Between the Lines | BHC: Once parties acknowledge existence of arbitration clause, court can appoint arbitrator even if stamp duty is insufficiently paid April 22, 2022
Published in: Between The Lines
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The Bombay High Court (“BHC”) has in the judgement dated February 28, 2022 (“Judgement”), in the matter of Pigments and Allieds v. Carboline (India) Private Limited and Official Liquidator and Liquidator of Octamec Engineering Limited [Arb. Application 225 of 2016] held that once parties acknowledge existence of arbitration clause, court can appoint arbitrator even if stamp duty is insufficiently paid.
Pigments & Allieds, a partnership firm (“Applicant”) filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) and sought appointment of a sole arbitrator in furtherance of invoking the arbitration clause under a Tripartite Agreement dated February 06, 2013 (“Agreement”), executed between the Applicant, Carboline (India) Private Limited (“Respondent no. 1”) and Official Liquidator and Liquidator of Octamec Engineering Limited (“Respondent no. 2”) (collectively referred to as “Respondents”). A original copy of the Agreement was not available with any of the parties.
As per the Agreement, the Applicant was required to carry out work including construction and maintenance for Vodafone Shared Services Limited pursuant to a Subcontractor Agreement dated September 18, 2012 between the Respondents inter se (“Subcontractor Agreement”). Essentially the work involved supply and application of intumescent paint fire protection system and anti- corrosive paint to steel columns, fire and rust protection systems for the Vodafone Data Centre. The Respondent no.2 had placed a work order and a purchase order (“PO”) issued under the Subcontractor Agreement on October 08, 2012, on the Respondent no.1 for supply and application of the aforesaid. The PO was placed by the Respondent no. 1 on the Applicant for supply of paint, as aforesaid for a consideration of Rs.18,00,77,644/- approx. Payment was to be made by way of a Letter of Credit (“LoC”) of 90 days.
Pursuantly, Applicant had ordered 21 full container loads of the paint from Jordan. But the Respondent no. 1 had defaulted in making payments. The Respondent no. 1 apparently entered into negotiations with the Applicant to revise payment terms. Thereafter a new purchase order dated December 26, 2012 (“NPO”) was issued reflecting negotiated terms for supply of 3,32,597 ltrs. (approx.) of paint for a consideration of Rs.19,19,13,125/- approx. The consignments had begun arriving at Nhava Sheva Port around January 2013 and the Applicant was incurring high demurrage charges and port charges. However, the Respondent no. 1 did not make payments under the NPO as well. The Respondent no. 1 then suggested that the Respondent no. 2 would open the requisite LoCs in favour of the Applicant and that the Respondent no. 2 should accept a combination of advances payable by post-dated cheques as guarantee against the LoCs being issued to the Applicant by the Respondent no. 2. Subsequently, the Agreement was executed on February 06, 2013. After much follow-up, some part payments were made in February 2013 and March 2013. Corresponding quantity of paint was released after payment was made towards detention charges, demurrage and customs duty.
The first shipment was then delivered at Vodafone site on February 26, 2013. The Applicant reminded Respondent no. 2 that they were incurring huge costs by way of customs duty, demurrage charges since the paint had not been collected due to the default of Respondent no. 1. The 3rd and 4th consignments were awaiting clearance and this has caused enormous loss to the Applicant. Under clause 10(b) of the Agreement, disputes between the parties were to be referred to Arbitration. The Applicant’s case was that both the Respondents had avoided interacting with the Applicant and that they had jointly and severally failed to make payments for a shipment. A claim for a sum of Rs.8,92,97,690/- approx. had been made along with Rs.1,24,04,618/- approx. towards demurrage, detention and other port charges. Interest had also been claimed @ 18% P.A. In these circumstances, the Applicant invoked arbitration by its letter-cum-demand notice dated June 2, 2016 (“Demand Notice”), and a sole arbitrator had been nominated.
It was stated that, on November 09, 2017, court had ordered impounding of the Agreement since it was found to be inadequately stamped. On December 10, 2019, the Superintendent of Stamps, Mumbai passed an order and issued a demand notice for payment of duty amounting to Rs.10,72,140/- , penalty of Rs.15,01,000/-, and a sum of Rs.200/- was payable towards indemnity.
Contentions raised by the Appellant:
By virtue of the decision in InterContinental Hotels Group (India) Private Limited and Another v. Waterline Hotels Private Limited [Arbitration Petition (Civil) No.12 of 2019], when a court was faced with an issue of insufficient stamping, it was observed that there was no bar against proceeding and appointing an arbitrator. Further that after Applicant’s response to the notice of demand, an order was expected to be passed, which could be challenged by way of a statutory appeal under Section 40 of the Maharashtra Stamp Act, 1958 (“MSA”). Relying upon the decision of Pradeep Shyamrao Kakirwar v. Dr. Seema Arun Mankar and Others [(2020) SCC OnLine Bom 799], the Applicant urged that though the photocopy was not an instrument, it did not come in way of stamp-duty being paid upon it pursuant to an impounding order of the court.
The Applicant cited the observations of the judgment in Intercontinental Hotels Group (supra), where the court held that until the larger bench decides the issue of existence of the arbitration agreement by virtue of reference made to the larger bench in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Others [(2021) 4 SCC 379], the court should ensure that the arbitrations are carried on, unless the issue before the court patently indicates existence of deadwood. In conclusion, it was Applicant’s case that an arbitrator must be appointed.
Contentions raised by Respondents:
The Respondent no. 1 contended that the obligation to make payment was equally of the Respondent no. 2, which however, had been ordered to be wound-up. According to the Respondent no. 1, there was no dispute that existed and the question of appointment of an arbitrator did not arise. The Respondent no. 1 submitted that terms of the Agreement were not followed since there was no attempt to explore good faith negotiations as contemplated under Clause 10(a) of the Agreement prior to arbitration being invoked. According to the Respondent no. 1, unless the negotiations were held and had failed, arbitration could not have been invoked. Furthermore, it was contended that the Respondent no. 2 was also required to nominate an arbitrator and not just Respondent no. 1. It was the Respondent no. 1’s case that an arbitration, if any, could only proceed as amongst the three parties. Hence, if the Applicant had a claim, it had to proceed against both the Respondents.
It was the Respondent no. 1’s case that an instrument could be stamped even if it was a copy and the original were unavailable. Per contra, the Respondent no. 1 submitted that the court should not have proceeded and appointed an arbitrator since the instrument was not sufficiently stamped. Therefore the copy was inadmissible in evidence. According to the Respondent no. 1, stamp-duty of a sum of Rs.100/- on the Agreement had been paid in Tamil Nadu. However, the stamp-paper purchased in Tamil Nadu would have been of no relevance when the agreement was executed in Mumbai. According to the Respondent no. 1, ad-valorem stamp duty was to be paid under the MSA and no stamp- duty having been paid after it was brought into Maharashtra, the Agreement was not stamped at all.
Observations of the BHC
The BHC noted that the Chapter III of the Arbitration Act dealing with the composition of the arbitral tribunal requires the court to act on behalf of a party to an arbitration agreement when the party fails to act as required under Section 11(5) and 11(6). Applying the above provisions to the case at hand, the BHC found that when the document was first executed, it should have been stamped with duty chargeable as per Section 2(d) of MSA. In the instant case therefore, it was suffice to say that when the agreement was first executed, it appeared to have been executed by the Respondent no. 1 , a Chennai based company, on a stamp paper purchased in its name from a vendor in Chennai and thereafter sent to the two other parties being the Applicant and Respondent no. 2 in Mumbai, therefore duty chargeable in Chennai would be applicable. No doubt, the Agreement mentioned that the agreement was executed in Mumbai, but that does not take away the possibility that first execution appears to be in Chennai. Thus, the BHC observed that, it would be upto the arbitral tribunal to consider this aspect of the case.
In the present case, on a fair reading of the provisions of the MSA, it was evident under definition 2(d) of the MSA that the Agreement was required to be stamped when it was first executed. The Agreement was first executed by the Respondent no. 1 presumably with appropriate stamp duty, since it was not the case of the Respondent no. 1 that it was under-stamped in Chennai. The BHC observed that as far as liability of duty on the instrument was concerned, Section 3 of the MSA provides that every instrument, which is not previously executed by any person and is executed in the State of Maharashtra on and after the commencement of the MSA, shall be chargeable with duty, as set out in Schedule-I of the MSA. The proviso to Section 3(b) of the MSA clarifies that a copy, whether true copy or not, including a facsimile image of the original instrument, on which duty is chargeable under the provisions of that section, shall also be chargeable with full stamp duty, as set out in Schedule-I of the MSA, if proper duty is not paid on such original instrument. Further, the BHC observed that, it was evident that under Section 7 of the MSA, unless it was proved that stamp duty had been paid on the Agreement, being the original instrument, duty chargeable under the MSA would have to be paid on a copy of the instrument.
In N.N. Global (supra), the Hon’ble Supreme Court had considered the validity of the arbitration agreement in an unstamped document holding that on the basis of the doctrine of separability, the arbitration agreement need not be stamped. The BHC noted the fact that N.N. Global (supra) also dealt with the Supreme Court’s decision in Hindustan Steel Limited v. Dilip Construction Co [(1969) 1 SCC 597], which observed that the stamp act is a fiscal measure enacted to secure revenue of the state on certain classes of instruments. It was not enacted to arm a litigant with a weapon of technicality to meet the case of his opponent. The judgment reiterated that the stringent provisions of the stamp act are in the interest of the ‘Revenue’ and once that object is secured in accordance with law, the party taking itsclaim on the instrument will not be defeated on the ground of the initial defect in the instrument. Thus, the BHC was unable to accept the Respondent no. 1’s contention that the Agreement was unstamped and that the BHC had a case of deadwood at hand.
The enquiry that the court was required to make was to ascertain whether an arbitration agreement existed between the parties and in that behalf, the Applicant was the claimant and the defendant was the Respondent no. 1. In any event, upon receipt of the Demand Notice, it was open to the Respondent no. 1 to state that the parties should engage in negotiations prior to acting on the invocation. However, the BHC found an averment in the Application that after the Demand Notice was served, neither the Respondent no. 1 nor the Respondent no. 2 had replied. The Respondents failed to establish that negotiations were proposed and they were denied by the Applicant. The BHC found no substance in the objection that under clause 10(a) of the Agreement, negotiations had not been held. In BHC’s view, under Clause 10(a) of the Agreement, if negotiations were not initiated by either party, reference to arbitration would not be bad.
The BHC was unable to accept the contention of the Respondent no. 1 that, the Respondents were required to appoint an arbitrator jointly and not solely by the Respondent no. 1. The BHC observed that, the provisions of the Agreement clearly stated that where there was a claimant and a defendant, the claimant would appoint one arbitrator and the defendant the other. Hence, merely because the Respondent no. 2 was in liquidation, did not mean that the instant application had to be rendered ineffective or deadwood. The BHC noted that, it was upto the Applicant to decide whether it had a claim against the liquidator or not and proceed in accordance with law. The Applicant had chosen not to proceed against the Respondent no. 2.
The BHC cited that in the case of InterContinental Hotels Group (supra), the Supreme Court had considered the jurisdiction of the court to adjudicate on existence of an agreement at the pre-appointment stage, and the fact that case by case, courts have restricted themselves in occupying the space provided for the arbitrators in line with party autonomy. Furthermore, the BHC observed that notwithstanding the decision in Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1], which clearly expounded that courts have limited jurisdiction under Section 11(6) of the Act, the narrow exception carved was that court could adjudicate to cut out the deadwood.
Decision of the Bombay High Court
Pending the decision of the Collector of Stamps, the BHC was of the view that the non-availability of the original Agreement at this stage would not prevent the BHC from appointing an arbitrator. The BHC noted that, it was possible that the document might still be lying undiscovered with either of one of the parties and could surface any day. The Agreement and its contents having been accepted and relied upon by both sides, there was no merit in contending that the original Agreement being absent, no reference could be made. Further, in BHC’s view, one need not await the decision of the claimant in the case at hand, as to whether or not to pay stamp-duty, as adjudicated. If this is not to be so, a large number of arbitration proceedings will be held up right at the inception, which is not desirable. It was left to the arbitral tribunal to decide admissibility of the Agreement. Mr. Rajendra M. Savant, Former Judge of the BHC, was appointed as sole arbitrator for and on behalf of the Respondent no. 1. The parties were asked to appear before the sole arbitrator on a date fixed by him.
The BHC has in this Judgement correctly observed that, arbitration is seen as a speedy remedy. But if applicants and respondents who may have counter-claims, have to await the fate of adjudication of documents for stamping and conclusion of the statutory challenge, the purpose of arbitration may be defeated. Further, the decision in InterContinental Hotels Group (supra) was cited, wherein it was held that, when in doubt, one must refer the matter to arbitration.
In BHC’s view, once parties are ad-idem on the fact that they have signed the writing containing an arbitration clause, the parties having acknowledged that an arbitration clause was embodied in the substantive contract, one cannot prevent the court from disposing an application under Section 11 of the Act.
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