Implication of Unstamped Documents on Arbitration Agreements
[Mrudula Dixit is a student at Symbiosis Law School, Pune.]
In dispute resolution circles, the Supreme Court of India’s judgment in Garware Wall Ropes v. Coastal Marine Constructions and Engineering Company (Garware) is (in)famous. Although the decision to impound unstamped documents before proceeding with Section 11 applications has been analyzed earlier, it is relevant to study it from a fresh perspective. This can be done by outlining the clear inconsistency in opinion between Section 9 and Section 11 of the Arbitration Act 1996 (Act) created by this judgment, and by examining whether this judgment can extend beyond arbitration and cover summary suits as well.
Before proceeding with the analysis, it is imperative to briefly understand the facts of Garware. The Appellant and the Respondent had entered into a sub-contract for installation of geo-textile tube embankments which contained an arbitration clause. As the Appellant refused to appoint an arbitrator, the Respondent filed a Section 11 application with the Bombay High Court for the same. The decision of the High Court allowing the application and appointing a sole arbitrator was appealed against before the Supreme Court.
The issues framed by the court were (a) when an inadequately stamped document should be impounded, and (b) whether the impounding can be effected by the court itself acting under a Section 11 application or it is to be done by the arbitrator when the dispute comes before him.
The Appellant primarily rested its argument on SMS Tea Estates v. Chandmari Tea Company (SMS Tea Estates) to buttress the contention that an unstamped document is inadmissible in evidence and cannot be acted upon even in a Section 11 application. To counter this, the Respondent argued that according to the newly added Section 11(6A), the court should be only concerned with the existence of an arbitration agreement and not the validity of the same. The court decided in favour of the Appellant and observed as follows:
In accordance with the judgment of SMS Tea Estates, the arbitration clause remains inseparable from the main contract for the purposes of stamping. Courts cannot act upon any inadequately stamped documents as per the provisions of the Indian Stamp Act 1899 or the Bombay Stamp Act 1958. Hence, even an arbitration clause contained in such a document will be unenforceable.
As regards to the Respondent’s contention about restricting the observations of the court under Section 11 to only of existence of the contract, it was observed that existence is interpreted to mean ‘existence in law'. Further, as per Section 7(2) of the Act, an arbitration clause can be a part of a contract. This ‘contract’ should be construed according to Section 2 of the Indian Contract Act 1872 and, if not stamped, it would not be recognised as a valid contract. Hence, an arbitration clause would not exist when the agreement itself is not enforceable by law.
The author will analyze the implication of the judgement in two parts. The first part of the analysis will highlight the inconsistency in the approach towards Section 11 (Appointment of Arbitrators) and Section 9 (Interim Measures) of the Act. The second part will question the extension of this judgment to summary suits.
As per the current jurisprudence, Section 11 applications cannot be proceeded with unless the court impounds the inadequately stamped document. However, a Section 9 remedy does not depend on stamping of the document.
Interestingly, in Gautam Landscapes Private Limited v. Shailesh S Shah (Gautam Landscapes), the Bombay High Court held that a Section 9 application for interim measures can be entertained by the court even if the agreement containing the arbitration clause is insufficiently stamped. It relied on the case of Firm Ashok Traders v. Gurumukh Das to reiterate that the right under Section 9 to seek interim measures does not arise out of a contract. It is permissible for the courts to grant interim or ad-interim reliefs under a Section 9 petition even if the document in question is not sufficiently stamped.
Gautam Landscapes was partly overruled by Garware. The Supreme Court of India, in the present case, stated that Gautam Landscapes erred in concluding that by virtue of Section 11(6A), the court could no longer look into stamping before appointing an arbitrator. The Bombay High Court in Saifee Developers v. Shanklesha Constructions and later in IREP Credit Capital v. Tapaswi Mercantile upheld the other part of Gautam Landscapes which unequivocally upheld that Section 9 remains untouched from the technicalities of the stamp law.
However, what these latter two cases failed to consider, in the opinion of the author, is that part of the judgment in Garware which spoke about the existence of the contracts. The contract must exist in law. Hence, even if the right does not ‘arise out of a contract’, arbitration still depends on a contract, and without an arbitration (because an unstamped document will not be considered as a valid arbitration agreement), interim measures should not (ideally) be granted. The Garware judgment thus creates a tussle between Section 9 and Section 11, a conflict which has been reinforced ever since. As long as the courts (like Bombay High Court) uphold that non-stamping will only affect Section 11 and not Section 9 even after the Garware decision, it will further the obvious discrepancy contained therein.
Another important question arises when courts adjudge inadequate stamping in arbitration matters – can the same extend to summary suits? Does insufficiency in stamping allow the defendant an unconditional right to defend?
In a summary suit, (Order XXXVII of the Code of Civil Procedure 1908), the defendant is not entitled to a right to defend but rather has to apply for a leave to defend. The object is to expedite the matter and prevent unnecessary obstruction by the defendant. A summary suit can only exist when there is a debt on a written contract [Rule 1(2)(b)(i)]. The leave to defend will be granted to the defendant if he raises a triable issue. This means that the defendant should have a good defense to the claim on merits.
Courts have been reluctant in denying a summary suit on the ground that there is an inadequately stamped document. While balancing unstamped document and leave to defend, courts have noted that a technical and curable defect of stamping cannot hinder a bona-fide and expedited process of summary suits. In two cases, namely Morpheus Media Ventures v. Anthony Maharaj and Unity Infraprojects v. L&T Finance Limited, the defendants had relied on SMS Tea Estates to buttress the argument that inadequately stamped documents should not be acted upon even in a summary suit. In both these cases, the court rejected SMS Tea Estates stating that the case was only applicable to arbitration agreements and could not be extended to summary suits. But, is this position likely to change post the decision in Garware? SMS Tea Estates was upheld in Garware, thus strengthening its ratio. Hence, it can go two ways.
The Supreme Court of India had gone a step further and delved into the existence of a contract under law in Garware. It was clearly stated that a mere physical/documentary copy of an agreement would not suffice, it must fulfill all requisites of being ‘lawful’. Thus, an agreement is not a contract if it is not sufficiently stamped, does not exist in the eyes of law and cannot be acted upon. This defeats a summary suit in limine, as there will be no debt on a written contract, if the contract itself does not exist in law. But, on the other hand, Justice Rohinton Nariman, the same judge who authored Garware, had also held in State of West Bengal v. Associated Contractors that decisions of the Chief Justice under Section 11, not being a ‘judgment’ of the court, have no precedential value. This may limit the application of a Section 11 decision to only arbitration agreements. Hence, the issue remains contentious.
The Supreme Court of India, in author's view, erred while deciding the implication of unstamped documents on arbitration agreements. A decision on a Section 11 application should be limited to only the prima facie existence (not in law) of an arbitration clause. If there is any dispute as to the inadequacy of stamping, the same can be looked into and decided by the arbitrator at a later stage, once he/she has been appointed. The court had a good opportunity to expand the scope of ‘intent of the parties to arbitrate’ but failed on that front. Arbitration should remain free from the shackles of technicalities and curable impediments but this judgment further reinforced it. As shown above, this may also have wide implications on other laws like Section 9 of the Act or summary suits. As the position stands today, Gautam Landscapes has been appealed against in the Supreme Court (SLP No. 010232/2019) but the decision is still pending. This decision may set the course right.