Unstamped Arbitration Agreement: Ratio in Garware Wall Ropes Ltd.

In the matter of: Garware Wall Ropes Ltd. V/s Costal Marine Constructions & Engineering Ltd., Civil Appeal No. 3631/ 2019, Supreme Court of India (Date of Decision: 10.04.2019), it was held that:

1.   Where an arbitration clause is contained in an unstamped agreement, the provisions of the Indian Stamp Act, 1899 (hereinafter referred to as the ISA) require the Judge hearing the Section 11 (the Arbitration & Conciliation Act, 1996 hereinafter referred to as the A&C Act) application to impound the agreement and ensure that stamp duty and penalty (if any) are paid thereon before proceeding with the Section 11 application (the A&C Act).[1]

2.   The power to appoint an arbitrator under Section 11 of the A&C Act is judicial and not administrative.[2]

3.   When a contract contains an arbitration agreement, it is a collateral term relating to the resolution of disputes, unrelated to the performance of the contract, it is as if two contracts- one in regard to the substantive terms of the main contract and the other relating to resolution of disputes- had been rolled into one, for purposes of convenience. An arbitration clause is therefore an agreement independent of the other terms of the contract or the instrument. Resultantly, even if the contract or its performance is terminated or comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.

4.   When an instrument or deed of transfer (or a document affecting immovable property) contains an arbitration agreement, it is a collateral term relating to resolution of disputes, unrelated to the transfer or transaction affecting the immovable property. It is as if two documents- one affecting the immovable property requiring registration and the other relating to resolution of disputes which is not compulsorily registerable- are rolled into a single instrument. Therefore, even if a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer.

5.   Where the contract or instrument is voidable at the option of a party (as for example under Section 19 of the Contract Act, 1872), the invalidity that attaches itself to the main agreement may also attach itself to the arbitration agreement, if the reasons which make the main agreement voidable, exist in relation to the making of the arbitration agreement also. For example, if a person is made to sign an agreement to sell his property under threat of physical harm or threat to life, and the said person repudiates the agreement on that ground, not only the agreement for sale, but any arbitration agreement therein will not be binding.

6.   An arbitration agreement does not require registration under the Registration Act, 1908 (hereinafter referred to as the RA). Even if it is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument. Therefore, having regard to the proviso to Section 49 of the RA read with Section 16 (1) (a) of the A&C Act, an arbitration agreement in an unregistered but compulsorily registerable document can be acted upon and enforced for the purpose of dispute resolution by arbitration.

7.   When a lease deed or any other instrument is relied upon as contending the arbitration agreement, the court should consider at the outset, whether an objection in that behalf is raised or not, whether the document is properly stamped. If it comes to the conclusion that it is not properly stamped, it should be impounded and dealt with in the manner specified in Section 38 of the ISA. The court cannot act upon such a document or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the ISA, the document can be acted upon or admitted in evidence.

8.   Therefore:

a.   The court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/ document is duly stamped and whether it is an instrument which is compulsorily registerable.

b.   If the document is found to be not duly stamped, Section 35 of the ISA bars the said document being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The court should then proceed to impound the document under Section 33 of the ISA and follow the procedure under Sections 35 and 38 of the ISA.

c.   If the document is found to be duly stamped, or if the deficit stamp duty and penalty is paid, either before the court or before the Collector (as contemplated in Sections 35 or 40 of the ISA), and the defect with reference to deficit stamp is cured, the court may treat the document as duly stamped.

9.   When an arbitration clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law. Under the ISA an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. An arbitration clause in an agreement would not exist when it is not enforceable by law.

10. A court under the A&C Act, can entertain and grant interim or ad-interim relief in an application under Section 9 of the A&C Act when a document containing arbitration clause is unstamped or insufficiently stamped.[3]

Note:

That the Hon’ble Supreme Court of India in the matter of: Dharmaratnakara Rai Bahadur Arcot Narainswamy V/s Bhaskar Raju, 2020 SCC Online SC 183, observed 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.