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EFFECT OF AN ARBITRATION CLAUSE IN AN INSUFFICIENTLY STAMPED
CONTRACT
In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. 1, the
Supreme Court of India has examined a very critical question viz. what would be the
effect of an arbitration clause contained in a contract which requires to be stamped?
Garware Wall Ropes Ltd. (‘Garware’) was awarded a sub-contract for the installation
of certain geo-textile tube embankments at a village in Orissa to protect it against
coastal erosion. As a result of disputes arising between the parties, Garware
terminated the sub-contract and issued a notice to Coastal Marine Constructions &
Engineering Ltd. (‘Coastal’) appointing a sole arbitrator to resolve the dispute. By its
reply, Coastal did not accept the appointment of the sole arbitrator, contending that
the invocation of arbitration under the sub-contract was premature. Garware filed an
application under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Act’)
before the Bombay High Court, which was eventually allowed, and a sole arbitrator
was appointed to adjudicate the disputes that had arisen between the parties.
Garware preferred an appeal to the Supreme Court of India in which the primary
question that had arisen for its consideration was what is the effect of an arbitration
clause which is contained in a contract which requires to be stamped?
1 Civil Appeal No. 3631 of 2019
1
May 9, 2019
In its earlier judgment in SMS Tea Estates (P) Ltd. v. Chandmari Tea C. (P) Ltd. 2, the
Supreme Court of India had held that a court, while hearing an application under
Section 11 of the Act with respect to an arbitration clause contained in an unstamped
agreement, is required to impound the agreement, and proceed with the hearing of
the application under Section 11 only when the applicable/ deficient stamp duty and
penalty have been paid. However, the judgment in SMS Tea Estates (supra) was
pronounced prior to the introduction of Section 11 (6A) by the Arbitration and
Conciliation (Amendment) Act, 2015 (‘Amendment Act’). Therefore, the question
that was to be answered by the Supreme Court of India in the appeal filed by
Garware was whether the law laid down in SMS Tea Estates (supra) continues to be a
good law post introduction of the Amendment Act, 2015.
In Gautam Landscapes Private Limited v. Shailesh S. Shah & Anr. 3, which was
pronounced a few days prior to Garware Wall Ropes (supra) judgment, a full bench
of the Bombay High Court held that the law laid down in SMS Tea Estates (supra)
could not be made applicable to applications under Section 11 filed after the coming
into force of the Amendment Act. Applying the law laid down by the Supreme Court
in Duro Felguera, S.A. v. Gangavaram Port Ltd. 4, the Bombay High Court held that it
is not necessary for the court to await an adjudication by the stamp authorities,
before considering and passing final orders on an application under Section 11 (6) of
the Act, in a case where the document objected to, is not adequately stamped. The
2 (2011) 14 SCC 66
3 Arbitration Petition No. 466 of 2017
4 (2017) 9 SCC 729
Supreme Court in Duro Felguera (supra) held that, all the court must see while
deciding an application under Section 11 of the Act is whether an arbitration
agreement between the parties, exists – nothing more nothing less.
The Supreme Court, however, has held that the Bombay High Court’s decision in
Gautam Landscapes (supra) is incorrect to the extent it deals with the question arisen
in the present case.
Rival Contentions
Garware argued that Sections 33 and 34 of the Maharashtra Stamp Act, 1958
(‘Maharashtra Stamp Act’) are applicable to an application under Section 11 of the
Act. Under Sections 33 and 34 of the Maharashtra Stamp Act, a judicial authority is
required to impound insufficiently or unstamped stamped instruments which are
received in evidence and can be acted upon only when the applicable stamp duty and
penalty are paid. In essence, Garware contended that the law laid down by the
Supreme Court in SMS Tea Estates (supra) continues to hold the field even after the
introduction of the Amendment Act.
Coastal on the other hand argued that:
i. The object of the Amendment Act clarified that the court is to confine itself to
examine the existence of an arbitration agreement while deciding an
application under Section 11 of the Act;
ii. The Maharashtra Stamp Act is a fiscal legislation and therefore, the
insufficiency of stamp duty with respect to an agreement would at best raise a
question on its validity but not render the arbitration agreement non-existent;
iii. The arbitration agreement is independent of the agreement in which it is
contained;
iv. The sixty-day time period to dispose of an application under Section 11
prescribed under Section 11(13) of the Act could not possibly be complied
with if the questions relating to stamp duty were to be decided at the Section
11 stage;
v. The stamp duty was payable by the Appellant and therefore the Appellant
could not take advantage of its own wrong doing.
2
Rejecting the arguments advanced by Coastal, the Supreme Court allowed the appeal
filed by Garware and held:
i. By its report5 No. 246, the Law Commission of India inter alia recommended
the introduction of Section 11 (6A) to restrict judicial intervention in
applications for appointment of arbitrators to only those cases in which the
court finds that an arbitration agreement does not exist or is null and void.
Further, the Statement of Objects and Reasons appended to the Bill
pursuant to which the Amendment Act was passed, provided that the court,
while deciding an application under Section 11 of the Act shall examine the
existence of a prima facie arbitration agreement and not the other issues.
ii. Therefore, the aforesaid would suggest that the intention behind
introduction of Section 11 (6A) was to alter the position resulting from the
law laid down by the Supreme Court under which, the court while hearing
an application under Section 11 of the Act, was empowered to deal with
many preliminary issues which did not relate to the existence of the
arbitration agreement thereby conducting a mini trial 6 at the Section 11
stage. However, it does not seek to alter the legal position laid down by SMS
Tea Estates (supra) as the law laid down therein only takes into account the
mandatory provisions contained in the Indian Stamp Act, 1899 and held
them to be applicable to a court deciding an application under Section 11 of
the Act.
iii. The Indian Stamp Act, 1899 is applicable to the agreement as a whole,
including the arbitration clause contained therein. Therefore, it is not
possible to give it an independent existence as far as the payment of stamp
duty is concerned.
iv. Section 7 (2) of the Act provides that the arbitration agreement may be in
the form of an arbitration clause ‘in a contract’. Under Section 2(h) of the
Indian Contract Act, 1872, an agreement is considered to be a contract only
if it is enforceable by law. However, under the Indian Stamp Act, 1899, an
5
Law Commission of India, Amendments to the Arbitration and Conciliation Act 1996
(Report No. 246, August 2014)
6 SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618; National Insurance Co. Ltd.
v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267
 agreement which is not duly stamped is not enforceable in law. This clarifies
the position that an arbitration clause contained in an agreement would not
exist when it is not enforceable in law.

v. It is trite law that the conflict between two provisions of equal authority
should be, as far as possible, interpreted harmoniously so that effect can be
given to both the provisions. Accordingly, the provisions of the Maharashtra
Stamp Act and Section 11 (13) of the Act, which provides for disposal of an
application under section 11 within 60 days from the date of service of
notice must be construed harmoniously by which both the provisions can be
subserved.

vi. Coastal’s argument that Garware was seeking to take advantage of its own
wrong doing was rejected on the ground that the same is an argument of
prejudice and hence is of no avail when it comes to the application of the
mandatory provisions of law.

Conclusion

While the Supreme Court has held that a court cannot appoint an arbitrator/s when
an application under Section 11 of the Act is filed pursuant to an arbitration clause
contained in an unstamped or insufficiently stamped agreement, until the same is
adjudicated by the stamp authorities, and further until the applicable stamp duty and
penalty is paid, the question regarding the grant of interim relief under Section 9 of
the Act in a similar situation was not an issue before the Supreme Court. It will be
interesting to see how the Supreme Court examines this question as and when the
same arises before it.

Authored by Nirav Shah & Ryan D’Souza

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