Supreme Court of India: Arbitration Clause Contained In An Improperly Stamped Instrument Cannot Be Acted Upon For Appointment of An Arbitrator

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In M/s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities v. M/s Bhaskar Raju & Brothers & Ors, Civ Appeal no. 1599 of 2020 decided on 14 Feb 2020, the Supreme Court reiterated the position of law in respect of an arbitration clause contained in an unstamped instrument for the purpose of appointment of an arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996 (‘Act’).

The issue before the Court was whether an arbitration clause contained in an insufficiently stamped lease deed can be relied upon in an application seeking appointment of an arbitrator under Section 11 of the Act unless proper duty and penalty is paid by the applicant? The issue is no longer res integra under Indian law. It first came up for consideration of the Supreme Court in  SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[1]

In that case, the disputes between the parties sought to be adjudicated was related to a lease deed whereby the respondent before the Supreme Court granted a lease of two estates to the appellant for a term of 30 years. As on the date of its execution, the said deed of lease was not only compulsorily registrable the same was also chargeable to stamp duty. However, the said deed was neither registered nor stamped. Thus, when the appellant before the Supreme Court filed an application under Section 11 of the Act for the appointment of an arbitrator enforcing the arbitration agreement contained in the said deed of lease, it was held that the said deed of lease being not duly stamped and therefore, Section 35 of the Stamp Act, 1899 (‘Stamp Act’) was clearly applicable. Consequently, the Supreme Court upheld the decision of the Gauhati High Court dismissing the said application under Section 11 of the Act.

The ratio laid down by this case was that the inadequacy of stamp duty mandates impounding of such unstamped instrument and requires the concerned authority to proceed in accordance with Section 35 and 38 of the Stamp Act, for payment of proper stamp duty and penalty, if any, before the matter is taken up for appointment of an arbitrator.

Recently, another similar issue cropped up for the consideration of the Supreme Court in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd[2]. In that case, the Supreme Court dealt with the issue of whether the introduction of Section 11(6A) by the Arbitration & Conciliation (Amendment) Act, 2015  has removed the basis of SMS Tea judgment, so that the stage at which the instrument is to be impounded is not by the Court hearing the Section 11 application, but by an arbitrator who is appointed under Section 11 by the Court.

The Supreme Court while holding that the introduction of Section 11(6A) has not changed the law laid down in SMS Tea inter alia held that a close look at Section 11(6A) would show that when the Court considers an application under Section 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. Since the Stamp Act applies to the agreement or conveyance as a whole, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence. Further, it was observed that an arbitration clause in an agreement would not exist when it is not enforceable by law (i.e. when it is not a ‘contract’ since an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped). Thus, the arbitration clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped.

In the instant case, the question which arose for the consideration of the Supreme Court was whether an arbitration clause contained in a lease deed which was insufficiently stamped can be relied upon by the Court for appointing an Arbitrator. The Court placed reliance on the law propounded in SMS Tea Estate and held that when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. Even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue. If the Court comes to the conclusion, that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in the Stamp Act and the Court cannot act upon such a document or the arbitration clause therein. However, if the deficit duty and penalty is paid in the manner set out in the Stamp Act, the document can be acted upon or admitted in evidence. In view thereof, the Court rejection the application to appoint an arbitrator stemming from an arbitration clause contained in an unstamped lease deed.

[1] (2011) 14 SCC 66

[2] 2019 SCC OnLine SC 515

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

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