Registration, stamp duty and enforceability of arbitration clauses

On 20th July, the Supreme Court came out with its decision in M/S Sms Tea Estates P.Ltd. vs M/S Chandmari Tea Co.P.Ltd. The decision clarified (i) that an arbitration clause in an unregistered, but compulsorily registrable, instrument can be enforced and (ii) that an arbitration clause in a document which is not duly stamped cannot be enforced till the stamp duty and the penalty thereon have been paid.

An application was filed before the Chief Justice of the Guwahati High Court seeking the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The same was dismissed on the ground that the lease deed that contained the arbitration clause was not registered and duly stamped and was hence unenforceable. A special leave appeal was preferred before the Supreme Court challenging this order of the Chief Justice.

The issues considered in this case were summarised by the Supreme Court in the following words:

"(i) Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable?

(ii) Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable?

(iii) Whether there is an arbitration agreement between the appellant and respondent and whether an Arbitrator should be appointed?"

The following paragraphs summarise the Court's reasoning and conclusion with respect to the first two of these questions.

i. Arbitration clauses in Unregistered, but compulsarily registrable instruments: 

A yearly lease deed is a compulsorily registrable instrument under Section 17 of Registration Act, 1908 and Section 107 of the Transfer of Property Act, 1882. 

The effect of non-registration of a compulsorily registrable instrument is provided in Section 49 of the Registration Act as follows:

"Effect of non-registration of documents required to be registered
No document required by section 17 or by any provision of the Transfer of Property Act, 1882 to be registered shall-

(a) affect any immovable property comprised therein, or

(b) confer any power to adopt, or

(c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered:

PROVIDED that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882, to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1877, or as evidence of part performance of a contract for the purposes of section 53A of the Transfer of Property Act, 1882, or as evidence of any collateral transaction not required to be effected by registered instrument."

The Court observed that the proviso to Section 49 clearly indicates that an unregistered (but compulsorily registrable) instrument may be used as evidence of any collateral transactions that may not require registration. Relying on the well established jurisprudence on severability of the arbitration clause, the Court reasoned that inclusion of an arbitration clause into a lease deed was like rolling a lease deed (which requires registration) and an arbitration agreement (which does not require registration) together. Hence, the arbitration clause is a collateral agreement in whose evidence the unregistered lease deed may be relied upon as per proviso to Section 49 of the Registration Act.

Therefore, the Court concluded that an arbitration clause in an unregistered, but compulsorily registrable, lease deed is enforceable.

(ii) Arbitration clauses in unregistered and not duly stamped instruments:

Section 35 of the Indian Stamp Act, 1899 provides:

"Instruments not duly stamped inadmissible in evidence, etc.

No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped :

Provided that--

(a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion."

Based on this clear statutory injunction, the Court held that an arbitration clause in an instrument which is not duly stamped can be enforced only upon the stamp duty and the penalty thereon being paid by the party relying on the instrument to establish the existence of the arbitration clause.