Validity of arbitration agreement in unregistered instrument

Facts
Decision
Comment

In a recent judgment in M/s SMS Tea Estates P Ltd v M/s Chandmari Tea Co P Ltd,(1) the Supreme Court opined on the question of whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument was valid and enforceable.

Facts

The appellant, M/s SMS Tea Estates Pvt Ltd, had filed an application under Section 11 of the Arbitration and Conciliation Act 1996 in regard to a clause in a 30-year lease deed dated December 21 2006 executed between the appellant and the respondent. The lease deed in question was unregistered and unstamped.

The respondent contested the appellant's application on the grounds that as the lease deed was unregistered and unstamped, it was unenforceable and not binding on the parties, according to Secton 107(2) of the Transfer of Property Act read with Sections 17(3) and 49(4) of the Registration Act.

The respondent further contended that since the arbitration clause invoked by the appellant was part of an invalid and unenforceable document, such clause was also invalid and could not be invoked by the appellant.

The Guwahati High Court dismissed the application filed by the appellant under Section 11 of the Arbitration Act, holding that since the lease deed was required to be registered under Section 17 of the Registration Act and Section 106 of the Transfer of Property Act, and had not been registered, none of its term could be relied on for any purpose. Therefore, the appellant could not rely on the arbitration clause contained in the lease deed to seek reference to arbitration. The appellant filed an appeal with the Supreme Court.

Decision

After due examination of the relevant legal provisions, the Supreme Court opined as follows:

• When a contract contains an arbitration agreement it is a collateral term unrelated to the performance of the contract. An arbitration clause is independent of the other terms of the contract or the instrument wherein it is contained; even if a deed of transfer of immovable property is challenged as being invalid or unenforceable, the arbitration agreement contained therein remains unaffected for the purpose of resolving disputes arising from such transfer.
• An arbitration agreement does not require registration under the Registration Act and, even if it is found in one of the clauses in a contract or a instrument, it is independent of the main contract or instrument. Further, by virtue of the proviso to Section 49 of the Registration Act read with Section 16(1)(a) of the Arbitration and Conciliation Act 1996, an arbitration agreement in an unregistered (but compulsorily registrable) document can be acted on and enforced for the purpose of dispute resolution by arbitration.

The court went on to lay down guidelines for how a court should deal with an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument which is not duly stamped as follows:

• Before considering any application arising from such an arbitration clause, the court must examine whether the instrument containing the clause is duly stamped:
  • if the instrument is found to be unstamped, the court should impound the instrument(5) and order this defect to be rectified under Section 35 and 38 of the Stamp Act; or
  • if the document is found to be duly stamped or if the deficit stamp duty and penalties are paid before either the court or the collector (as contemplated in Sections 35 or 40 of the Stamp Act), and the defect is thus rectified, the court may treat the document as duly stamped.
• Once the document is found to be duly stamped, the court shall proceed to consider whether the document is compulsorily registrable:
  • if the document is found to be registered, the court can act on the arbitration agreement without impediment; or
  • if the document is not registered but is compulsorily registrable, the court can detach the arbitration agreement from the main document and examine the validity of the arbitration agreement according to Section 19 of the Contract Act.
• If the unregistered document is compulsorily registrable, but the arbitration agreement contained therein is valid and separable, an arbitrator can be appointed on the basis of such clause. However, the appointed arbitrator must bear in mind that he or she can rely on the unregistered instrument for only two purposes:
  • as evidence of a contract in a claim for specific performance; and
  • as evidence of a collateral transaction which does not require registration.

Having laid down these guidelines, the Supreme Court remitted the matter to the Guwahati High Court.

Comment

The decision is of interest to parties dealing with immovable property transactions as it confirms that parties should be vigilant about the statutory requirements of registering and stamping an instrument. Although in this case the Supreme Court opined that the arbitration agreement contained in an unregistered (but compulsorily registrable) instrument was valid and enforceable, it limited the extent to which an arbitrator can rely on the unregistered document to two circumstances (as evidence of contract in a claim for specific performance and as evidence of a collateral transaction which does not require registration). In effect, it eliminated arbitration proceedings relating to disputes arising from a non-registered lease deed. In most cases, an arbitrator appointed under such an instrument would have his or her hands tied in regard to most issues arising from such a document. Therefore, any failure by the parties to comply with the requirement to register the instrument would render the arbitration clause contained therein of little or no value, even if it were held to be enforceable.

Endnotes

For further information on this topic please contact Jasleen K Oberoi or Bahaar Dhawan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email ([email protected] or [email protected]).