Jun 26,2020 | 10 min read

Enforceability of Arbitration Clause In An Unstamped Agreement by Rahul Hingmire

The arbitration provision is an integral aspect of a contract whereby all conflicts between two parties that have entered into a contractual arrangement are settled via the arbitration process rather than through the courts. This is very positive for both companies and customers by ensuring a cost-effective conflict resolution solution. Businesses have arbitration agreements so they can settle disputes quickly and privately without the often lengthy and time-consuming legal system. Once the dispute arises, the main advantage of incorporating an arbitration clause in a contract is that if the conflict occurs, one can push the conflict out of the legal system so that the other party can arbitrate. This saves the parties money, expenses and needless abuse. Therefore, having an explicit arbitration clause is very necessary for a contract.

LexisNexis India: July 2019

Advantages Of Arbitration Clause

  • Tailored rulesThe most significant benefit of the arbitration clause is that the rules can be modified to suit the parties' needs and the types of conflicts likely to occur under the contract. Parties should also agree to restrict damages or even stipulate procedural guidelines for the discovery process.

  • Expert arbitrators: A well-crafted arbitration clause would probably require arbitrators to have some experience or expertise in the issue of dispute, mainly when the issues are complicated or unique. If the subject-matter of the dispute is legal, such as a patent, then the parties may choose an arbitrator with technical expertise in that area, rather than a judge who does not know the issues.

  • Arbitration proceedings are usually privately owned. And the parties can agree, whether they wish to keep the decision as confidential, beforehand. It also removes some of the animosity of court cases, possibly because it is a private case against the courtroom's public drama.

  • Simplified rules of evidence and procedure: The sometimes-conflicting rules of evidence and procedure do not apply in arbitration procedure, making them less stylistic and more comfortable to adapt to the needs of those involved.

  • Faster than litigation: In general, arbitration is cheaper, more accessible, more productive and more versatile than litigation.

  • Expedient, convenient, less-expensive forumThe arbitration is performed and resolved quicker, and at a lower rate, compared with a court trial.

 

Enforceability in Unstamped Agreements

The Supreme Court recently addressed the question if an arbitration provision found in an agreement that is not signed or inadequately signed can be extended to select arbitrators pursuant to section 11 of the Arbitration & Conciliation Act 1996, in Garware Wall Ropes v Coastal Marine Constructions & Engineering (Judgment dated April 10, 2019, in CA 3631 of 2019). 

Relying on the earlier decision in SMS Tea Estates. v. Chandmari Tea Co., (2011) 14 SCC 66 that it is the responsibility of the Supreme Court or the High Court, before appointing an arbitrator pursuant to section 11, to ensure that the contract is impounded and that the stamp duty and penalty (if any) are paid before the agreement (including the arbitration clause) can be enforced. 

The Supreme Court also held that following the 2015 amendment to section 11 of the 1996 Act the SMS Tea Estates decision will continue to work. With the amendment of 2015, the investigation was limited to the' existence' of the arbitration arrangement between the parties. According to the Supreme Court, an agreement is a 'contract' only if it can be enforced, and it cannot be enforced until it is properly stamped. The Supreme Court explained that the Indian Stamp Act extends to the whole contract or conveyance. Consequently, the arbitration clause inherent in any agreement or transmission cannot be bifurcated to give it an autonomous existence. The arbitration provision may only be issued independently for such specific reasons, for example, if the contract has not been properly registered, as it is held in SMS Tea Estates.

The Supreme Court reversed the Bombay High Court's decision under appeal before it, and also overruled many Delhi and Karnataka High Court rulings. In all such cases, it was held that, since the 2015 amendments to the 1996 Act, complaints about the stamp duty should be determined by the arbitrator, who could enforce the document and pay the stamp duty and penalty direction if necessary. Those decisions no longer are good law.

Duty of An Arbitrator in An Unstamped Agreement

In Garware Wall Ropes, the important consequence of the decision of the Supreme Court appears to be that the arbitrator(s) must automatically refer the parties to the competent authority under the Stamp Act before taking any steps in the matter. The arbitration cannot continue based on an unstamped document, because the arbitration clause of such an arrangement would be inapplicable.

Conclusion

Although the Supreme Court did not answer the issue of whether an application for temporary relief under Section 9 of the Act can be sustained in an arbitration arising from an unstamped agreement, it appears that such applications might not be viable because of the ratio in the Garware Wall Ropes. However, since there is no express ruling on this aspect, it is likely to be open for debate until a specific decision is given on this issue by the Supreme Court.

 

 

 


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ABOUT THE AUTHOR


Rahul Hingmire

I have been practising in Mumbai for more than 10 years. I am engaged as legal advisor and representative for civil & commercial litigation, domestic & international arbitration, real estate transactions & disputes. Since, inception of Insolvency & Bankruptcy Code cases, I have been handling various assignments Pan India basis. Since 2018, I am also supervising team of Advocates operating from Mumbai, New Delhi & Pune.

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