Unstamped Arbitration Agreements: Awaiting the Light at the End of the Tunnel

Editor_4

3 years ago

The High Court of Delhi recently in IMZ Corporate (P) Ltd. v. MSD Telematics (P) Ltd.[1] held that the Court may appoint an arbitrator despite the arbitration agreement being unstamped. The Court relied on the judgment of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[2] speaking through a Bench of three Judges. The Supreme Court in that case found that non-payment of stamp duty does not invalidate the arbitration clause. Consequently, the appointment of an arbitrator cannot be refused on the ground of non-payment of stamp duty.

The Supreme Court in N.N. Global[3] was concerned with a judgment of the Bombay High Court where it was held that failure to pay stamp duty is not a ground to refuse an application under Section 8 of the Arbitration and Conciliation Act, 1996[4] (“the Act”). The High Court held that the said objection may be raised in the proceedings under Section 11 or before the Arbitral Tribunal. The Supreme Court invoked the diarchy of kompetenz-kompetenz and the doctrine of separability of arbitration clauses to hold that an arbitration agreement is not invalid only due to failure to pay requisite stamp duty. The Arbitral Tribunal would therefore be the appropriate forum to adjudicate such an objection. The Court also noted that the issue of stamp duty is beyond the scope of the inquiry under Section 11 which is limited to the “existence” of the arbitration agreement with the insertion of Section 11(6-A).

Previously, the Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[5] held that an unstamped arbitration clause in an agreement that is compulsorily registrable or chargeable to stamp duty cannot be the basis for the appointment of an arbitrator. This was based on the reasoning that an agreement that is compulsorily registrable or chargeable to stamp duty cannot be taken into evidence or relied upon for any purpose under the Stamp Act.

The Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[6] speaking through a Bench of two Judges applied and reiterated the principle enunciated in SMS Tea Estates[7]. The Court specifically held that the insertion of Section 11(6-A) did not alter the position of law as enunciated in SMS Tea Estates[8]. Recently, the Supreme Court speaking through a Bench of three Judges in Vidya Drolia v. Durga Trading Corpn.[9], approved the holdings in SMS Tea Estates[10] and Garware Wall Ropes[11] pronounced by Benches of two Judges.

The Court in N.N. Global[12] doubted the correctness of the ratio in SMS Tea Estates[13] and Garware Wall Ropes[14]. The Court in the face of the approval of the ratio of the said cases in Vidya Drolia[15] by a Coordinate Bench referred the matter to a larger Bench of five Judges to resolve the cleavage in judicial opinion. In the ultimate analysis, the Court in N.N. Global[16] ordered the impounding of the agreement and payment of stamp duty. And the parties were granted the liberty to appointment an arbitrator under the arbitration agreement or institute a petition under Section 11 of the Act.

The Delhi High Court’s judgment in IMZ Corporate[17] is a progressive development in the steadfast march towards a pro-arbitration jurisprudence. Parties having chosen to incorporate an arbitration clause must be bound by that bargain. Civil courts routinely adjudicate objections in relation to non-payment of stamp duty or failure to register a compulsorily registrable instrument. This adjudication is not vested in the civil court specifically by any law nor does it have erga omnes effect impacting the rights of third parties. Accordingly, even by the test of arbitrability in Vidya Drolia[18] objections as to registration and stamp duty must be left to the province of the arbitration tribunal.

The judgment of the Delhi High Court is however vulnerable since it proceeds on the specious basis that the decisions in SMS Tea[19] and Garware Wall Ropes[20] stand overruled by the decision in N.N. Global[21]. The Court in N.N. Global[22] faced with the approval of the principle stated in the said cases by a Coordinate Bench in Vidya Drolia[23]. It is for this reason that the reference was made to a larger Bench. The Court in N.N. Global[24] however in conclusion on the facts of that case decided in accordance with the principle approved by Vidya Drolia[25] which continues to hold the field. The Delhi High Court therefore would necessarily be bound to follow the ratio approved in Vidya Drolia[26] until the Supreme Court by a Bench of five Judges finally pronounces on this principle of law. Until then the decision in IMZ Corporate[27] only mouths the brooding spirit of the law.