Arbitration Clause In An Unstamped Contract : Issue Of Enforceability

Let me start with the statutory regime pertaining to an arbitration clause in an unstamped contract (contract on which no stamp duty or insufficient stamp duty is paid). Section 2 (14) and Section 3 of Indian Stamp Act, 1899 are reproduced hereinbelow:- "Section 2 . Definitions. – In this Act, unless there is something repugnant in the subject or context, - (1)-(13) xxxxxxxx (14) "Instrument" includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;" Xx xx xx Section 3. Instruments chargeable with duty. – Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore, respectively, that is to say – (a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in [India] on or after the first day of July, 1899; Section 33 relates to examination and impounding of instrument if same is not duly stamped as required by the Stamp Act and Section 35 provides that instruments not duly stamped are inadmissible in evidence and cannot be enforced or acted upon. The relevant provisions of A&C Act, 1996 may also be seen. The definition of the arbitration agreement is contained in Section 2 (b) which means an Agreement referred to in Section 7. Section 7 (2) provides that an arbitration agreement may be in the form of arbitration clause in a contract or in the form of a separate agreement and Section 7 (4) envisages that an arbitration agreement can come into existence if it is contained in a document signed by the parties or by exchange of letters, telex, telegram or by an exchange of statement of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. In other words, if the arbitration agreement is a standalone agreement and not one contained in a contract, the issue of registration or stamping would not arise and a court seized of a petition under Section 11 and/or Section 9 can deal with the same and appoint an Arbitrator or pass interim order(s) respectively so long as the existence of the arbitration clause/ agreement is not disputed. This issue had arisen firstly, in the matter of SMS Tea Estate Pvt. Ltd. vs. Chandmari Tea Co. Pvt.Ltd. (2011) 14 SCC 66, wherein the question arose in the context of a petition moved under Section 11 of the A&C Act, 1996 for appointment of an Arbitrator by the Court. The factual background was in the context of lease document executed between the parties by which a lease for a term of 30 years was granted with respect to two tea estates. The respondent in that case raised an objection that since the lease deed was an unregistered one and also not duly stamped, the arbitration clause which was part of the lease document was also invalid and unenforceable. The Supreme Court framed inter alia the following questions for consideration:- (i) Whether an arbitration agreement contained in unregistered (but compulsorily registerable) instrument is valid and enforceable? (ii) Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable? In relation to the first question the Supreme Court referred to Section 17 (1) (d) of the Registration Act and Section 107 of the Transfer of Property Act which provides that leases of immovable property from year to year, or for any term exceeding one year required compulsory registration. The court then referred to Section 49 of the Registration Act which posits effect of non-registration of document required to be registered. Section 49 is set out herein below:- "Section 49: 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 (4 of 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 (4 of 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 (1 of 1877), or as evidence of any collateral transaction not required to be effected by registered instrument". The Court after referring to Section 49 observed that a document which is required to be compulsorily registerable, if not registered, cannot be received as ...

Arbitration Clause In An Unstamped Contract : Issue Of Enforceability

Dhruv Mehta, Senior Advocate

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