arbitration agreement unregistered instrument validity and enforceability

IN THE SUPREME COURT OF INDIA:  CIVIL APPELLATE JURISDICTION

Subject: ARBITRATION MATTER S.L.P. (CIVIL) NO.31311/2011 Date of Disposal:  13/07/12

Title: NAINA THAKKAR  VERSUS  M/S ANNAPURNA BUILDERS                     

4.   In M/s SMS Tea Estates Pvt. Ltd. Vs M/s Chandmari Tea Co. Pvt. Ltd (2011 (7) SCALE 747 case   (supra),  this  Court  was concerned with, inter alia, two questions  - 

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

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

5.   While dealing with question (i), the Court  referred  to  statutory provisions contained in Sections 17(1)(d) and 49 of  the  Registration  Act, 1908, Section 107 of the Transfer of Property Act, 1882, Section 19  of  the Indian Contract Act, 1872 and Section 16 of  the  Act.  While dealing  with question (ii), the Court  referred to Sections 33, 35,  38  and  40  of  the Indian Stamp Act, 1899 and Section 49 of the Registration  Act,  1908.   The Court then summed up 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 as under :

(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 (as contemplated in section 35 or 40 of the Stamp  Act),  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,  as  pointed  out  in para 8 above. 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."