Arbitration weekly Update – Intercontinental Hotels Group (India) Private Limited & Anr. v. Waterline Hotels Private Limited

• Intercontinental Hotels Group (India) Private Limited (Petitioner No.1), Intercontinental Hotels Group (Asia-Pacific) Pvt Ltd. (Petitioner No. 2) (collectively referred to as the Petitioners) and the Respondent entered into a Hotel Management Agreement (HMA) to run and operate a hotel. The HMA inter alia provided the rights and obligations of the parties for a ten-year period and provided for subsequent renewals. Additionally, the HMA provided for payments to be made by the Respondent to the Petitioners towards various fees including ‘investment management fee’, ‘technology service fee’. The Petitioners contended that the Respondent failed to fulfil the said payment obligations. Further, the Respondent addressed an email dated October 12, 2018 (Notice) and terminated the HMA. In response to the Notice, the Petitioners stated that unilateral termination of the HMA was invalid.
• Aggrieved by the Notice, the Petitioners invoked section 9 of the Arbitration and Conciliation Act, 1996 (Act) and sought interim relief before the High Court of Karnataka (High Court). By an ad-interim order dated October 23, 2018, the High Court directed the Respondent not to evict the Petitioners from the Hotel without due process of law until further orders (Order). The Petitioners alleged that the Respondent failed to comply with the Order. Subsequently, the Petitioners invoked the arbitration clause under the HMA and issued a notice of arbitration dated January 21, 2019 (Arbitration Notice). In response to the Arbitration Notice, the Respondent allegedly stated that the Arbitration Notice was not a notice of arbitration and did not merit a response.
• The arbitration clause inter alia provided the procedure for constitution of the tribunal. Pursuant to the response received from the Respondent, the Petitioners requested Singapore International Arbitration Centre to suggest names of sole arbitrators or invoke the mechanism of appointing a three-member tribunal, as per the HMA, in the event the Respondent did not agree to the name of a sole arbitrator. Although SIAC issued a notice dated February 15, 2019 to the Respondent for the appointment of a suitable arbitrator, in response, the Respondent stated the Arbitration Notice was defective and not curable. Aggrieved by the Respondent’s refusal to appoint an arbitrator, the Petitioners filed the present petition under sections 11(6) read with 11(12)(a) of the Act to constitute the Tribunal, before the Supreme Court (Section 11 Proceedings).

• In the Section 11 Proceedings, the Respondent filed a counter-affidavit dated July 24, 2019 and contended that the HMA which contained the arbitration agreement was an unstamped document. The Respondent submitted that, in light of Garware Wall Ropes[2], an agreement which is not duly stamped cannot be relied on or acted upon unless the unstamped document is impounded, and the applicable stamp duty/penalty is assessed and paid. On the other hand, the Petitioners submitted that pursuant to the warranty clause in the HMA, the Respondent was obligated to ensure that the agreement would be legally valid in India.
• The Petitioners filed an application for permission to file additional documents on June 23, 2020 (Application). By the said Application, the Petitioners inter alia (i) stated that they had taken the requisite steps to pay the applicable stamp duty along with the penalties that may be accruable under Karnataka Stamp Act, 1957 (Karnataka Stamp Act) on a without prejudice basis; (ii) pointed out that the HMA was a services agreement, which would be covered under the residuary provisions, e., Article 5(j) of the Karnataka Stamp Act; and (iii) requested the Supreme Court to appoint an arbitrator.
• Objecting to the Application, the Respondent, submitted that by a letter dated February 28, 2020, the Petitioners had previously stated that the HMA was classified as a “bond”. The Respondent further contended that (i) the Petitioners had not been granted permission to file additional stamp papers under Article 5(j) of the Karnataka Stamp Act; (ii) the Petitioners have not paid the proper stamp duty and penalty under the Karnataka Stamp Act; and (iii) the Petitioners could not have self-adjudicated the proper stamp duty and penalty payable.

• The issue which arose for consideration before the Supreme Court was whether the issue of insufficient stamping indicated an unworkable arbitration agreement under section 11(6) of the Act.

Reiterated the view in Vidya Drolia that ‘When in doubt, do refer’

• The Supreme Court concurred that Vidya Drolia^[3] established that (i) courts have a very limited jurisdiction under section 11(6) of the Act; (ii) courts are to take a ‘prima facie’ view on issues relating to the existence of arbitration agreements; (iii) issues of arbitrability/validity were usually to be adjudicated upon by arbitrators, with the only narrow exception carved out there being that courts could adjudicate to ‘cut the deadwood’; and (iv) the ‘watch word’ for the courts is ‘when in doubt, do refer’.

The Supreme Court should ensure that arbitrations are carried on unless there is ‘deadwood’

• The Supreme Court examined Vidya Drolia’s affirmation of Garware Wall Ropes^[4], where it had been held that an arbitration agreement would not “exist” until the arbitration agreement had been duly stamped. In NN Mercantile^[5], the Supreme Court took a different view from its coordinate bench in Vidya Drolia^[6] and inter alia, held that (a) the doctrine of separability would override the concern under respective stamp acts; (b) any concerns of non-stamping or under stamping would not affect the validity of the arbitration agreement. [For a further read, please click here for ELP’s earlier updates on NN Global Mercantile and Vidya Drolia.]
• The Supreme Court held that while there is a need for a larger bench to settle the jurisprudence, considering the “time sensitive” nature of arbitration matters, all matters at pre-appointment stage could not be left hanging until the larger bench settled the issue. In view of the same, Supreme Court held that until the larger bench decided on the interplay between sections 11(6) and 16 of the Act, the Supreme Court should ensure that arbitrations are carried on unless the issue before the Supreme Court patently indicates the existence of ‘deadwood’.

The warranty provided by the Respondent in the HMA give rise to deeper issues which can be resolved at a later stage. Therefore, the issue of insufficient stamping is not ‘deadwood’. 

• The Supreme Court considered the Petitioners’ contention that the warranty clause in the HMA provided that the Respondent was obligated to ensure that the agreement would be legally valid in India. The Supreme Court culled out three issues which could be adjudicated at a later stage, e.: (a) whether the Respondent is estopped from raising the contention of unenforceability of the HMA; (b) whether the HMA is insufficiently or incorrectly stamped; and (c) the extent to which the Petitioners could rely on the Respondent’s warranty. The Supreme Court held that the foregoing aspects demonstrated that the issue of insufficient stamping was not a matter of ‘deadwood’.

The Supreme Court did not delve into the adequacy of the stamp duty paid. 

• The Supreme Court observed that to determine whether adequate stamp duty had been paid in terms of the Karnataka Stamp Act, the court would need to examine (i) the nature of the substantive agreement, (ii) the nature of the arbitration agreement; and (iii) whether a separate stamp fee is payable.
• Referring to Vidya Drolia, the Supreme Court held that the issue of ‘existence’ and/or ‘validity’ of the arbitration clause, would not be needed to be looked into herein, as “payment of stamp duty, sufficient or otherwise, has taken place”.
• The Supreme Court concluded that “it was clear that stamp duty had been paid. Whether it was insufficient or appropriate is a question to be answered at a later stage as the Court could not review this issue under section 11(6). If it was a question of complete non stamping, then the Court, might have had an occasion to examine the concern raised in N. N. Global, however, this case, is not one such scenario.”

In view of the above, the Supreme Court referred the matter to arbitration and appointed a sole arbitrator to adjudicate the issues.

Scope of intervention under Section 11(6) of the Act

The Supreme Court held that the question regarding the insufficiency of the stamp duty did not have to be considered under section 11(6). The fact that stamp duty was paid, irrespective of whether the duty was insufficient or inadequate, weighed in on the court. Therefore, once stamp duty is paid on the contract, irrespective of whether the stamp duty is proper or improper, the same shall not be an issue for consideration under section 11(6) of the Act.

Different approach from N. N. Global Mercantile

In N.N. Global Mercantile, the Supreme Court held that the phrase “duly stamped” “implies that the instrument must be stamped with the requisite amount of duty determined in accordance with the Schedule to the Act^[7]. If it is found that the instrument is not stamped, or inadequately stamped, it is mandated by law to impound the instrument, and deal with it in accordance with the provisions of the Stamp Act.”^[8] Then, the Supreme Court observed three scenarios under which the authority could exercise the power of impounding the instrument albeit under the Maharashtra Stamp Act. One of the scenarios being – the High Court, or the Supreme Court, as the case may be, while exercising jurisdiction under Section 11, would “impound the substantive contract which is either unstamped or inadequately stamped, and direct the parties to cure the defect before the arbitrator/tribunal can adjudicate upon the contract.”  ^[9]

Taking a different path from this view, in the present case, the Supreme Court did not examine the nature of the contract and consequently, did not consider whether the HMA was duly stamped. Further, in exercise of its jurisdiction under section 11, the apex court did not impound the substantive contract which was purportedly inadequately stamped nor did it pass any directions to verify the assessment of stamp duty. The payment of stamp duty was sufficient to satisfy the Supreme Court for the purpose of section 11(6) of the Act, irrespective of whether the stamp duty was a proper/ appropriate assessment.

The apex court acknowledged that issues of substantive rights and obligations under the HMA would require adjudication at a later stage. However, it did not clarify whether the adjudication of rights and obligations of the main contract could proceed before complying with the mandatory provisions of the relevant stamp act. On the other hand, in N.N. Global Mercantile, the Supreme Court held that “there is no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantive contract. The adjudication of the rights and obligations under the work order or the substantive commercial contract would, however, not proceed before complying with the mandatory provisions of the Stamp Act.” ^[10]

The Supreme Court, in the present judgement, has observed that it is only where a document is completely unstamped that courts might have an occasion to examine the concerns raised in N.N. Global Mercantile and that the present case was not one such scenario, since the Petitioners had paid an amount towards stamp duty. The Supreme Court therefore distinguishes the applicability of N.N. Global Mercantile by seemingly drawing a distinction between complete non-payment of stamp duty and part payment of stamp duty (even if insufficient). However, the consequences envisaged in N.N. Global Mercantile are the same irrespective of whether there was complete non-payment of stamp duty or inadequate payment of stamp duty i.e. as mentioned above, the findings were with respect to an instrument/ contract that is unstamped “or inadequately stamped”. Hence, N.N Global Mercantile did not contemplate impounding of instruments solely in cases where there is a question of complete non-stamping.

Further, although in the present judgement the Supreme Court declined to examine the nature of the substantive contract to determine the adequacy of the duty paid, it would be worthwhile to note the Supreme Court’s observations in Black Pearl Hotels^[11]. In Black Pearl Hotels the nature of the substantive agreement containing an arbitration clause was disputed. The apex court in that matter held that the determination of the nature of an instrument is a judicial function and ought to be determined by the court at the stage of appointment of an arbitrator under section 11 of the Act. There was therefore, a precedent that allowed courts to pass a ruling on the nature of a document in proceedings under section 11 of the Act, that was available to this Court.

The way forward in similar matters where allegations of inadequate payment of stamp duty are levelled in proceedings under Section 11 of the Act is likely to change.  In the present judgement, the Supreme Court has held that the question of adequacy of stamp duty is not be delved into at the stage of proceedings under section 11 and consequently left it to be determined at a later stage without passing any directions as to the impoundment of the underlying contract. In doing so, has the Supreme Court opened doors for applicants in pending applications under section 11 (6) of the Act?  In similar situations where the arbitration agreement is in a contract, applicants may seek constitution of the tribunal once payment of any amount of stamp duty is made (irrespective of whether the stamp duty is proper/adequate).

The present judgement has been delivered by a bench that is equal in strength to N.N. Global Mercantile and Vidya Drolia. Therefore, the larger bench constituted pursuant to the reference made in N.N. Global Mercantile ought to clarify the different views adopted in these three judgements and the road ahead.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ria Dalwani, Principal Associate – Email – riadalwani@elp-in.com

[1] Judgement dated 25 January 2022 in Arbitration Petition (Civil) No. 12 of 2019
[2] Garware Wall Ropes v. Coastal Marine Constructions & Engineering Limited (2019) 9 SCC 209
[3] Vidya Drolia and Others v. Durga Trading Corporation, 2020 SCC OnLine SC 1018.
[4] Garware Wall Ropes v. Coastal Marine Constructions & Engineering Limited (2019) 9 SCC 209
[5] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd and Ors., 2021 SCC OnLine SC 13;
[6] Vidya Drolia and Others v. Durga Trading Corporation, 2020 SCC OnLine SC 1018;Vidya Drolia (at paragraph 92) had affirmed paragraphs 22 and 29 of Garware Wall Ropes, which in turn had followed the observations made in SMS Tea Estates. However, in NN Global Mercantile, the Supreme Court overruled SMS Tea Estates. The correctness of the said paragraph in Vidya Drolia was therefore doubted in NN Mercantile.
[7] Black Pearl Hotels (P) Ltd. v. Planet M. Retail Ltd., (2017) 4 SCC 498.
[8] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd and Ors., 2021 SCC OnLine SC 13 [Para 10.5]
[9] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd and Ors., 2021 SCC OnLine SC 13 [Para 36.2]
[10] N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd and Ors., 2021 SCC OnLine SC 13 [Para 26]
[11] Black Pearl Hotels (P) Ltd. v. Planet M. Retail Ltd., (2017) 4 SCC 498.