2019 (4) TMI 716 - SC - Indian Laws

What is the effect of an arbitration clause contained in a contract which requires to be stamped? Held that - 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. We have seen how, under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law. Stamp duty, when paid with penalty (if any), would require adjudication by the stamp authorities, which would take far more than the 60-day period that is laid down by Section 11(13). Undoubtedly, Section 11(13), which was also introduced by Amendment Act 3 of 2016, was enacted keeping one of the important objectives of the 1996 Act in mind, namely, speedy disposal of disputes by the arbitral tribunal, and appointment of an arbitrator having to be made as expeditiously as possible, therefore. Thus, a harmonious construction needs to be given to the provisions of the Maharashtra Stamp Act and Section 11(13) of the 1996 Act by which, if it is possible, both provisions ought to be subserved. A harmonious construction needs to be given to the provisions of the Maharashtra Stamp Act and Section 11(13) of the 1996 Act by which, if it is possible, both provisions ought to be subserved. We have already seen that under the Maharashtra Stamp Act, the object of impounding an instrument that is unstamped is to ensure that stamp duty and penalty (if any) must be paid on such instrument before it is acted upon by any authority. Likewise, under Section 11(13) of the 1996 Act, an application made under Section 11 for appointment of an arbitrator should be disposed of as expeditiously as possible, and, in any event, an endeavour shall be made to dispose of such application at least within a period of 60 days from the date of service of notice on the opposite party. Arguments taken of prejudice, namely, that on the facts of this case, the appellant had to pay the stamp duty and cannot take advantage of his own wrong, are of no avail when it comes to the application of mandatory provisions of law. Even this argument, therefore, must be rejected. The matter is remitted to the Bombay High Court to dispose of the same - appeal allowed by way of remand.

Summary

Issues Involved:
1. Effect of an arbitration clause in an unstamped agreement.
2. Applicability of the Indian Stamp Act and Maharashtra Stamp Act to arbitration agreements.
3. Interpretation of Section 11(6A) of the Arbitration and Conciliation Act, 1996.
4. Judicial intervention in the appointment of arbitrators.
5. Harmonious construction of statutes.

Issue-wise Detailed Analysis:

1. Effect of an Arbitration Clause in an Unstamped Agreement:
The primary question in this appeal was the effect of an arbitration clause contained in an agreement that requires stamping. The Court referred to the precedent set in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., which held that an arbitration clause in an unstamped agreement cannot be acted upon until the stamp duty and penalty are paid. This principle was reaffirmed, emphasizing that an arbitration agreement in an unstamped contract does not legally exist until the document is duly stamped.

2. Applicability of the Indian Stamp Act and Maharashtra Stamp Act to Arbitration Agreements:
The Court examined the provisions of the Indian Stamp Act, 1899, and the Maharashtra Stamp Act, 1958, particularly Sections 33 and 34, which mandate that unstamped documents must be impounded and cannot be admitted in evidence or acted upon until properly stamped. The Court held that these provisions apply to arbitration agreements, and judicial authorities must ensure compliance with stamp duty requirements before proceeding with arbitration-related applications.

3. Interpretation of Section 11(6A) of the Arbitration and Conciliation Act, 1996:
Section 11(6A) confines the Court's role to examining the existence of an arbitration agreement. The Court clarified that this does not override the requirement to impound unstamped documents under the Indian Stamp Act. The existence of an arbitration agreement, as per Section 7(2) of the 1996 Act, is contingent upon the agreement being enforceable by law, which includes being duly stamped.

4. Judicial Intervention in the Appointment of Arbitrators:
The Court discussed the judicial intervention in the context of appointing arbitrators, referencing the judgments in SBP & Co. v. Patel Engineering Ltd. and National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. The introduction of Section 11(6A) aimed to minimize judicial intervention, limiting it to the examination of the existence of an arbitration agreement. However, the Court held that this does not negate the requirement to comply with the Indian Stamp Act.

5. Harmonious Construction of Statutes:
The Court applied the doctrine of harmonious construction to reconcile the provisions of the Maharashtra Stamp Act and Section 11(13) of the 1996 Act. It held that while the High Court must impound unstamped documents, the stamp authorities should expedite the adjudication of stamp duty and penalty, preferably within 45 days. This ensures compliance with both the Stamp Act and the objective of speedy arbitration under the 1996 Act.

Conclusion:
The appeal was allowed, and the Bombay High Court's judgment was set aside. The matter was remitted to the Bombay High Court to dispose of the application in light of the Supreme Court's judgment, ensuring that the unstamped agreement is impounded and stamp duty and penalty are paid before proceeding with the appointment of an arbitrator.