Article: Verification of Arbitral Awards For Effective Enforcement: Technical Complexity

This Article is an attempt by the authors to analyze the technical position in law relating to enforcement of arbitral awards passed in the country where neither the legislature nor the courts have a clear mechanism to verify the payment of stamp duty or wherever registration of the award is mandatory, the same has been done by the parties. The author have analyzed a case of the Madras High Court wherein this difficulty was brought out and the mechanism in which the courts are to deal with the situation was laid down. The authors have found the judgment and the recommendations given by the court as erroneous and have supported the same with adequate reasoning.

The author have analyzed Section 3 of the Stamp Act read with Article 12 of the Schedule to the Indian Stamp Act, 1899 which lays down the stamp duty payable on ‘arbitration awards’ in the light of Section 17 of the Registration Act, 1908 which requires every non-testamentary document to be compulsorily registered.

The authors go on to discuss the judgment of the Madras High Court and the inherent flaws in the recommendations. The authors have relied on the suggestions made in the Law Commission Report on the matter to correct the mechanism of verification. Finally, they conclude that the corrective mechanism as per the Arbitration and Conciliation (Amendment) Act of 2003 is pending for the approval before the parliament.

Accordingly the authors have given their suggestions to deal with the situation more effectively. These suggestions are aimed at reducing the burden on the courts and arbitrators and simultaneously affording greater convenience to the parties for enforcement of the Award.

 

Introduction

Under Section 31 (5) of the new Arbitration and Conciliation Act, 1996, the arbitral tribunal shall communicate a ‘signed’ copy of the award to the parties. Thereafter, the parties are entitled to file applications for setting it aside, under Section 34 (1), or for its enforcement, under Section 36, by annexing the copy of the arbitral award.

In its 194th report, the Law Commission draws our attention to the problem that if only a copy of the award is to be filed along with the said applications under the new Act of 1996, the court will not be in a position to ascertain whether the original award is duly stamped, or where it is required to be compulsorily registered, whether the same has been complied with.

It is in this context that the Madras High Court, on 17th December, 2003, formulated an interim solution to solve the problem. In fact, it was in this case that the legislative machinery was set in motion as per the recommendations of the Law Commission.

The Law Commission did not find this interim solution satisfactory as it could cause serious hardship to the parties where the stamp duty would be of a heavy amount. Moreover, this solution does not solve the problem pertaining to registration.

Hence, the first part of this Article talks about the various aspects and the required form of the arbitral award for its enforcement under the Arbitration and Conciliation Act, 1996. Thereafter, the authors discuss the obligation on the courts to verify whether the stamp duty is duly paid or where required, whether it is duly registered or not. Then the third part contains the discussion on mechanism for the courts to verify as suggested by the Madras High Court and the inherent flaws in the solution. Lastly, the authors discuss the Law Commission Report and the recommendations in the report. Finally, the authors conclude that recommendation number (5) is the most suitable solution out of the proposed and that an amendment shall be brought to that effect in the Arbitration and Conciliation Act 1996.

Form And Requirement Of Arbitral Award Under New Arbitration Act

Arbitration comes into being as a result of an arbitration agreement. Parties submit their dispute to the Arbitral Tribunal, which passes a binding award with reasons. Hence, an award is the judgment by the arbitrator on the merits of the case. The tribunal can also give an interim award under Section 17 of the Arbitration and Conciliation Act, 1996[1] and the definition of Arbitral Award includes interim award.[2]

However, Indian law does not impose any legal requirement as to the form of a valid arbitral award. The only requirement prescribed by the legislation is that it should be in writing and should be signed by the sole arbitrator or by a majority of the members of the arbitral tribunal as the case may be. Apart from this, there are other basic requirements as regards the content of the award like the name of the parties, date and place of the award declared, signatures of the arbitrators, certainty of the award, etc.

The procedure for enforcing foreign awards is prescribed in Part II of the new Act and as it incorporates the Geneva Convention of 1927 and the New York Convention of 1958, the parties seeking to enforce a foreign award must produce the original award or a duly authenticated copy thereof. Hence, the courts have been placed in position to examine all the documents to verify the form of the award for its enforcement. Hence, the scope of this article is limited to enforcement of domestic arbitral awards.

The arbitrator is required to give the signed copy of the award to the parties.[3]  After receiving the signed copy of the award, the concerned party has to apply to the Court to execute the award and obtain relief. The court will issue notice to the judgment debtor on the basis of the signed copy of the arbitral award.

An award can be enforced as such because it is now equated with a decree of the Court.  A party who wishes to enforce the award can file it before the Court and it will be treated as a decree unless set aside in an application under Section 34.[4]

However, under Stamp Act and Registration Act, there are some  prerequisites for any award to be enforced.

Under Section 3 of the Stamp Act, every instrument mentioned in the schedule is chargeable with duty of the amount indicated therein. Article 12 of the Schedule to the Indian Stamp Act, 1899 contains a specific provision mentioning the stamp duty payable on ‘arbitration awards’.

Also, every non-testamentary document is to be mandatorily registered under Section 17 of the Registration Act, 1908. An award falling within Section 17 (1) (b) of the Registration Act, 1908has to be registered. Section 17 (1) (b) makes it mandatory for non-testamentary instruments to be registered which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, to or in immovable property. Therefore, after an arbitral award is passed by the arbitral tribunal, the question arises whether the original arbitral award passed by the arbitral tribunal under the Arbitration and Conciliation Act, 1996 has been duly stamped or duly registered and which authority to ensure compliance of the same.

Courts Duty To Verify Under Stamp Act And Registration Act

The structure of the Government as defined in our Constitution is trifurcated as the Executive, the Legislature and the Judiciary. Collection of Revenue is primarily the function of the Executive. The State actors[5] have to help the executive in ensuring that revenue is duly paid by an individual, which will assist the state machinery to finance its activities. The Courts forming the judiciary   have the duty to ensure the collection of revenue. Hence, the courts are duty bound to check whether an individual has duly paid the revenue that he is entitle to pay through stamp duty under the Stamp Act, 1899. The same applies where any instrument is required to be compulsorily registered under the Registration Act, 1908.

Section 2(14) of the Stamp Act defines the word “Instrument” which covers every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Therefore, it cannot include those documents by which no such right or liability arises. Further, Section 3 of the Stamp Act states that every instrument mentioned in the schedule is chargeable with duty of the amount indicated therein. Article 12 of the Schedule to the Indian Stamp Act, 1899 contains a specific provision mentioning the stamp duty payable on ‘arbitration awards’.

The courts have the right to impound any instrument produced before it for execution, if not duly stamped, for which the courts shall have the power to examine such instrument.[6] Hence, the Courts draw their right to examine every instrument produced before it during execution under Section 33 (2) of the Stamp Act, 1899[7].

In addition to the above, Section 35 of the Indian Stamp Act, 1899 directs that documents which are required to be stamped, are not stamped, or are inadequately stamped, they will not be admissible in evidence ‘for any purpose’.

However, it is the courts that are entitled to record evidence from the documents presented, and hence it is the duty of the courts to check the admissibility of the documents presented before it under Section 35 of the Stamp Act, 1899.

It is undisputed that an arbitral award given by the arbitrator is an instrument as defined under Section 2(14) of the Stamp Act, which shall be executed[8] and stamped.[9]

Also, every non-testamentary document is required to be compulsorily registered under Section 17 of the Registration Act, 1908. An award is required to be registered if it falls within Section 17(1) (b) of the Registration Act, 1908 and in the circumstances if it is not registered, it is not a valid document and cannot affect immovable property.[10]

Accordingly it was held by the Full Bench of Andhra Pradesh High Court in M. Venkataratnam v. M. Chelamayya[11] that a binding arbitral award passed by an Arbitral tribunal, if affecting immovable property, must be registered in the manner mentioned in Section 17(1) (b) of the Registration Act, otherwise it will be invalid.

Hence, in view of the provisions of Section 35 of the Stamp Act, 1899, the award which requires to be stamped is not stamped or is inadequately stamped, is inadmissible for “all purposes” and an award which requires to be registered, if it falls within Section 17(1) (b) of the Registration Act, 1908 and if it is not registered, is not a valid document and cannot be treated as affecting immovable property.

The authors further discuss the Madras High Court’s decision wherein the mechanism to be adopted by the courts to determine whether the Arbitral award is duly stamped or duly registered was laid down. This issue arose because in the Arbitration and Conciliation Act, 1996 there is no mention of the mechanism to ensure compliance of the same. The Division Bench of the court made certain recommendations and further referred the matter to the Law Commission.

 

Mechanism Suggested By The Madras High Court

The Madras High court faced the problem of mechanism and hence, it suo moto took the matter of Verification of Stamp Duties and Registration of Arbitral Awards in the Judgment by the Division Bench of the Madras High Court[12] and asked the Law Commission for its opinion on the matter and that on  a proposed legislative amendment.

The Madras High Court, in the above Judgment, while observing that a legislative amendment is necessary, formulated an interim working solution under which the applicant could be directed by the Registry of the Court to file fresh stamp papers in the Court of the required value or to deposit the money-value of the required stamp duty, along with the application under Section 34(1) or Section 36 of the Arbitration and Conciliation Act 1996 by annexing a copy of the arbitral award, with a right to obtain refund thereof, in case the original is thereafter found by the Court to have been duly stamped.

The Court held that in view of Section 31 (5), the copy of the award signed by the arbitrators could be treated as a counterpart as done in Jayarama Iyer v. Ramanatha Iyer[13] within Section 62 of the Evidence Act, 1872 and that the copy does not fall within Section 63 of that Act and hence a copy is chargeable to stamp duty under Article 25 of Schedule I of the Stamp Act. However, it is upto the Court to ask for the original to be produced in such a contingency unless the fact of payment of such duty has been endorsed therein.

The Court appreciated the difficulty caused to an applicant for stay of the original award on the Court insisting for the production of the original award not being available with the applicant especially when irreparable loss may be caused to him by its enforcement. Though Section 36 of 1996 Act states that enforcement of the award is not to be permitted if an application for setting aside the award is pending, it is possible for the opposite party to contend that there is no valid application under Section 34 as the signed copy of the award does not disclose that the original award bears the required stamp or that it is duly registered. Likewise, the execution of the award may be objected by the other party relying on non-compliance of the requirement of production of the original award or proof of the original being stamped or registered.

In para. 25 of the judgment, the Madras High Court proposed the following amendment to Section 31 (1) of 1996 Act to ascertain whether the stamp duty has been collected or not

The present provision in Section 31 (1) reads:

“31 (1) An arbitral award shall be made in writing and shall be signed by the members of the arbitral tribunal.”

The proposal by the Madras High Court is to substitute the following sub-section for the present Section31 (1). The following proposal was forwarded by the Court:

“31 (1) An arbitral award shall be made in writing, duly stamped and shall be signed by the members of the arbitral tribunal.”

The Court specifically observed that the Law Commission may consider the above proposal and make appropriate recommendations.

By the subsequent second order of Madras High Court order dated 30th January, 2004, the Court stated that the earlier directions given by them for deposit of the stamp duty (i.e. filing of stamp papers and later refunding the same) could cause hardship and result in problems in granting refund. This problem arises because there is a separate procedure under the Stamp Act, 1899 in Section 54 for seeking refund . The High Court, therefore, slightly modified its earlier order dated 17th December, 2003 to the following effect, permitting cash deposit.

The author opines that the court by suggesting such mechanism is overburdening the judiciary. Also, this recommendation takes away the benefit of quick adjudication afforded by arbitration by introducing time consuming procedures.

Flaws In Madras High Court’s Recommendations

There are certain inherent flaws in the Madras High court’s judgment as also observed by the Law Commission.

First, the proposal of the Madras High Court deals only with the question whether the original award is ‘duly stamped’ and not whether the award is ‘duly registered’.

Second, the view of the Madras High Court’s recommendation to deposit the requisite stamp papers or payment of cash equivalent of the stamp duty payable on the original award, serious hardship would be caused in several cases. If the parties had already provided the necessary stamp papers to the arbitrator for engrossing the award on stamp paper, to ask them to deposit fresh stamp papers or cash equivalent would, in our view, amount to an unnecessary burden.

For example, in a case where an award was passed in Delhi in a claim of Rs 500 crores, the parties deposited stamp papers worth Rs 50 lakhs and the award was indeed engrossed on such papers. If in such a case, the original award is retained with the arbitrators and one of the parties files an application under Section 34 or Section 36 of 1996 Act, to direct that party to again deposit cash of Rs 50 lakhs would be a great hardship. Hence, this interim working solution may, in a large number of cases, be not a satisfactory solution.

Mechanism To Verify: Recommendations By Law Commission

On reference by the Madras High Court, the Law Commission examined several alternative solutions and submitted the 194th report to Sri. H.R. Bhardwaj, then Minister for Law & Justice on 7th June, 2005. The Commission found solutions (3) and (5) (as suggested by the Commission) of the report as acceptable.

Solution (3) proposes an amendment to be brought to the 1996 Act laying down that the original award should be filed in the Court within whose jurisdiction the award is passed, i.e. just as it was being done under the 1940 Act. The advantage here is that the Court will then have in its possession, the original award itself and it can verify whether or not the requirements of stamp duty and registration have been complied with by the arbitrators.

However, in our view, this is not the proper solution since the Arbitrators can pass only one award and there can be only one copy of the original award. Now which party shall keep the original award copy is the question. Also, if the Arbitrators submit the original arbitral award to the court within whose jurisdiction the award is passed, then what if the parties has to enforce this award in some other  jurisdiction? This procedure will create a lot of technical difficulty and delay in the enforcement of awards and in case some party needs an immediate enforcement of the award. Generally arbitrators enquire as to how long they should keep the original award with them, particularly, if no party files an application under Section 34 or Section 36? However, submitting the same with the Court would lead to unnecessary piling of the records. Hence, the author opines that this solution is not appropriate for solving the problem and that a mechanism is required that is neither a burden on the Court nor on the Arbitrators.

Solution (5) of the Law Commission Report provides an alternative solution which requires amendment of Section 31(1) and Section 31(5) thereby making it the responsibility of the arbitral tribunal to get the original arbitral award duly stamped and if the award requires compulsory registration under Section 17(1) (b) of the Registration Act, 1908, to have it duly registered and to send photocopies of such original award to the parties..

Further, the word ‘duly stamped’ can create some doubts and it will be difficult for the Court in which the copy is filed by the parties with such an endorsement, to find out if the stamp papers on which the original is engrossed are sufficient in value as prescribed by law. Therefore, the arbitral tribunal should be required to specify in the endorsement, the value of the stamp duty paid on the original award so that the courts can initiate proceedings under Section 40 and Section 42 of the Indian Stamp Act, 1899. Also, under Section 35 of the Indian Stamp Act, 1899, the award to be admissible as evidential decree, needs to be duly stamped.

The Commission also voices its consent to solution (5), which would require the arbitral tribunal to make an endorsement on the photocopy of the award (which is sent to the parties) as to whether the original award is duly stamped (and specifying the value of the stamp duty paid) and specifying whether the original award is duly registered (where it requires compulsory registration).

Hence the suitable amendment to the Arbitration and Conciliation Act 1996 is Section 31(1) of the new Act shall be replaced by the following:

“(1) An arbitral award shall be made in writing and shall be signed by the members of the arbitral tribunal after having the award duly stamped and having it duly registered, where it requires compulsory registration.” and

Section 31(5) of the new Act shall be replaced by the following:

“(5) After the arbitral award is made, a signed photocopy thereof shall be delivered to each party with an endorsement signed by the members of the arbitral tribunal that the original award is duly stamped and mentioning the value of the stamp duty paid, and where it compulsorily requires registration, that it has been duly registered.”

Conclusion

Hence we reach the conclusion that the most suitable solution to the problem is to get the arbitral award endorsed by the tribunal itself so that the courts can verify the compliances required under the Stamp Act and the Registration Act. This procedure does not cause any serious hardship to the arbitrators or the parties. As the new Arbitration and Conciliation (Amendment) Bill, 2003 remains pending before the Standing Committee of Parliament; the Law Commission has recommended this solution to be incorporated into the Amendment Bill.

Suggestions

The burden of the Arbitrators may be further reduced by shifting the responsibility of endorsement to the Collector. Since it is the duty of the Collector to see that the revenue is collected for all the services provided by the governmental machinery, he shall be under the duty to acknowledge the receipt of the revenue and endorse the original award thereby.

It is suggested that the Collector shall endorse along with the original award, the photocopy of the award, which has to be delivered to the parties for the enforcement of the award. Hereby, the courts will be certain of the payment of stamp duty or registration of award wherever required since the endorsement is directly from the concerned authority for the revenue collection.

[1] Interim measures ordered by arbitral tribunal.

[2] S. 2 (1) (c) of Arbitration and Conciliation Act, 1996.

[3] S. 31(5), Arbitration and Conciliation Act, 1996.

[4] S. 34 of the Arbitration and Conciliation Act, 1996 provides for an application to the Court for setting aside an award.

[5] Duty is cast upon various “Public Offices”, through giving powers to “Officer incharge of such Public Offices”. Under S. 33 (3) of the Stamp Act, the State Government determines as to what offices shall be deemed to be public offices. Courts are considered as “public office” under Clause 17, S. 2 of Civil Procedure Code, 1908 as stated in the judgment of  M/s. Deepak Corporation v. Pushpa Prahlad Nanderjog, AIR 1994 Bom 337.

[6] S. 33 (1) of Stamp Act, 1899: Examination and impounding of instruments:-

    (1) Every person having by law or consent of parties authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance in his functions shall, if it appears to him that such instrument is not duly stamped, impound the same.

[7]S. 33 (2) of Stamp Act, 1899: For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain whether it is stamped with a stamp of the value and description required by the law in force in India when such instrument was executed or first executed…

[8] The term ‘executed’ of ‘execution’ as defined in S. 2 (12) of the Stamp Act which means “signed” and “signature” Thus, for the purpose of stamp duty, the arbitral award shall be an instrument executed by the arbitrator.

[9] M/s. Wilson & Company Private Limited etc. v. K.S. Lokavinayagam, AIR 1992 Mad 100 (Decided by Lakshmanan, J).

[10] M. Chelamayya v. M. Venkataratnam, AIR 1972 SC 1121.

[11] AIR 1967 AP 257 (Full Bench).

[12] O.P.D. 27597/02 dated 17.12.2003 (modified on 30.1.2004).

[13] (1976) 1 MLJ 135.

 

Author:

Dr. Vaibhav Goel Bhartiya, Dean & Principal, Subharti Institute of Law

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