Judgment: Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.
Citation: 2019 SCC OnLine SC 515
Court: Supreme Court of India
Coram: R.F. Nariman, Vineet Saran
Date: April 10, 2019
Overview: Supreme Court held that an arbitration agreement in an unstamped instrument doesn’t exist in law, thus it cannot be acted upon by courts for appointment of an arbitrator under Section 11 of the A&C Act, 1996.
Issue: What is the effect on an arbitration clause when the agreement that it is contained in is not stamped?
Dispute arose out of subcontract between Garware Wall Ropes Ltd. (“Appellant”) and Coastal Marine Constructions & Engineering Ltd. (“Respondent”). The Respondent invoked the arbitration clause and appointed an arbitrator. The appellant disputed such appointment. Thereafter the Respondent filed an application under Sec 11 of the Act, 1996 before the Bombay High Court, which appointed an arbitrator. Appealing from the order of the Bombay High Court, the Appellant approached the Supreme Court.
The Supreme Court referred to its earlier decision in SMS Tea Estates v. Chandmari Tea Co. P. Ltd. wherein it had held that if an arbitration clause is contained in an unstamped agreement the Judge would be required to impound the agreement and ensure that the stamp duty and penalty, if any, are paid before proceeding with the appointment of the arbitrator.
However after this judgment, in 2015 section 11(6A) was introduced in the Act, which states that while appointing an arbitrator courts should confine themselves to the examination of the existence of an arbitration agreement and no more. Relying on the introduction of Section 11(6A), it was argued that the judge appointing an arbitrator should not impound the agreement for being insufficiently stamped, rather the arbitrator appointed pursuant to Section 11 may do so if deemed necessary.
The Supreme Court observed that under the Maharashtra Stamp Act, 1958 (“Stamp Act”), an agreement becomes enforceable in law only when it is duly stamped. The Respondent attempted to draw a distinction between the “validity” and the “existence” of an arbitration agreement and argued that the provisions of the Stamp Act are fiscal measures, which will be covered under a determination of the “validity” of an arbitration clause and not its “existence” and therefore, the court should be permitted to appoint arbitrators even in cases where the agreement is unstamped.
However, the Supreme Court didn’t accept such submissions and observed that an arbitration clause cannot be bifurcated entirely from the agreement it is contained in and the Stamp Act applies to the entire agreement. Therefore an arbitration clause would not ‘exist’ when the underlying agreement is not enforceable under law. As a consequence, the Supreme Court held that under section 11 of the Act the court can impound an agreement if it is not stamped in accordance with the mandatory provisions of the Stamp Act.
It was held that while proceeding with the section 11 application, the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Stamp Act, who will then decide the issues relating to payment of stamp duty. As soon as stamp duty and penalty, if any, are paid on the instrument, any of the parties can bring the instrument to the notice of the High Court, which will then proceed to hear and dispose of the section 11 application expeditiously
(2011) 14 SCC 66