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Interplay of Arbitration Agreements and stamping requirements

INTRODUCTION – STAMPING REQUIREMENTS
The Arbitration regime in India has been ever-developing and coming up with fresh recommendations to speed up the procedure and with minimal judicial intervention.
The Courts are required to dispose of an application under Section 11 (13) of the Arbitration & Conciliation Act, 1996, for an appointment of an arbitrator, within a period of sixty days from the date of service of notice on the opposite party.
It is imperative to note that Section 11 of the Arbitration & Conciliation Act, 1996 has been further amended under the Arbitration & Conciliation (Amendment) Act, 2019 which is yet to come into effect. The said amendment gives power to the Supreme Court of India and the High Courts to designate arbitration institutions graded by the Arbitration Council of India for appointment of arbitrators and the Courts to have no interference in the same.
However, it is important to discuss the interplay between the validity of arbitration agreements and the stamping requirements for the same. The judiciary has in the process of liberalizing the interpretation, taken a step back on the issue of the stamp duty with respect to arbitration agreements.
ARBITRATION AGREEMENT & STAMP DUTY
Section 33 of the Indian Stamp Act, 1899 imposes a duty on the Courts to examine an Instrument on whether it is duly stamped or not. Further, Section 35 of the Indian Stamp Act, 1899 envisages that any contract not duly stamped is not admissible as evidence and can even be impounded. Therefore, in order to approach the Courts under an application under Section 11 of the Arbitration & Conciliation Act, 1996 it is crucial that the contract containing the arbitration clause or the arbitration agreement is sufficiently stamped in order to avoid inadmissibility.
On 14th February, 2020, the Supreme Court was faced with the said issue of whether the instrument is validly stamped or not in the case of Dharmaratnakara Rai Bahadur Arcot Narainswamy v. Bhaskar Raju 2020 SCC Online SC 183. It is to be noted that even without any objection by the parties, it is a mandate upon the Court to consider the same.
The Courts have settled the situation that in the event of a dispute arising between the parties and thereafter, approaching the Courts for remedy, unstamped agreements will lead to the Courts not discussing the preliminary issues between the parties hence, it is wise to stamp the agreements from the very initiation of the commercial relationship and not when a dispute comes into picture.
JUDICIAL PRECEDENTS ON STAMPING REQUIREMENTS
The arbitration provisions have faced several developments and the judiciary has a bigger hand in putting across interpretations to help and guide the present legal system.
Similarly, the Indian Courts have dealt with the issue of stamping requirements of an arbitration agreement several times. The Supreme Court in the case of SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (2011) 14 SCC 66 examined the provisions under the Indian Stamp Act, 1899 i.e. Section 33 and 35. The Agreement not being stamped, the Court held that because they cannot act upon the instrument, the arbitration agreement also cannot be taken into account being a part of the instrument. The Court concluded as follows:
“We may therefore sum up the procedure to be adopted where the arbitration clause is contained in a document which is not registered (but compulsorily registrable) and which is not duly stamped:
(i) The court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/document is duly stamped and whether it is an instrument which is compulsorily registrable.
(ii) If the document is found to be not duly stamped, Section 35 of Stamp Act bars the said document being acted upon. Consequently, even the arbitration clause therein cannot be acted upon. The court should then proceed to impound the document under Section 33 of the Stamp Act and follow the procedure under Section 35 and 38 of the Stamp Act.
…”
Thereafter, in pursuance of the 246th Law Commission Report, Section 11 (6A) of the Arbitration & Conciliation Act, 1996 was inserted to confine the Courts to only examination of the arbitration agreement while dealing with the question of appointment of an arbitrator. However, there existed no discussion with regard to the question of stamping of such arbitration agreement.
The above mentioned precedent was still a good law till the Bombay High Court decision under Gautam Landscapes Pvt. Ltd. v. Shailesh S Shah, Arb Pet. 466/2017 & Arb App 246/2016 wherein issues regarding (i) validity of the application under Section 9 of the Arbitration & Conciliation Act, 1996 in an unstamped agreement and (ii) the Courts appointing arbitrators without considering stamp duty requirements under Section 11 (6A) of the Arbitration & Conciliation Act, 1996 were discussed
The Bombay High Court held that:
  • the case of SMS Tea Estate was only with respect to Section 11 of the Arbitration & Conciliation Act, 1996 and had no application on Section 9 applications and
  • considering the legislative intent behind insertion of the said Section, it was to minimal judicial intervention therefore, the Court would only look into the ‘existence’ of an arbitration agreement and not the stamping requirements.
Lastly, pertaining to the highs and lows in the question of stamp duty on an arbitration agreement, the same has been settled in the case of Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and Other Charities and Ors. v. Bhaskar Raju and Brothers and Ors. 2020 SCC Online SC 183 as follows:
“In this view of the matter, we are of the considered view, that in view of the law laid down in the case of SMS Tea Estates Private Limited (supra), that the lease deed containing the arbitration Clause which is required to be duly stamped, was not sufficiently stamped and though the Registrar (Judicial) had directed the Respondent Nos. 1 and 2 to pay deficit stamp duty and penalty of Rs. 1,01,56,388/- (Rupees One crore One lakh fifty-six thousand Three hundred and Eighty-eight only), the Respondents failed to do so, the High Court has erred in relying on the said lease dated 12.3.1997.”
CONCLUSION

It is a trite law that all agreements are required to be stamped before the parties approach the Courts for enforcing them for seeking a remedy at any given point of time. It is incumbent upon the Courts to see the validity of an arbitration agreement, that it passes the test of the requirement of Indian Stamp Act, 1899, before considering an application under Section 11 of the Arbitration & Conciliation Act, 1996.

It is advisable to have agreements and instrument which require compulsory registration stamped to avoid payment of additional interest or penalty payments while stamping at a later stage. The Bombay High Court, also on 28th November, 2019 in the case of S. Satyanarayana & Co. v. West Quay Multisport Private Limited, Arbitration Application No. 261 of 2018, held that the arbitration agreements are required to be stamped in accordance with the provisions of the respective State’s Stamp Act where the arbitration is going to take place.

It is an established fact that stamping is an important aspect to assess before knocking the doors of the Court to find recourse and remedies for rights arising under a Contract/Instrument.
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