Commercial arbitration has been pivotal in the transactional space in India. Although often criticised for its high costs, when arbitration has been invoked, it has proven to be a time efficient option for parties looking to settle their disputes when compared to the process of approaching courts for dispute resolution in India. The process of arbitration however, is not completely exclusive from the purview of courts. The Indian courts and the institution of arbitration have had their fair share of interactions, subsequent to which, an amendment to the Arbitration Act in 2015 (“Amendment”) was promulgated.

The Amendment has provided much-needed clarity in dealing with the various realms of the institution of arbitration such as the appointment of arbitrators, grant of interim relief by Indian courts in foreign seated arbitrations, appeals against arbitral awards etc.

View of the Indian Courts in relation to stamping of instruments:

Historically, Indian courts have stated that where a document is inadequately stamped and presented before a judicial authority, the first responsibility of the judicial authority is to order (i) the impounding of such document; and (ii) submission of such document to the appropriate stamping and registration authorities to adjudicate the duty and penalty payable on the same by the parties. Only upon the payment of the stamp duty and the penalty, should the courts dive into the process of adjudicating the rights and obligations of the contesting parties contained in the document. In other words, if a document is inadequately stamped, even though the rights and obligations of the parties are not extinguished, for all practical purposes, courts will only act upon the document after appropriate stamp duty has been paid by the relevant party.

Implications with respect to arbitration clauses

The view of the Indian courts is clear when it comes to dealing with inadequately stamped instruments however, arbitration clauses contained in unstamped/ inadequately stamped documents raise a peculiar problem. Pursuant to Section 16(1) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the arbitral tribunal is empowered to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. This Section is important as one of the fundamental reasons for any party to invoke arbitration is to avoid approaching courts for adjudication of the disputes.

In continuation of the evolution of the jurisprudence on arbitration, the Supreme Court of India in its recent judgment of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. in, pronounced on April 10, 2019 (“Judgment”) has provided insights on the validity and enforceability of an arbitration clause contained in an inadequately stamped sub-contract between Garware Wall Ropes Ltd. (“GWRL”) and Coastal Marine Constructions & Engineering Limited (“COMACOE”) (“Contract”).

In this case, pursuant to certain disputes between COMACOE and GWRL, COMACOE communicated to GWRL, the appointment of an individual as the arbitrator for the disputes between them. GWRL did not accept the appointment of the arbitrator because it alleged that invocation of arbitration in pursuance of the Contract was premature, and therefore, COMACOE approached the Bombay High Court under Section 11 of the Arbitration Act in relation to the appointment of the arbitrator. It is pertinent to note at this juncture that the Contract contained an arbitration clause and was inadequately stamped. On March 9, 2018, the Section 11 petition was allowed in favour of COMACOE and the arbitrator was appointed.

Arguments and decision by the Supreme Court of India

One of the arguments against enforceability of the arbitration clause was that an instrument cannot be admitted in evidence or cannot be acted upon until it is duly stamped. This was opposed by COMACOE stating that courts while dealing with an arbitration agreement are required to restrict themselves to ascertaining the ‘existence’ and not the ‘validity’ of an arbitration agreement. COMACOE also contested that the mere fact that the document containing the arbitration clause is inadequately stamped does not affect the existence of the arbitration clause itself.

After listening to both GWRL and COMACOE, the Supreme Court opined and decided that the first responsibility upon a judicial authority when an inadequately stamped instrument is presented before the courts is to order the impounding of such instrument and to direct that proper adjudication of the stamp duty leviable on such an instrument be made by the relevant authorities. Further, the document in question can only be admitted as evidence by courts and therefore be acted upon by courts only when the stamp duty liability on the instrument is satisfied in accordance with the applicable stamp duty legislation.

Implications

The Judgment has settled the position on the enforceability of inadequately stamped arbitration agreements. The key takeaways for investors while undertaking a diligence exercise for investment in a prospective target entity are as follows:

• Identification of key agreements which are of commercial importance for the target, should be evaluated for payment of adequate stamp duty.
• Where agreements are insufficiently stamped, instead of opting to have the document adjudicated for payment of penalty and subsequent payment of stamp duty, parties may consider executing the agreements afresh with adequate stamp duty where this is possible; or
• Where parties are executing several agreements, parties tend not to pay on the smaller agreements. In such documents arbitration clauses are generally included by way of reference. Such agreements should also be stamped with the necessary stamp duty.

Disclaimer: This article is meant for information purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Pioneer Legal does not intend to advertise its service through this article.