ICC INDIA ARBITRATION NEWSLETTER | Issue 4 7

STAMPING OF THE UNDERLYING CONTRACT FOR A

VALID ARBITRATION CLAUSE – AN ‘EXISTENTIAL’
CRISIS
by Siddharth Ratho, International Dispute Resolution Team, Nishith Desai Associates

The Law Commission of India in its 246th and legislature in the recent past in In dealing with the second question, the
Report, recommended various amendments minimizing court interference. Supreme Court held that the arbitration
to the Arbitration & Conciliation Act, 1996 agreement in an unstamped instrument is
(Act) with the objective of upgrading the TO STAMP OR NOT TO STAMP – A PRECEDENTIAL invalid, given that Section 35 of the Indian
existing arbitration landscape in India and THROWBACK Stamp Act, 1899 (Stamp Act) explicitly
bringing it in line with international best prohibits the courts from acting on a
practices. When the Act was eventually Prior to the 2015 Amendment, this issue was document on which stamp duty has not been
amended by way of the Arbitration and first addressed by the Supreme Court in SMS paid or is insufficient. Even though the
Conciliation (Amendment) Act, 2015 (2015 Tea Estate (SMS Tea Estate Pvt Ltd v. arbitration agreement is severable from the
Amendment), two such amendments were Chandmari Tea Company Pvt Ltd, (2011) 14 main instrument, it is not saved by any
that of a newly inserted Section 11(6A),11 SCC 66). The main questions before it then provision in the Stamp Act, as in the case of
limiting the scope of court inquiry to only the was whether an arbitration agreement Section 49 of the Registration Act. Thus, it
‘existence’ of an arbitration agreement while contained in an unregistered (but held that in case an unstamped or
entertaining an application for appointment compulsorily registrable) instrument is valid insufficiently stamped instrument is
of an arbitrator, and insertion of Section and enforceable; and second, whether an presented before a court in a Section 11
11(13),12 calling on the courts for expedited arbitration agreement in an unregistered application, the said instrument must first be
disposal of such applications within sixty instrument (whether compulsorily registrable impounded as per the Stamp Act and only
days. or not) which is not duly stamped, is valid after satisfaction of the stamp duty can the
and enforceable. On the first question, the court appoint an arbitrator.
The objective behind such amendments was Supreme Court answered in the affirmative.
to streamline the Indian arbitration regime It considered that an arbitration agreement is A STEP FORWARD - MERE ‘EXISTENCE’ OF AN
which has historically been prone to severe severable from the main instrument and is ARBITRATION AGREEMENT SUFFICIENT FOR
delay. Arbitration applications, even for also saved by the proviso to Section 49 of the BOMBAY HIGH COURT
simpliciter appointment of arbitrators, Registration Act of 1908 (Registration Act)
languish in courts for years. However, in which allows an unregistered document Subsequent to the 2015 Amendment, a full
what may just be a case of one step forward affecting immovable property to be received judge bench of the Bombay High Court
and two steps back, the Supreme Court of as evidence.13 recently had occasion to deal with this issue
India recently raked up an old issue once again in Gautam Landscapes (Gautam
Accordingly, it held that the said arbitration Landscapes Pvt Ltd v. Shailesh S Shah, Arb
concerning the validity of an arbitration
agreement in an unregistered, but Pet. 466/2017 & Arb App 246/2016 and Vijay
agreement by holding that a court cannot
compulsorily registrable instrument is valid, Sharma v. Vivek Makhija, Arb App 300/2018).
appoint an arbitrator under Section 11 of the
However, the Court also noted that even It had to decide two principal questions. First,
Act when the contract containing the
though such an appointment is theoretically whether a court can grant reliefs under
arbitration clause is insufficiently stamped.
permissible, it would be of no practical use, Section 9 of the Act, based on an arbitration
This article shall analyse the evolution of the as even if the arbitrator is appointed, it agreement contained in an unstamped or
law with respect to the same and whether cannot adjudicate upon the disputes insufficiently stamped document. Second,
such a decision could possibly undo some of emanating from the terms of the said whether, considering the insertion of Section
the progressive steps taken by the judiciary unregistered document. 11(6A), a court may now appoint an
arbitrator regardless of sufficient stamping

11The Arbitration and Conciliation Act, 1996, 12 The Arbitration and Conciliation Act, 1996, 13The Registration Act, 1908, §49, Proviso:
§11(6A): The Supreme Court or, as the case may be, §11(13): An application made under this section for Provided that an unregistered document affecting
the High Court, while considering any application appointment of an arbitrator or arbitrators shall be immovable property and required by this Act or the
under sub-section (4) or sub-section (5) or sub- disposed of by the Supreme Court or the High Court Transfer of Property Act, 1882 (4 of 1882), to be
section (6), shall, notwithstanding any judgment, or the person or institution designated by such Court, registered may be received as evidence of a contract
decree or order of any Court, confine to the as the case may be, as expeditiously as possible and in a suit for specific performance under Chapter II of
examination of the existence of an arbitration an endeavour shall be made to dispose of the matter the Specific Relief Act, 1877 (3 of 1877), or as
agreement. within a period of sixty days from the date of service evidence of any collateral transaction not required to
of notice on the opposite party. be effected by registered instrument.
ICC INDIA ARBITRATION NEWSLETTER | Issue 4 8

of the underlying contract containing the applications for speedy initiation of arbitral agreement in fact is different from its
arbitration agreement. proceedings. ‘existence’ in law, and that it is the latter that
is to be examined. Observing that Section
The Bombay High Court answered the first SUPREME COURT ROLLS IT BACK TO SQUARE ONE 7(2) of the Act describes two kinds of
question in the affirmative, noting that since arbitration agreements, first, as a clause in a
SMS Tea Estate rendered its findings only Whatever progress that may have been “contract” and second, as a separate
with respect to Section 11 applications, it has achieved by the Bombay High Court decision agreement, it opined that the arbitration
no precedential value with respect to in Gautam Landscapes was undone within a agreement in the former situation will only
applications under Section 9. Instead, it week by the Supreme Court in its judgement be valid if the agreement containing the
considered the decision of the Supreme dated April 10, 2019 in Garware Wall Ropes clause is enforceable by law. Reading this
Court in Firm Ashok Traders (Firm Ashok (Garware Wall Ropes Ltd v. Coastal Marine with the United India Insurance principle, it
Traders v. Gurumukh Das Saluja, (2004) 3 SCC Constructions & Engineering Ltd, Appeal (Civil) held that an arbitration agreement cannot
155), wherein it was held that the scope of 3631/2019). The issue reached the Supreme exist in an unenforceable agreement and
inquiry by a court in a Section 9 application is Court in an appeal from an order of the that therefore it cannot be said to exist in a
restricted only to the existence of an Bombay High Court in a Section 11 document which is insufficiently stamped.
arbitration agreement since the right under a application. The Supreme Court in deciding
Section 9 application does not arise from the the appeal, reverted to the position taken in SO, WHAT DOES THIS MEAN FOR APPLICATIONS
contract, but from the arbitration agreement SMS Tea Estate, holding that the final order UNDER SECTION 9?
itself. It reaffirmed the deeply enshrined in an application under Section 11 can only be
doctrine of severability on a joint reading of made on satisfaction of stamp duty under What the Supreme Court did not do was
Sections 7(2)14 and 16(1)(a)15 of the Act. relevant provisions of the Stamp Act. tackle the issue of insufficient stamping of a
contract containing an arbitration clause in
Furthermore, it distinguished a Section 9 On a reading of the 246th Law Commission an application under Section 9, leaving the
from a Section 11, on the basis that a Section Report along with its statement of objects question on the validity of orders passed
9 application is for interim/ad interim reliefs and reasons, it found that the language therein open to further judicial scrutiny.
to protect the eventual award, which if “notwithstanding any judgment, decree or
delayed can cause irrevocable injury to a Having said that, the scope of powers under
order of any Court” in Section 11(6A) was
party. Moreover, it found that the Stamp Act Section 9, as defined in Firm Ashok Traders,
specifically inserted to undo the effect of its
is only a fiscal statute that cannot be used to limited court inquiry only to the existence of
decision in Patel Engineering (SBP & Co v.
arm recalcitrant respondents with technical an arbitration agreement. However, the
Patel Engineering Ltd, (2005) 8 SCC 618) and
objections. In any case, it held, that if at all, rejection of the doctrine of severability with
Boghara Polyfab (National Insurance Co Ltd v.
the issue of insufficient stamp duty can respect to the Stamp Act and the principle of
Boghara Polyfab (P) Ltd, (200() 1 SCC 267
always be dealt with by the arbitral tribunal ‘existence in law’ as espoused in United India
which had left the door wide open for courts
at the appropriate juncture. Insurance could theoretically also be
to deal with preliminary issues unrelated to
extended to Section 9 applications, albeit not
the existence of the arbitration agreement.
In considering the second question, the dealt with by the Supreme Court yet. At the
However, nowhere did it find any mention of
Bombay High Court placed reliance upon the same time, the idea of irrevocable injury
doing away with the effect of SMS Tea
Supreme Court judgement in Duro Felguera caused due to a delay in Section 9 application
Estates, either in the Statement of Objects
v. Gangavaram Port Ltd, (2017) 8 SCC 729, also holds merit. Unless the Supreme Court
and Reasons or the 346th Report itself.
wherein it was held that post the 2015 settles this question with respect to Section 9
Therefore, it held that SMS Tea Estates was
Amendment, courts could only look into the as well, it is safe to assume that this
still good law. It further observed that the
‘existence’ of arbitral agreements, and that ‘existential crisis’ shall continue for a while.
Stamp Act requires the document to be
therefore, the issue of insufficiency of stamp
impounded as a whole, thereby ruling out CONCLUSION
duty on the underlying contract is outside
the possibility of bifurcating the arbitration
the scope of inquiry of the court. It found
agreement from the rest of the document, The judiciary has generally adopted a pro-
that this was in line with the object behind
and thus rejecting the doctrine of severability arbitration approach since the turn of the
insertion of Section 11(6A) which is to
as espoused in Gautam Landscapes. decade, beginning with the infamous BALCO
minimise judicial interference at the stage of
appointment of the arbitrator. The Bombay judgement. Gautam Landscapes was yet
From a joint reading of Section 7(2) of the another step towards establishing an
High Court thus chose to further the Act, Section 2(h)16 of the Indian Contract Act,
legislative intent behind the 2015 arbitration regime in line with international
1872 (Contract Act) and its judgment in best practices and minimizing unwarranted
Amendment, minimize court interference United India Insurance (United India Insurance
and expedite the disposal of section 11 court interference. The Garware Wall Ropes
Co Ltd v. Hyundai Engineering and judgment of the Supreme Court now comes
Construction Co Ltd, (2018) SCC Online SC against the run of play, rolling back some of
1045), it held that ‘existence’ of an arbitration

14The Arbitration and Conciliation Act, 1996, §7(2): 15The Arbitration and Conciliation Act, 1996, 16The Indian Contract Act, 1872, §2(h): An
An arbitration agreement may be in the form of an §16(1)(a): [a]n arbitration clause which forms part of agreement enforceable by law is a contract.
arbitration clause in a contract or in the form of a a contract shall be treated as an agreement
separate agreement. independent of the other terms of the contract.
ICC INDIA ARBITRATION NEWSLETTER | Issue 4 9

the progress made towards a more

streamlined arbitration regime free of
technical hassles.

The importance of dues owed to the

exchequer is understandable and cannot be
denied. However, the Supreme Court may
have missed out on a chance to refrain from
interfering and allowing the alternate dispute
resolution mechanism to deal with issues
including insufficient stamping of
documents. This would have created a
perfect balance wherein arbitration is
proceeded with without delay while at the
same time revenues due to the exchequer is
also ensured. While revenue due to the
exchequer is certainly vital, so is the
perception of the country in terms of ease of
doing business and contract enforcement, a
cause which the Supreme Court may just
have missed out on advancing.

*Disclaimer: The content of this article does

not represent the official views of the
International Chamber of Commerce or ICC
India. The opinions expressed are solely
those of the authors and other contributors.