Home » Arbitration » Procedure for appointment of arbitrator when the arbitration clause is in a document which is not registered (but compulsorily registrable) and which is not duly stamped

Procedure for appointment of arbitrator when the arbitration clause is in a document which is not registered (but compulsorily registrable) and which is not duly stamped

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Arvind Ray

M/S SMS Tea Estates Pvt Limited V M/s Chandmari Tea co. Pvt Ltd. [SC Civil appeal No. 5820 of 2011 arising out of SLP(C) No. 24484/2010]. Decided on 20.07.2011

The Brief facts of the case: The appellant filed an application under section 11 of the Arbitration & Conciliation Act, 1996 (the “Act”) for appointment of an arbitrator.  The Appellant and The Respondent had entered into a lease deed whereby respondent had granted lease of two estates for a period of 30 years to the appellant.  The Clause 35 of the Lease Deed provided for settlement of disputes by Arbitration.  The lease deed is neither registered nor stamped as per the law.  The Chief Justice of Guwahati High Court dismissed the appellant’s application on the ground that the lease deed was compulsorily registrable under section 17 of the Registration Act and section 106 of the TP Act; and as the lease deed was not registered, no term in the said lease deed could be relied upon for any purpose and therefore clause 35 could not be relied upon for seeking reference to arbitration.  The High Court also held that the arbitration agreement contained in clause 35 could not be termed as a collateral transaction, and therefore, the proviso to section 49 of the Registration Act would not assist the appellant.

In appeal, before the Supreme Court, two important issues were:

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

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

In reply to the first issue the Supreme Court observed and held as follows: When a contract contains an arbitration agreement, it is a collateral term relating to the resolution of disputes, unrelated to the performance of the contract.  It is as if two contracts — one in regard to the substantive terms of the main contract and the other relating to resolution of disputes — had been rolled into one, for purposes of convenience.  An arbitration clause is therefore an agreement independent of the other terms of the contract or the instrument.  Resultantly, even if the contract or its performance is terminated or comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.  Similarly, when an instrument or deed of transfer (or a document affecting immovable property) contains an arbitration agreement, it is a collateral term relating to resolution of disputes, unrelated to the transfer or transaction affecting the immovable property.  It is as if two documents – one affecting the immovable property requiring registration and the other relating to resolution of disputes which is not compulsorily registrable – are rolled into a single instrument.  Therefore, even if a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer.  These principles have now found statutory recognition in sub-section (1) of section 16 of the Act.  But where the contract or instrument is voidable at the option of a party (as for example under section 19 of the Indian Contract Act, 1872), the invalidity that attaches itself to the main agreement may also attach itself to the arbitration agreement.

An arbitration agreement does not require registration under the Registration Act.  Even if it is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument.  Therefore having regard  to  the proviso to section 49 of Registration Act read with section 16(1)(a) of the Act, an arbitration agreement in an unregistered but compulsorily registrable document can be acted upon and enforced for the purpose of dispute resolution by arbitration.

In reply to second issue the apex court referred to section 33 and 35 (instruments not duly stamped is inadmissible in evidence) of the Stamp Act, 1899 and observed when a lease deed or any other instrument is relied upon as contending the arbitration agreement, the court should consider at the outset, whether an objection in that behalf is raised or not, whether the document is properly stamped.  If it comes to the conclusion that it is not properly stamped, it should be impounded and dealt with in the manner specified in section 38 of Stamp Act.  The court cannot act upon such a document or the arbitration clause therein.  But if the deficit duty and penalty is paid in the manner set out in section 35 or section 40 of the Stamp Act, the document can be acted upon or admitted in evidence.

The Court summarised the procedure to be adopted where the arbitration clause is contained in a document which is not registered (but compulsorily registrable) and which is not duly stamped:

(i)         The court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/document is duly stamped and whether it is an instrument which is compulsorily registrable.

(ii)         If the document is found to be not duly stamped, Section 35 of Stamp Act bars the said   document   being   acted   upon.   Consequently, even the arbitration clause therein cannot be acted upon.  The court should then proceed to impound the document under section 33 of the Stamp Act and follow the procedure under section 35 and 38 of the Stamp Act.

(iii)        If the document is found to be duly stamped, or if the deficit stamp duty and penalty is paid, either before the Court or before the Collector, and the defect with reference to deficit stamp is cured, the court may treat the document as duly stamped.

(iv)       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 not compulsorily registrable, the court can act upon the arbitration agreement, without any impediment.

(v)        If the document is not registered, but is compulsorily registrable, having regard to section 16(1) (a) of the Act, the court can de-link the arbitration agreement from the main document, as an agreement independent of the other terms of the document, even if the document itself cannot in any way affect the property or cannot be received as evidence of any transaction affecting such property.  The only exception is where the respondent in the application demonstrates that the arbitration agreement is also void and unenforceable.  If the respondent raises any objection that the arbitration agreement was invalid, the court will consider the said objection before proceeding to appoint an arbitrator.

(vi)        Where the document is compulsorily registrable, but is not registered, but the arbitration agreement is valid and separable, what is required to be borne in mind is that the Arbitrator appointed in such a matter cannot rely upon the unregistered instrument except for two purposes, that is (a)   as evidence of contract in a claim for specific performance and (b)   as evidence of any collateral transaction which does not require registration.

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