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  • Ajar Rab and Shubham Joshi

Stamping Arbitral Awards: An Illogical Fallacy?

– Ajar Rab and Shubham Joshi†

India aims to be an arbitration hub, and businesses are opting for arbitration as the preferred mode of dispute resolution as arbitration offers quick, cost effective and efficient dispute resolution. One of the reasons parties opt for arbitration is to avoid cumbersome court procedure, including an upfront payment of court fee which sometimes serves as a barrier to bring a claim. However, much to the surprise of parties, there are also costs related to enforcement of awards such as payment of stamp duty on the award.

Parties are mandated to pay exorbitant costs in the form of stamp duties for enforcement of the arbitral award. The stamp duty varies from state to state and may cost up to 1% of the value of the arbitral award (Article 12, Schedule 1-B). For instance, an arbitral award of value INR 10,00,00,000/- will incur an obligation to pay a stamp duty of INR 10,00,000 /- for its enforcement.

This poses a significant challenge to the affordability and cost-effectiveness of such a mechanism, which not only induces additional unwarranted costs on the litigants but also deprives the party on whose favour the award is made from reaping its rewards. It also raises concerns on the barriers imposed to the enforceability of the award as those parties who may not afford the additional costs of the stamp duty paid on the arbitral award during enforcement, cannot get it enforced, unless the parties make the requisite arrangement to furnish such additional costs.

Interestingly, the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and the UNCITRAL Model Law on International Commercial Arbitration do not mandate parties to pay any such stamp duties on arbitral awards. It is the Indian Stamp Act, 1899 (“Stamp Act”), which expressly requires stamp duty to be paid on arbitral awards (Section 3 read with Section 17 and Schedule 1, Article 12)failing which the unstamped or inadequately stamped awards can be impounded and will be inadmissible in courts.

The Stamp Act is a fiscal statute that levies a charge on the execution of instruments. An ‘instrument’ is defined as a document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished, or recorded. The logic behind an award being subject to stamp duty is that an award falls under this definition of ‘instrument’.

There appears to be no available literature which explains the basis for subjecting an arbitral award to stamp duty. In the absence of such explanation, there is a logical fallacy when an award is subject to stamp duty as [a] an arbitral award is enforced as a decree of court, [b] instruments prescribed under the Stamp Act are majorly those instruments which create or purport to create rights or liabilities but with the consent of the parties.[1] Therefore, an arbitral award does not qualify to be an ‘instrument’.

While the courts have had several occasions to delve into the question of whether an unstamped or inadequately stamped award is inadmissible, can be impounded, or can be used as a valid ground to set aside the award. Unfortunately, the courts have never ventured into the question of whether an arbitral award falls within the definition of ‘instrument’ as stipulated under the Stamp Act in the first place and should it even be subject to stamp duty.

It is submitted that an arbitral award is not an ‘instrument’, and it should not be subjected to stamp duty under the Stamp Act. An arbitral award stems from an adjudication of disputes where one party wins, and the other party loses. Subject to any settlement agreements entered between the parties during the arbitration proceedings, which will anyway be subject to applicable stamp duty, an arbitral award is not a creature of consent but a unilateral expression of adjudication which conclusively determines the rights and liabilities of the parties in relation to the subject matter in dispute.

Further, it is a trite law that an arbitration proceeding is in the nature of a quasi-judicial proceeding and that the arbitral award is a decree of court vis-à-vis its enforcement. In such a case, if an ordinary litigant is not required to pay stamp duty for enforcing a judgment or decree from ordinary courts, then there appears no basis for arbitral awards to be subject to stamp duty. Therefore, an arbitral award should be enforced like a court decree, in accordance with Section 36(1) of the Arbitration Act, but without the additional cost implication of stamp duty.

A plausible explanation for the explicit inclusion of arbitral award under Schedule 1 of the Stamp Act could be the misconception surrounding the concept of award while the Stamp Act was being drafted. Presumably, an award was mistakenly believed to be in the nature of a settlement agreement facilitated through the process of arbitration, mediation, or conciliation. This misplaced understanding is also reflected in Section 89 of the Code of Civil Procedure, 1908, where arbitration is perceived to be a mechanism to execute settlement agreements, and hence an award stemming from arbitration is possibly misconstrued to be an instrument.

The potential resistance to the proposal of abolishing stamp duties on arbitral awards could be a view that [a] such a step will result in loss of revenue to states, and [b] such stamp duties are justified as the costs incurred in enforcement for using state machinery. It is submitted that waiving stamp duties on arbitral awards may not make a significant difference to the states’ pool of revenue but may cause significant prejudice to the liquidity of businesses and the financial conditions of the individual litigants. This garners support from the fact that some states in India impose minimal stamp duties, as low as INR 500/-, which suggests that it is not the preferred source of revenue for the states. Moreover, justification of stamp duties as costs incurred for enforcement using state machinery seems to be misplaced since court fees are already charged for entertaining an execution application.

The Supreme Court has ruled that a foreign arbitral award can be enforced without paying any stamp duty in India. Even several High Courts have opined that inadequacy of stamp duty does not affect the enforceability of foreign arbitral awards in India.[2] In fact, the Supreme Court has been pro enforcement where recently it has held that there is no legal impediment to the enforceability of the arbitration agreement pending payment of stamp duty on substantive contract.

Therefore, it is about time that the courts and legislators examine whether a domestic arbitral award should be subject to stamp duty for its enforcement. Any such levy of stamp duty on the enforcement of arbitral awards in India, especially when the enforcement mechanism in India is predominantly slow, will be counter-intuitive and detrimental to the efforts of India in becoming a pro-arbitration regime.

The cost implication for award holders negatively impacts the choice of arbitration as a method of dispute resolution as parties have to incur additional costs for enforcement despite having an award in its favour. It is imperative that arbitral awards in India should not be subject to a levy of any stamp duty under the Stamp Act in the interests of reducing additional cost implications and unwarranted burden on the litigants for enforcing arbitral awards.

† Ajar Rab is Partner at Rab & Rab Associates LLP, Dehradun, Adjunct Professor at NUJS Kolkata and Visiting Professor at NLSIU, Bengaluru. Shubham Joshi is an Associate at Rab and Rab Associates and Visiting Faculty at NMIMS, Bangalore.

[1] A holistic look at all the instruments which are enlisted for the payment of stamp duties under Schedule I of the Stamp Act reflects that almost all the instruments are executed between the parties with their consent. See, Schedule I of the Indian Stamp Act, 1899. [2] Vitol S.A. v. Bhatia International Limited, 2014 SCC OnLine Bom 1058; Narayan Trading Co. v. Abcom Trading Pvt. Ltd., 2012 SCC OnLine MP 8645; Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd., 2009 SCC OnLine Del 2961.

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