In a recent case titled “Parsvanath Developers Ltd. (PDL) versus Future Retail Limited (FRL)”, decided on April 12, 2022, the Hon’ble Delhi High Court while dealing with a petition filed under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) seeking reference of the parties to arbitration, has held that the disputes as to whether the contract containing the arbitration clause is sufficiently stamped or not, or whether the claims made are barred by limitation, are contentious issues which can be decided by arbitrators and cannot be decided by the Court in a petition filed under Section 11 of A&C Act. 

As per the facts of the case, PDL and FRL are companies incorporated under the provisions of the Companies Act, 1956, engaged in the business of developing land and constructing residential and commercial projects in India and in the business of running large format stores like ‘Big Bazaar’, ‘Food Bazaar’, ‘Fashion Bazaar’ and ‘Central’ in some of the major cities in India, respectively.

On September 06, 2004, PDL entered into an agreement with the Delhi Metro Rail Corporation Ltd, whereby a specified area on the ground floor and first floor within the Station Box at Inderlok Metro Railway Station, Delhi was allocated to PDL for constructing a shopping complex under the name and style of ‘Parsvnath Mall’ and was given the right to sub-license the use of the facility for the period of the agreement. 

Thereafter, on June 29, 2005, PDL and FRL [formerly known as Pantaloon Retail (India) Limited] entered into a Sub-License Agreement (hereafter ‘the Contract’), for two units located at the Ground and First floors at Parsvnath Mall, for running a departmental store under the name of ‘Big Bazaar’.

During the subsistence of the Contract, in the year 2007, the Government of India enacted the Finance Act, 2007 by virtue of which the service of renting/licensing immovable properties for commercial use was included as a taxable service and brought under the nest of service tax with effect from June 01, 2007. Consequently, the licensing of the premises to FRL under the Contract was a taxable service. PDL claimed that FRL was liable to bear the additional burden of service tax; however, FRL failed to reimburse the service tax paid by PDL despite various demand letters. In response to demand notice by PDL, FRL disputed the payment of service tax and stated that no stipulation was contained in the Contract for payment of service tax which led to PDL invoking the arbitration clause contained in the Contract by nominating an arbitrator and reminding FRL to nominate its arbitrator within a period of seven days of the notice. On failure of FRL to do so, PDL filed the instant petition before Hon’ble Delhi High Court. 

Before the Hon’ble Delhi High Court, FRL opposed the said petition, essentially, on two grounds. First, the Contract was insufficiently stamped and therefore, the same could not be looked at that stage. It was contended that since the arbitration clause was incorporated as a part of the Contract, the recourse to courts in respect of the said clause was currently unavailable. According to FRL, the Contract was required to be impounded and sent for adjudication of the stamp duty and the penalty payable thereon. In addition, it was submitted that the Contract also required to be compulsorily registered; and, since it was an unregistered document, the same would not affect the rights and obligations of the parties. Second, it was contended that the disputes raised by PDL are, ex facie, barred by the Limitation Act, 1963.

The Hon’ble High Court observed that the question whether the petition for appointment of an arbitrator is required to be rejected on the ground that the main agreement is insufficiently stamped, is a vexed question. The Hon’ble High Court observed that in the judgment of N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Limited & Ors.: (2021) 4 SCC 379, the Supreme Court had observed that non-payment or deficiency of stamp duty did not invalidate the main contract. The Hon’ble High Court had also referred the decision in the case of Garware Wall Ropes Limited vs. Coastal Marine Constructions & Engineering Limited: (2019) 9 SCC 209 for reconsideration to a Constitution Bench.

The Hon’ble High Court held that an arbitration agreement, even though embodied in a main agreement, is a separate agreement. Invalidation of the main agreement does not necessarily invalidate the arbitration agreement. An arbitration agreement is not required to be compulsorily registered. Thus, following the doctrine of severability, denying the benefit of an arbitration agreement to a party on the ground of any deficiency in the main agreement, may not be apposite.

The Hon’ble High Court further observed that in the present case, there was a dispute whether the Contract is sufficiently stamped. According to PDL, it was in the nature of leave and license and did not create any interest in respect of the premises in question, in favour of FRL. Clearly, this was a contentious issue and was required to be adjudicated by the Arbitral Tribunal. Similarly, the question whether the claims are barred by limitation was also required to be examined by the Arbitral Tribunal considering that the question whether a claim is barred by limitation is a mixed question of fact and law.

The Hon’ble High Court observed that at a pre-reference stage, the courts would refrain from carrying out any adjudicatory exercise in respect of any contentious issue, as the agreement between the parties and the intent of A&C Act that all disputes must be adjudicated by an arbitral tribunal, is required to be implemented. Thus, the Arbitral Tribunal could deal with limitation under Section 16 of the A&C Act and if the tribunal finds that the claim is a dead one, or that the claim was barred by limitation, the adjudication of these issues would be on the merits of the claim. Under sub-section (5) of Section 16 of A&C Act, a tribunal has the obligation to decide the plea; and if it rejects the plea, the arbitral proceedings would continue, and the tribunal would make the award. 

In view of the above, the Court allowed the petition and appointed two arbitrators with direction to such arbitrators to jointly appoint the third Arbitrator for constitution of the Arbitral Tribunal.

Anhad Law’s Perspective 

The aforesaid is a significant order as the issue of validity of arbitration agreement on account of non-payment or deficiency of stamp duty has been a contentious issue. Further, the issue of liability to pay service tax on account of subsequent change of law is still unsettled. 

The Hon’ble High Court clarified that post amendment brought about in 2015 in A&C Act vide Section 11(6A) of A&C Act, all that the courts now need to see at the stage of relegating parties to arbitration or at the stage of appointment of arbitrator(s) is whether an arbitration agreement exists—nothing more, nothing less. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16 of A&C Act, which enshrines the kompetenz-kompetenz principle.

The said judgment is in line with the recent judgments passed by the Hon’ble Supreme Court of India including Intercontinental Hotel Groups & Anr. Vs. Waterline Hotels Pvt. Ltd. 3 (2022) SCC Online SC 83 wherein in a similar case of appointment of arbitrator and unstamped agreement, it was held that the scope of a court to examine the prima-facie validity of an arbitration agreement includes only:

(i) Whether the arbitration agreement was in writing?

(ii) Whether the arbitration agreement was contained in exchange for letters, telecommunication, etc.?

(iii)  Whether the core contractual ingredients qua the arbitration agreement were fulfilled? 

(iv) Whether the subject matter of dispute is arbitrable? 

The only narrow exception carved out was that the courts could adjudicate to ‘cut the deadwood’. 

The standard for rejecting a reference, on the ground that the disputes are not arbitrable or the agreement is invalid, is that of ‘beyond any doubt’. 

Therefore, it is now settled that the legislative policy and purpose of A&C Act is essentially to minimize a court’s intervention at the stage of appointment of an arbitrator and the  subject   matter   arbitrability cannot be decided at the stage of Sections 8 or 11 of the  A&C Act,   unless   it’s   a   clear   case   of deadwood. It is most likely that  undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. 

–Manishi Pathak, Founding Partner and Ranjan Jha, Partner 

Disclaimer: The contents of the above publication are based on understanding of applicable laws and updates in law, within the knowledge of authors. Readers should take steps to ascertain the current developments given the everyday changes that may be occurring in India on internationally on the subject covered hereinabove. These are personal views of authors and do not constitute a legal opinion, analysis or interpretation. This is an initiative to share developments in the world of law or as may be relevant for a reader. No reader should act on the basis of any statement made above without seeking professional and up-to-date legal advice.