Courts Need Not Hold Up Arbitration At Pre-Appointment Stage Over Insufficiency Of Stamp Duty: Bombay High Court

Applicant, Vivek Mehta & Anr., had filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, to seek appointment of a Sole Arbitrator to adjudicate upon disputes that had arisen under a Memorandum of Understanding (MOU) dated 29th August, 2009. An application filed in 2016 remained pending for numerous reasons. Initially, the parties were referred to mediation since they were in negotiations and meetings were held prior to 2017. These meetings did not yield results and on 18th April, 2019 the respondents raised objections to the maintainability of the petition since the MOU was not sufficiently stamped.

Eventually, mediation having failed, the matter was taken up for hearing on 26th November, 2019. After noting that clause 17 of the MOU contained an arbitration clause, the court noted that stamp duty in respect of the MOU was payable by the applicants. The court observed that unless stamp duty is fully paid with penalty, the court could not proceed with appointing an arbitrator, in view of the decisions of the Supreme Court in Garware Wall Ropes Limited v/s. Coastal Marine Constructions & Engineering Ltd.

The matter was thereafter adjourned with a request to the Collector of Stamps to decide the matter at his earliest convenience. The matter has remained pending since then. On 25th February, 2020 time was taken for parties to attempt a settlement. By 3rd January, 2022 no settlement had been arrived at and on 20th January, 2022 the Government Pleader informed the court that the Collector was expected to pass orders on 21st February, 2022.

Applicant relied upon the verdict of the Supreme Court in Intercontinental Hotels Group (India) Pvt. Ltd. and Anr.v/s. Waterline Hotels Pvt. Ltd., holding that insufficiency of stamps is not a reason for refusing to appoint an arbitrator.

The single judge noted that it appeared that on the issue of admissibility of a document due to insufficient stamping, the decision in Intercontinental Hotels Group(supra) would be a way out of the impasse presented by the decisions in SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Ltd, (2011) 14 SCC 66, Garware Wall Ropes (supra) and Vidya Drolia and Ors. vs. Durga Trading Corporation, all of which hold that it would be necessary to await the actual stamping of document with adjudicated value.

As against this, the decision in N.N. Global Mercantile Private Limited v/s. Indo Unique Flame Limited and Ors. suggests that once the existence of an arbitration agreement is admitted, there would be no impediment in appointing an arbitrator.

Respondent drew the judge's attention to the fact that the petitioners in Intercontinental (supra) had contended that they had paid the required stamp duty including the penalty and had sought appointment of an arbitrator pursuant to payment of such duty.

The judge observed that clause 15 of the MOU requires stamp duty and registration charges in respect of the agreement to be paid by the purchasers viz. the applicants whereas a sum of only Rs.100/- has been paid on the instrument as of now. There is no doubt that the MOU in clause 10 contemplates execution and registration of a formal agreement for sale and an indenture of conveyance and that is a matter that has engaged the attention of this court in a series of matters.

The judge considered the decision in N.N. Global (supra) which in no uncertain terms held that since both parties have admitted the existence of the arbitration agreement between the parties, they may either appoint a sole arbitrator consensually; failing which, an application under Section 11 for appointment of the arbitrator may be made before the High Court.

The single judge stated: "The Supreme Court then proceeded to set aside the judgment of the Bombay High Court and directed the Secretary General of the Supreme Court to impound the instrument and forward it to the Collector of Stamps for assessment of stamp duty. On determination of stamp duty, the appellant-plaintiff was directed to make payment of the duty assessed within four weeks subject to the right of statutory appeal available to the appellant. N. N. Global (supra) also held that the view taken by the Supreme Court in SMS Tea Estates (supra) and Garware Wall Ropes(supra) that non-payment of stamp duty would render the arbitration agreement non-existent, is not the correct position in law but also finds that Vidya Drolia (supra) had affirmed the judgment in Garware Wall Ropes (supra) and the court hence made a reference to a larger bench."

In Vidya Drolia (supra), applying the test in Intercontinental Hotel Group (supra) the Supreme Court held that usually issues of arbitrability/validity are matters to be adjudicated upon by arbitrators. The only narrow exception carved out was that Courts could adjudicate to 'cut the deadwood'. Nevertheless, while referring the issue to a larger bench it had opined that arbitrations in question should be carried on, and the appointment procedure should be completed.

In this backdrop, the single judge allowed the application and appointed a sole arbitrator. "I am of the view that the larger issue before the court is whether the arbitration should be held up at the pre-appointment stage and pre-reference stage or whether party should be left to follow the procedures post reference and be left to agitate their respective challenges. The aspect of self-assessment of duty and penalty and payment thereof was not the issued that fueled the ratio. The ratio is clear viz. least interference at the pre-appointment stage."