Court Can't Appoint Arbitrator When The Contract Containing Arbitration Clause Is Insufficiently Stamped: SC [Read Judgment]

The bench comprising Justice Rohinton Fali Nariman and Justice Vineet Saran observed that the law laid down in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. still applies, even after introduction of Section 11(6A), by way of the Arbitration and Conciliation (Amendment) Act, 2015.

Incidentally, it was only a week ago, a full bench of Bombay High Court answered a reference to it and had held otherwise. The Apex court bench, in its judgment today, noticed that, and has held it to be incorrectly decided.

The question considered by the bench in Garware Wall Ropes Ltd vs. Coastal Marine Constructions & Engineering Ltd. was whether Section 11(6A), has removed the basis of this judgment in SMS Tea Estates (P) Ltd., so that the stage at which the instrument is to be impounded is not by the Judge hearing the Section 11 application, but by an arbitrator who is appointed under Section 11?

Section 11(6A) provides that the Supreme Court or, as the case may be, the High Court, while considering any application under subsection (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.

The bench held that arbitration clause contained in an agreement does not have an independent existence. It said:

"A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Indian Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. It is important to remember that the Indian Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence."

It further observed:

"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."

The bench concluded that the judgment in SMS Tea Estates (P) Ltd has not been touched by the amendment of Section 11(6A).

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