"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, July 26, 2011

Validity of Arbitration Agreements Contained in Unstamped/ Unregistered Instruments

In SMS Tea Estates Pvt. Ltd. v.Chandmari Tea Company Pvt. Ltd., the Supreme Court had to decide on the validity of arbitration clause contained in instruments that should have been registered but are not or that should have been stamped but are not.

Bench: RV Raveendran & AK Patnaik, JJ.
Case:   Civil Appeal No. 5820 of 2011 (out of SLP (C) No. 24484/ 2010)

SMS Tea Estates (SMS) filed an application before the Guwahati High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) for the constitution of arbitral tribunal as per the arbitration clause contained in the lease deed (a thirty year lease) executed between SMS and Chandmari Tea Company Pvt. Ltd. (CTC). The application was opposed by CTC, inter alia, on the ground the lease deed was invalid, unenforceable and not binding between the parties because it was neither registered nor stamped when the laws required the lease deed to be registered and stamped.

The Guwahati High Court accepted CTC’s contention and held that since the lease deed was neither stamped nor registered in breach of applicable laws, no term in the lease deed could be relied upon for any purpose. Further, the High Court held that the arbitration clause cannot be held binding on the ground that it was a collateral transaction. The said provision was not a collateral transaction.

The Supreme Court’s decision on the question is summarized below:

On the Validity of an Arbitration Clause Contained in an Unregistered Lease Deed:

  • Section 17(1)(d) of the Registration Act, 1908 and Section 107 of the Transfer of Property Act, 1882 make registration of leases like the one involved in this case compulsorily registrable. Relevant portions of Section 49 of the Registration Act provide that such an unregistered document shall not affect any immovable property or be received as evidence of any transaction affecting such property or conferring such power, unless it is registered. The exception to this rule is provided in Section 49 itself: such unregistered document affecting immovable property could be received as evidence in a suit for specific performance under the Specific Relief Act as evidence of any collateral transaction not required to be effected by a registered instrument.
  • The question is whether an arbitration clause in such an instrument is a collateral instrument or not. If it is so, the said clause would be valid.
  • An arbitration clause, being unrelated to the performance of the agreement, is incidentally connected to the performance, is a collateral term. Therefore, the deed could be received as evidence under the exception carved out by Section 49 for the purpose of proving the existence of the arbitration clause. Even if the contract is terminated or the performance completed, the arbitration clause would survive for resolution of disputes between the parties. In this case, even if the deed for transferring immovable property is challenged for its validity, there would be no effect on the arbitration clause merely because of such challenge. This has been accorded statutory recognition in Section 16(1) of the Arbitration and Conciliation Act, 1996.
  • However, where the agreement is voidable at the option of a party there may be situations where the reason for invalidity of the agreement also exists in the arbitration agreement.
  • The Registration Act does not require an arbitration agreement to be registered. Therefore, reading the exception carved out by Section 49 of the Registration Act, 1908 and Section 16(1)(a) of the Act together, an arbitration clause contained in an unregistered but compulsorily registrable instrument would be enforceable.
On the Validity of an Arbitration Clause Contained in an Unstamped Lease Deed:

  • Section 35 of the Stamp Act provides that court cannot act upon an instrument which is not duly stamped. This means that even an arbitration agreement contained in an unstamped instrument cannot be acted upon.
  • Section 35 is different from Section 49 of the Registration Act as the former does not contain a proviso similar to the latter.
  • The Scheme for Appointment of Arbitrators by the Chief Justice of the Guwahati High Court 1996 requires an application under Section 11 of the Act to be accompanied by the original arbitration agreement or a duly certified copy of such agreement. The same requirement is found in Schemes of all other High Courts.
  • Under Section 33 of the Stamp Act, any person having the power to receive evidence, whether by law or consent, or any person holding a public office to impound an unstamped instrument on which stamp duty is compulsorily to be paid (“Unstamped Instrument”). Therefore, a court is duty bound under Section 38 to impound an Unstamped Instrument.
  • When a lease deed or other instrument containing an arbitration clause is sought to be relied, the court should, at the outset, consider whether the instrument is duly stamped. The court cannot act upon such instrument or arbitration clause therein, unless the deficit duty and penalty is paid as per Section 35 or Section 40 of the Stamp Act.
More on this decision in the next post.

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