Effect Of An Unstamped Contract On An Arbitration Clause
Legal Era|June -July 2019

The Garware Case is definitely a welcome judgment in many ways, not the least of which is that it clarifies that in the event of an unstamped agreement, an arbitration agreement cannot have an independent existence

Introduction to the Issue

Recently, the Supreme Court of India was faced with a peculiar, yet pertinent interpretational issue, wherein it had to strike a balance between two ends of the spectrum, i.e., speedy and expeditious disposal of an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) for appointment of an arbitrator and ensuring that no revenue loss is caused to the State on account of an agreement (containing an arbitration clause) being unstamped. In the case of Garware Wall Ropes Ltd. Vs. Coastal Marine Constructions & Engineering Ltd. (Civil Appeal 3631 of 2019) (“Garware Case”), in appeal from the Bombay High Court, the Supreme Court had to decide as to what is the effect of an arbitration clause contained in a contract, which is required to be stamped, yet it is unstamped? What is the stage at which an unstamped document can be impounded – whether at the stage of appointment of an arbitrator or by the arbitrator himself post appointment? Can an arbitration clause have an existence of its own if the underlying contract is unstamped and is not legally enforceable?

The question had to be examined from two perspectives, i.e., ‘pre-2015’ and ‘post-2015’. India made significant changes in the Arbitration Act in 2015 by introducing the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”). The Amendment Act brought in specific timelines to ensure speedy disposal of an arbitration process including expeditious disposal of an application under Section 11. The timeline for disposal of an application under Section 11 for appointment of an arbitrator is Sixty (60) days, as set out in Section 11(13), from the date of service on the opposite party, although the said timeline is not mandatory.

Background

Section 11(6A) was introduced in the Arbitration Act, to ensure that the Supreme Court, or as the case may be, the High Court, while considering any application under Sections 11(4) to 11(6) for appointment of an arbitrator confine to the existence of an arbitration agreement. This is contrast to the legal position existing until then by virtue of various judicial pronouncements, notably SBP & Co. vs. Patel Engineering Ltd., (2005)8 SCC 618 (“Patel Engineering”), that the power to appoint an arbitrator under Section 11 is ‘judicial’ and not ‘administrative’. Post introduction of Section 11(6A), an appointing authority under Section 11 cannot go into the merits of the dispute.

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