LI Network
Published on: 02 September 2023 at 15:22 IST
In a recent ruling, the Karnataka High Court has clarified that penalties for insufficient stamping cannot be imposed on arbitral awards during their enforcement or execution stage.
This significant decision was made in the case of Shakeel Pasha and others v. M/s City Max Hotels.
Justice Sachin Shankar Magadum, in his judgment dated July 28, emphasized that the concept of penalizing insufficiently stamped instruments should not apply to arbitral awards in execution proceedings.
This ruling aims to alleviate the struggles faced by decree holders who have already obtained an arbitral award but encounter difficulties in executing it.
The Court highlighted the pressing need for greater clarity in the law regarding when arbitral awards should be stamped, or if they should be subjected to stamp duty at all.
Justice Magadum raised questions about whether arbitral awards should be treated as “instruments” under the Stamp Act and subjected to stamp duty, considering that they are essentially treated as decrees for enforcement purposes only.
Furthermore, the Court pointed out that it is the State’s Stamp Act, rather than the Arbitration and Conciliation Act of 1996, that mandates the payment of stamp duty on arbitral awards.
The Court emphasized that whether an arbitral award falls under the definition of an “instrument” and should be subject to stamp duty requires careful consideration.
The judge also addressed the issue of insufficient stamping potentially serving as grounds to challenge an award under Section 34 of the Arbitration Act.
He suggested that unless there is an amendment to Section 31(1) of the Act, requiring awards to be duly stamped and registered, when necessary, this anomaly would persist.
The Court concluded that, currently, an award cannot be acted upon by the court unless it is properly stamped. However, it cautioned execution courts against imposing penalties under the Stamp Act on decree holders during the enforcement of arbitral awards.
The Court stressed the importance of framing rules and establishing mechanisms to clarify when and how arbitral awards should be stamped before execution.
This ruling stemmed from a case where an execution court had imposed a penalty on a decree holder due to insufficient stamping of the arbitral award.
The High Court criticized this decision, emphasizing that the stamp duty should be calculated based on the rate applicable when the award was signed, and the excessive penalty imposed was unjustified.
Additionally, the Court emphasized that since the arbitral award is not submitted as “evidence” or for adjudication purposes, there is no need to impound it. This approach supports the promotion of arbitration as an efficient dispute resolution mechanism.
In conclusion, the Karnataka High Court’s ruling provides important clarity on stamping requirements for arbitral awards during the execution stage and underscores the need for smoother enforcement mechanisms to maintain trust and confidence in arbitration as a preferred method of resolving disputes in India.
