Facts of the Case

Mukut House Developers Private Limited, the petitioner, entered into a Collaboration Agreement dated 7 September 2011 with the respondents. Under the Agreement, the respondents were required, inter alia, to place at the petitioner’s disposal the project land comprising Building No. 3 bearing Corporation No. 362/XII-min., together with the underlying land measuring 6,675 square yards bearing Khasra Nos. 1312 and 1315, situated at The Mall, Amritsar, Punjab, for construction and development of a commercial complex consisting of a shopping mall and two basements.

The petitioner’s principal obligations included payment of amounts and refundable sums/deposits as consideration for development and construction of the complex. According to the petitioner, it paid a total amount of ₹10.25 crore under the Agreement, comprising ₹6.75 crore as an interest-free refundable deposit to the respondents and ₹3.50 crore directly to Parsvnath towards execution of the Sale Deed/Conveyance Deed for the petitioner’s undivided share in the project land.

The petitioner stated that the refundable deposit of ₹6.75 crore and direct payments of ₹3.50 crore were to be refunded by the respondents at the time of handing over possession of the respondents’ share in the built-up spaces of the complex. Clauses 7.5 and 7.6 of the Agreement allegedly provided remedies and modes for recovery of damages if the respondents failed or were unable to refund the gross amount of ₹10.25 crore along with other expenses. The petitioner also asserted a right of lien over the exclusive area reserved for the respondents and rights to recover outstanding payments by selling reserved units or leasing the respondents’ areas and receiving rentals.

By notice dated 18 July 2018, the petitioner informed the respondents that it had applied for an Occupation Certificate and called upon them to pay the amounts due under the Agreement. The petitioner subsequently received the Occupation Certificate on 7 May 2019 and communicated this fact through a letter dated 31 July 2019, again demanding clearance of the outstanding amount with interest at 14% per annum from 20 December 2018.

According to the petitioner, the respondents began making some payments only after October 2019 but failed to clear the entire outstanding amount. The petitioner claimed that an aggregate amount of ₹4,98,20,250 remained outstanding at that stage. By letter dated 7 July 2020, the petitioner demanded specified dues, including refundable deposit amounts, interest at 14% per annum, and outstanding marketing costs.

Thereafter, by legal notice dated 4 November 2020, the petitioner called upon the respondents to pay ₹8,97,03,475 along with interest at 14% per annum. Upon alleged failure to clear the dues, disputes arose between the parties. The petitioner invoked Clause 19 of the Agreement by an Arbitration Notice dated 11 December 2020 and proposed names of former judges for appointment as Sole Arbitrator. As no mutually agreed appointment followed, the petitioner approached the Delhi High Court under Section 11(5) of the Arbitration and Conciliation Act, 1996.

Issues Involved

The principal issues before the Delhi High Court were:

Whether a Sole Arbitrator should be appointed under Section 11(5) of the Arbitration and Conciliation Act, 1996 where the parties had admittedly executed a Collaboration Agreement containing an arbitration clause and the respondents had not agreed to the proposed appointment.

Whether the petition for appointment of an arbitrator was maintainable when the respondents contended that the Collaboration Agreement containing the arbitration clause was not duly stamped.

Whether, in view of Sections 35 and 38 of the Indian Stamp Act, 1899, the Court was required first to impound the Agreement and ensure payment of stamp duty and penalty before acting upon the arbitration clause.

Whether the pending Larger Bench consideration of the legal position concerning unstamped agreements required the Section 11 proceedings to remain stalled.

Whether the approach adopted by the Supreme Court in Intercontinental Hotels Group (India) Pvt. Ltd. & Ors. vs Waterline Hotels Pvt. Ltd. justified allowing arbitration to proceed at the pre-appointment stage unless the dispute was patently “deadwood”.

Whether respondent No. 2 could be taken on record as the legal heir representing the estate of deceased respondent No. 1.

Petitioner’s Arguments

The petitioner contended that the Collaboration Agreement contained a valid and express arbitration clause in Clause 19.1. The clause provided that disputes arising between the parties concerning the Agreement, interpretation of its terms, performance or execution were to be settled by arbitration under the Arbitration and Conciliation Act, 1996.

The petitioner submitted that disputes had crystallised due to the respondents’ alleged failure to clear outstanding payments. It had issued communications dated 31 July 2019, a legal notice dated 4 November 2020 and an arbitration invocation notice dated 11 December 2020.

It was argued that, despite service of the arbitration notice and proposal of names of retired judges for appointment as Sole Arbitrator, the respondents did not respond and no mutual appointment could be achieved. Consequently, Court intervention under Section 11(5) was warranted.

On the stamping objection, the petitioner relied upon the Supreme Court decision in Intercontinental Hotels Group (India) Pvt. Ltd. & Ors. vs Waterline Hotels Pvt. Ltd., contending that although the broader jurisprudential issue had been referred for Larger Bench consideration, pre-appointment arbitration matters should not remain indefinitely pending and arbitration should proceed unless the matter patently represented “deadwood”.

The petitioner therefore urged the Court to move the arbitral process forward and appoint a neutral Sole Arbitrator.

Respondents’ Arguments

The respondents challenged the maintainability of the petition primarily on the ground that the Collaboration Agreement containing the arbitration clause was not duly stamped.

Relying on Section 35 of the Indian Stamp Act, 1899, the respondents argued that an instrument not duly stamped was inadmissible in evidence and could not be acted upon unless the stamp defect was cured. They further contended that the document was required to be impounded and dealt with under Section 38 of the Indian Stamp Act, 1899.

The respondents relied upon the following case law:

SMS Tea Estates Private Limited vs Chandmari Tea Company Private Limited, (2011) 14 SCC 66 – relied upon to support the proposition concerning the legal consequences of an unstamped instrument containing an arbitration clause.

Garware Wall Ropes Ltd. vs Coastal Marine Constructions and Engineering Limited, (2019) 9 SCC 209 – relied upon for the contention that where a Court dealing with an application under Sections 11(4) to 11(6) encounters an unstamped arbitration agreement or conveyance, it must first impound the instrument and ensure payment of stamp duty and penalty before the agreement can be acted upon.

N.N. Global Mercantile Private Limited vs Indo Unique Flame Limited & Ors., (2021) 4 SCC 379 – discussed in relation to the proposition that non-payment of stamp duty on the commercial contract should not invalidate the arbitration agreement or render it non-existent and unenforceable, while noting that the issue had been referred for consideration by a Larger Bench.

Vidya Drolia & Ors. vs Durga Trading Corporation, (2021) 2 SCC 1 – relied upon in the broader jurisprudential discussion concerning the effect of stamping objections and the legal position then holding the field.

State of Maharashtra & Anr. vs Sarva Shramik Sangh, Sangli & Ors., (2013) 16 SCC 16 – relied upon to argue that mere reference of an issue to a Larger Bench does not, by itself, render the existing precedent non-binding until the reference is answered.

Accordingly, the respondents urged that the petition should be dismissed and that the Court should not appoint an arbitrator on the basis of the allegedly insufficiently stamped Agreement.

Court Order / Findings

The Delhi High Court noted that there was no dispute regarding execution of the Collaboration Agreement dated 7 September 2011 between the petitioner and the respondents.

The Court further recorded that the Agreement contained Clause 19, an arbitration clause, under which disputes relating to the Agreement, interpretation of its terms, performance or execution were to be referred to arbitration. The clause contemplated appointment of a Sole Arbitrator mutually by the parties and, failing mutual agreement, appointment by the Court in accordance with the Arbitration and Conciliation Act, 1996. New Delhi was stipulated as the venue of arbitration.

The Court noted the petitioner’s case that communications and notices had been issued demanding payment and that the arbitration clause had been invoked through notice dated 11 December 2020. The petitioner had also proposed names of three retired judges, but no response was received from the respondents.

The Court particularly relied upon the Supreme Court’s approach in Intercontinental Hotels Group (India) Pvt. Ltd. & Ors. vs Waterline Hotels Pvt. Ltd. and held that the arbitration process needed to be taken forward as an alternate dispute resolution mechanism under Clause 19 of the Agreement.

Accordingly, the Court allowed the petition and appointed Justice Badar Durrez Ahmed, former Chief Justice of the Jammu & Kashmir High Court, as the Sole Arbitrator to adjudicate the disputes between the parties through claims and counterclaims, if any.

The Court directed that the Arbitrator’s fee would be regulated in terms of the Fourth Schedule to the Arbitration and Conciliation Act, 1996 and that the Arbitrator would furnish disclosure under Section 12 of the Act.

The petition was accordingly disposed of.

Important Clarification

The judgment is significant because the Delhi High Court did not permit the stamping objection to indefinitely halt the arbitral process at the pre-appointment stage. Applying the then-relevant Supreme Court approach in Intercontinental Hotels Group (India) Pvt. Ltd. & Ors. vs Waterline Hotels Pvt. Ltd., the Court proceeded with appointment of the arbitrator while the larger jurisprudential issue concerning the interplay between arbitration proceedings and unstamped agreements awaited authoritative settlement.

The Court’s reasoning was rooted in the need to ensure that arbitration matters at the pre-appointment stage were not left hanging merely because a related legal issue was pending before a Larger Bench, particularly where the dispute did not patently indicate “deadwood”.

A further procedural clarification concerns I.A. 12501/2021. Respondent No. 1 had died on 31 December 2020. The petitioner sought impleadment of respondent No. 2, Harpratap Singh, as the legal heir of the deceased respondent No. 1. The Court allowed the application and directed that the deceased respondent No. 1 be represented through respondent No. 2, with an amended memo of parties to be filed within ten days.

Sections and Legal Provisions Involved

Section 11(5), Arbitration and Conciliation Act, 1996 – Appointment of arbitrator where parties fail to agree on the arbitrator in an arbitration with a sole arbitrator.

Sections 11(4) to 11(6), Arbitration and Conciliation Act, 1996 – Statutory framework governing Court intervention in appointment of arbitrators in specified circumstances.

Section 12, Arbitration and Conciliation Act, 1996 – Disclosure obligations concerning independence and impartiality of the arbitrator.

Section 16, Arbitration and Conciliation Act, 1996 – Competence of the arbitral tribunal to rule on its own jurisdiction.

Fourth Schedule, Arbitration and Conciliation Act, 1996 – Relevant framework for regulation of arbitral fees.

Section 35, Indian Stamp Act, 1899 – Inadmissibility of instruments not duly stamped, subject to statutory conditions.

Section 38, Indian Stamp Act, 1899 – Procedure concerning instruments impounded under the Stamp Act.

Order I Rule 10, Code of Civil Procedure, 1908 – Addition, deletion and substitution of parties.

Order XXII Rule 4, Code of Civil Procedure, 1908 – Procedure concerning legal representatives upon death of a defendant/respondent.

Clause 19 of the Collaboration Agreement – Arbitration clause providing for reference of disputes to a Sole Arbitrator and stipulating New Delhi as the venue of

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783321248_1258compressed.pdf

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