Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.: Stamping an Arbitration Agreement

Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.: Stamping an Arbitration Agreement

Author: Kkanika Sharma, a student at Army Institute of Law

Abstract

This article aims to delve into the legalities surrounding arbitration agreements within unstamped documents and their validity in court via an analysis of the Landmark judgment of Garware Wall Ropes. This analysis highlights the legal differences between the Registration Act, which permits the independence of arbitration clauses, and the Stamp Act, which deems the entire agreement inseparable. Taking the doctrine of harmonious construction where the doctrine of Separability failed, the paper outlines a procedural framework directed by the court in such cases. It explores the implications of unstamped arbitration agreements and the steps to take thereafter to rectify any deficiencies. The subsequent Vidya Drolia Judgment is also briefly examined, which upheld Garware. In essence, this paper provides an examination of the legal intricacies associated with unstamped arbitration agreements in the Indian context.

Keywords: arbitration clause, unstamped, stamp act, Vidya Drolia, SMS Tea Estates, fines, harmonious construction, separability.

Introduction

When parties to a contract undergo a dispute, they have the liberty to take the matters to court to settle the score, or they could save themselves substantive time and money and opt for alternate dispute resolution methods. One of the most commonly treaded ADR paths in contractual relationships is that of arbitration. Most parties at the time of entering into a contract prefer to include an arbitration clause to the agreement, or sign a separate arbitration agreement in the same transaction. 

When it is time to invoke the arbitration clause and get the Court’s referral for the appointment of an arbitrator, in some cases that leads to a little side-feud, usually involving the validity of the entire arbitration clause, with the objective being encroaching upon as many rights of the other party while collecting equally as many for your sole self.

One of the grounds on which such validity can be challenged is the non-registration of the agreement, but since remedy has been found against that impediment, the most popular ground of challenge is the non-stamping of the document.

Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. (2019) 9 SCC 209 (Garware) is the landmark Supreme Court judgment which finally laid down the law in this regard- What course of action is to be taken by the Court and the parties in a matter where the arbitration agreement is enshrined within an unstamped, compulsorily stampable, document.

The Law

Parties to a contract can approach the court to seek referral to arbitration and the appointment of an arbitrator under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996 (“1996 Act”) if their contract is governed by a valid arbitration clause or if they have a valid arbitration agreement. Section 8(1) gives the Court Power to refer parties to arbitration where there is an arbitration agreement. It states that the judicial power to which an application for referring the parties to arbitration is brought, will do so unless it finds that “prima facie no valid arbitration agreement exists”

Section 8(1) of the 1996 Act expressly states that a “valid arbitration agreement” is required before the Court can entertain an application. An agreement must be registered and stamped in order to be legally binding and enforceable, as well as admissible as evidence in court. Section 49 of the Registration Act, 1908 (“the Registration Act”) considers an arbitration clause inside the parent agreement to be an agreement independent of the latter; therefore, non-registration of the primary agreement does not render the arbitration clause void.

Section 49’s proviso enables certain unregistered documents to be accepted as evidence, one of which is “any collateral transaction not required to be effected by registered instrument.” An arbitration agreement was held to fall under this category by the case law of SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd. (2011) 14 SCC 66.

However, unlike the Registration Act, the Indian Stamp Act of 1899 (“the Stamp Act”) contains no such proviso, thus making an unstamped document including an arbitration clause unenforceable by law. Section 35 of the Stamp Act prohibits the Court or other judicial authority from acting on or accepting an unstamped document as evidence. Section 35 states that no instrument that is chargeable with duty can be admissible as evidence, or acted upon, or registered, etc. unless it is stamped. It can however, be admitted if a duty is paid, along with fine if any, as stipulated in the statute.

The Judgment

The Supreme Court settled the question of the validity of an arbitration agreement enshrined in an unstamped underlying agreement in the leading precedent of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. (Garware), where Section 34 of the Maharashtra Stamp Act, 1958, was referred to instead of the Stamp Act. The section states that no instrument that is chargeable with duty shall be admissible as evidence, or acted upon, or registered, or authenticated unless it is duly stamped, or written on stamp paper. However, it can be admitted as evidence if payment of duty, along with fine (if any) is done.

Section 16 of the 1996 Act which provides for the powers of the arbitral tribunal states in clause (a) that the arbitration clause in the main contract and the underlying contract itself shall be treated as two different, independent contracts. However, the Stamp Act states that it applies to the entire agreement as a whole, and bifurcation of it into a mother agreement and a separate arbitration agreement is not possible.

The Court observed in Garware that the Stamp Act applies to the conveyance (or agreement in this regard) as a whole and it is not possible to bifurcate only the arbitration clause contained within it with the purpose of giving it an independent existence.

According to the precedent set by Garware, an agreement is not enforceable unless it is appropriately stamped, and hence a legitimate arbitration clause contained in an unstamped document would not exist if the main agreement itself is not enforceable. Because the agreement is unenforceable, the Court cannot appoint an arbitrator in the first place unless it is remedied. In this scenario, the use of the Doctrine of Separability is restricted.

The sole purpose of arbitration is speedy, expeditious dispute resolution. Therefore, giving appropriate instructions so as to safeguard the 60-day statutory deadline, the Supreme Court held that a harmonious construction needs to be given to the provisions of the 1996 Act and the Maharashtra Stamp Act, that is to say they are to be read in complementarity, and a Section 11 application for the appointment of an arbitrator should be disposed of keeping in mind the objective of expeditious and speedy justice. The Court also put emphasis on speedy disposal by stating that an endeavour should be made to dispose of such an application within 60 days from the date of service of notice.

While arbitration must be an expeditious process, properly stamping a document is necessary for giving it legal cognizance and validity. Stamping is also one of the government’s fiscal measures for collecting revenue. Taking into account both vantage points of view and drawing a link between them using the principle of Harmonious Construction, the Supreme Court issued certain directions via its decision.

These directions lay down a mechanism which is to be followed by the Courts, the parties and the stamp authorities when the underlying arbitration agreement is unstamped:

1. The appropriate Court will determine the existence and validity of an arbitration clause or agreement within an underlying agreement. The primary agreement must be stamped in order to be a legal agreement enforceable by law, although non-registration of the main agreement will not defect the validity of the arbitration agreement.
2. If the document is not lawfully stamped or is insufficiently stamped, the court will impound it.
3. The unstamped or insufficiently stamped agreement will be handed over to the relevant authority under the Stamp Act, which will decide the issues relating to stamp duty and penalty (if any) expeditiously, within 45 days from the receipt of the agreement by the authority.
4. The defaulter will then pay the stamp duty and the penalty (if any) to the Stamp Authorities, after which the document becomes enforceable. The Court will then expeditiously hear and dispose of the said application U/S 11.

Conclusion

Following the Garware judgment came the Vidya Drolia Judgment [Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1] which upheld it and struck down an alternate judgment of Global Mercantile [N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.,(2021 SCC OnLine SC 13)]. The majority decision was against Global Mercantile, it held that an unstamped agreement including an arbitration clause cannot be enforceable or admissible as evidence, the Court must impound it under section 33 of the Stamp Act and it can only proceed further with the Section 11 (1996 Act) application once the defect in payment in cured.

The minority upheld Global Mercantile w.r.t. the validity of the arbitration clause. It said that a certified copy of the arbitration agreement, even unstamped, at the pre-reference stage is enforceable for the appointment of an arbitrator U/S 11(6A) of the 1996 Act.