Non-Registration And Insufficient Stamp Duty ; Added Limitations To The Arbitration

Relevant provisions of Law

Certain classes of agreements are required to be registered^[2]. The requirement of registration is given under the Transfer of Property Act, 1882 (herein after the "TP Act") r/w the Registration Act, 1908. The TP Act mandates the registration of various agreements, including the agreements related to the sale of an immovable property^[3], mortgage^[4], lease^[5], and transfer of immovable property by way of gift^[6].

The registration process is being regulated by the Registration Act, 1908 (herein after the "Registration Act") and the rules made thereunder. The Registration Act, inter alia, deals with compulsory and optional registrabel documents^[7]. Agreements of gift of immovable property and lease of immovable property^[8] are just few of the many compulsory registrable documents.

Moreover, section 49 of the Registration Act clarifies that if any compulsory registrabel document is not registered, then the same can't be acted upon until the document gets registered. However, such unregistered document may be received as evidence in a suit for specific performance or as evidence of any collateral transaction not required to be effected by the registered document.

The aforesaid discussion touches the few of many classes of agreements which carry the mandate of registration. Moreover, the law requires the payment of stamp duty qua certain classes of agreements. The stamp duty provisions are embodied under the Indian Stamp Act, 1899 (herein after the "Stamp Act"). It is apposite to mention that few states have enacted their own municipal stamp rules. The Stamp Act, inter alia, discusses the consequences of inadequately stamped 'instruments'^[9]/documents and their evidentiary value^[10]. The same is briefly depicted below.

Impounding of the instruments not duly stamped

Section 33 of the Stamp Act, inter alia, states that a court shall impound the instrument which is not duly stamped in accordance with law. The provision casts the duty upon a court to impound such instrument whenever provided by.

Admissibility of such instruments

section 35 of the act says that the instrument which is not duly stamped can't be acted upon and can also not be received as evidence until it gets duly stamped. Moreover, the concerned party can be penalized for not getting the instrument stamped^[11].

The aforesaid discussion provides us a brief idea about the mandate of registration and stamp duty in certain classes of agreements. The arbitration agreement, per se, doesn't find any substantial place in the aforesaid statues. however, the registration and stamp duty laws have helped in shaping the scope of arbitration which is elucidated as follows.

Arbitration and registration/ stamp laws

Asunder from the liability of stamp duty qua the arbitral award^[12] and the instrument of partition^[13], there is as such no clear description or relation of arbitration and laws relating to registration and stamp duty.

It is submitted that section 16 of the Arbitration Act, 1996 (herein after the "Arbitration Act") makes the arbitration independent of the other provisions of the main agreement and it also empowers the arbitral tribunal to adjudicate the issues pertaining to its jurisdiction. Therefore, prima facie, it can be stated that the arbitration can't be ruled out merely on the basis of unregistered and not duly stamped agreement and the same needs to be decided by the arbitral tribunal as provided by and under section 16 of the Arbitration Act. However, it can also not be ignored that if there is no agreement to act upon, then the parties may find it difficult to invoke the arbitral proceedings.

The said issue is no more res integra and the same is dealt by the Hon'ble Supreme Court on more than one occasion. Various instances are discussed below which have come up before the Hon'ble Supreme Court.

1. The impact of unregistered and insufficient/ unstamped agreement on arbitration

The Hon'ble Supreme Court in SMS Tea Estates Pvt. Ltd. vs. Chandmari Tea Company Pvt. Ltd.^[14] discussed the impact of an unregistered and not duly stamped agreement on arbitration and also elaborated the course of action which the concerned court needs to follow in such cases. Among others, the following questions of law were raised before the Hon'ble Court.

- Arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable?

the Hon'ble Court while placing reliance upon section 49 of the Registration Act held that the arbitration clause containing in an unregistered but compulsorily registrable instrument (lease deed in this case) is a collateral provision relating to the dispute resolution mechanism and the same is not related with the main transaction i.e. transfer of an immovable property Moreover, the arbitration agreement is not needed to be registered under the Registration Act. Thus, a combine reading of section 49 of the Registration Act and section 16 of the Arbitration Act clarifies that even where an arbitration agreement is a part of an unregistered but compulsorily registrable instrument, the same can be acted upon. However, despite being admissible qua triggering the process of arbitration proceedings, the said instrument can't be relied upon by the arbitrator except for merely 2 (two) purposes i.e. (i) as evidence of contract in a claim for specific performance and (ii) as evidence of any collateral transaction which does not require registration. Thus, technically the arbitration is not ousted in such scenario, but it remains with limited options which may not serve the purpose.

• An arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable?

The Hon'ble Court held that where an instrument is not duly stamped then the concerned court is duty bound to impound such instrument and follow the procedure prescribed under the Stamp Act. Moreover, the court cannot act upon such instrument until the deficit duty is paid. Consequently, the arbitration clause can't also be invoked till then. The Stamp Act is bereft of any provision akin to section 49 of the Registration Act. Therefore, an instruments] not being duly stamped can't be acted upon even for the limited purposes.

It is submitted that the Hon'ble Court succinctly stated that the arbitration clause can't be ignored merely due to the non registration of an instrument required to be compulsorily registered. However, even in such scenario, the arbitral tribunal can't rely upon the instrument except for the limited purposes as discussed above. Moreover, an instrument which in not duly stamped can't be acted upon unless the mandate of the Stamp Act is not fulfilled. Consequently, the arbitration clause also remains unenforceable till the deficit stamp duty is paid.

1. Where the party is not willing to pay the deficit stamp duty

The Hon'ble Supreme Court in the case of Naina Thakkar Vs. Annapurna Builders^[15] noted that the lease deed in question is unregistered and not duly stamped. Moreover, the party is not willing to pay the deficit stamp duty and the penalty which may be imposed by the collector.

It was held that the procedure mentioned in SMS Tea case is not applicable to the proceedings under section 8 of the Arbitration Act where the applicant does not express his willingness to pay the deficit stamp duty and the penalty. Moreover, the civil court is not duty bound to adjourn the suit indefinitely until the said defect is cured.

1. Impact of the Arbitration and Conciliation (Amendment) Act, 2015

The Arbitration and Conciliation (Amendment) Act, 2015 (herein after the "2015 Amendment Act", inter alia, brought an amendment to section 11 of the Arbitration Act. Section 11 deals with the appointment of an arbitrator.

During section 11 application proceedings, the court can examine the existence and validity of an arbitration agreement. Moreover, the validity of a main contract due to want of registration and not being duly stamped can also be considered in such proceedings. Therefore, it is imperative to study the impact of 2015 Amendment Act on section 11 of the Arbitration Act.

Among various amendments, section 11 (6A) was inserted^[16] by way of the 2015 Amendment act.

(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

Section 11 (6A) prima facie restricts the scope of section 11 proceedings. The perusal of the provision shows that the courts are merely required to examine the existence of an arbitration agreement, nothing more and nothing less.

However, where the validity or existence of a main agreement is itself in question, then can the parties be directed to an arbitrator without deciding the existence or validity of the main agreement, considering the fact that the 2015 Amendment prima facie restricts the scope of section 11 application?

This interesting question came up before the Hon'ble Supreme Court in the case of Garware Wall Ropes Ltd. vs. Coastal Marine Constructions & Engineering Ltd.^[17]. The Hon'ble Apex Court while discussing plethora of cases stated that section 16 of the Act comes only after the constitution of an arbitral tribunal and therefore it'd be incorrect to say that while deciding section 11 application, section 16 is required to be applied.

The Hon'ble court also held that when an arbitration clause is contained in a 'main agreement', then the arbitration can only be relied upon when the main contract is enforceable in law. Therefore, if the main agreement is not enforceable by any reason including but not limited to the non registration and being not duly stamped, then the course to arbitration can't be acceded to until the defect doesn't cease to exist. Dealing with the amendment i.e. section 11(6A) the Hon'ble Court held that:

"…It is clear, therefore, that the introduction of Section 11(6A) does not, in any manner, deal with or get over the basis of the judgment in SMS Tea Estates (supra), which continues to apply even after the amendment of Section 11(6A)"

"...Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration Clause in an agreement would not exist when it is not enforceable by law. This is also an indicator that SMS Tea Estates (supra) has, in no manner, been touched by the amendment of Section 11(6A)."

The Hon'ble Court thereby delimits the scope of section 11 application, despite there being a clear indication of restricted role of a court as embodied by section 11(6A) of the Arbitration Act.

1. Recent developments

Following the settled law, the Hon'ble Court in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Ors. vs. Bhaskar Raju & Brothers and Ors.^[18] reiterated that the arbitration clause cannot be acted upon by a court where the instrument is not registered or not duly stamped.

It is interesting to note that the Arbitration Act was further amended in 2019^[19] and by the virtue of the said amendment, section 11(6A) is omitted from the statue book^[20]. The said omission affirms the stand of the Hon'ble Supreme Court on the impact of an unregistered and not duly stamped instrument on the arbitration.

Final remarks

As we have discussed above, the Hon'ble Supreme Court has consistently followed the impact of want of registration and stamp duty on an arbitration agreement. Moreover, the Hon'ble Court didn't interpret the matter differently despite there being a clear restriction imposed upon the courts by way of addition of section 11(6A) to the Act^[21].

The conjoint and harmonious reading of the various statutes, aforesaid case laws and the recent amendments shows that the registration and duly stamped instruments in certain classes of agreements are sine qua non to trigger the arbitration proceedings. The aforesaid discussion leaves no room of doubt about the fate of an arbitration agreement where the main agreement is not registered and not duly stamped.