors in the event the underlying agreement is not properly stamped. As such, it is imperative to ensure that all agreements are stamped and parties should not wait to have the same stamped when it is required to be enforced upon a dispute arising between the parties. The chosen forum of arbitration for resolving disputes shall not be available to the parties.
The situation is different when parties approach Court for interim reliefs under Section 9 of the Act. A decision by a full bench of the Hon’ble Bombay High Court In ‘Gautam Landscapes Pvt. Ltd v Shailesh Shah’ reported in 2019 (3)Mh.L.J. has held that the Court can entertain and grant any interim or ad-interim reliefs in an application under Section 9 of the Act when a document containing arbitration clause is unstamped or insufficiently stamped. The decision of the full bench the Hon’ble Bombay High Court is a subject matter of challenge before the Hon’ble Supreme Court, however, there is no stay till date. The decision of Gautam Landscapes (supra) has been subsequently followed in ‘Saifee Developers Private Limited v Sanklesha Construction’ (order dated July 15, 2019 in Commercial Arbitration Petition (L) No. 627 of 2019) and thereafter in ‘IREP Credit Capital Private Limited v Tapaswi Merchantile Pvt. Ltd.’ reported in 2019 SCC Online Bom 5719.
The judgments mentioned above may be accessed in the below links.
https://main.sci.gov.in/supremecourt/2015/6442/6442_2015_1_1501_20571_Judgement_14-Feb-2020.pdf
https://main.sci.gov.in/supremecourt/2018/12561/12561_2018_Judgement_10-Apr-2019.pdf
https://main.sci.gov.in/jonew/judis/38260.pdf
This update has been contributed by Ranjit Shetty (Senior Partner) and Priyanka Shetty (Senior Associate).
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