Arbitration Clause In An Unstamped Contract : Issue Of Enforceability

"Section 2 . Definitions. – In this Act, unless there is something repugnant in the subject or context, -

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(14) "Instrument" includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;"

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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 evidence of any transaction affecting such property. For present purposes what is germane is proviso to Section 49 which carves out an exception that such a document can be received as evidence of any collateral transaction. The court held that 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. An arbitration clause is, therefore, an agreement independent of the other terms of the contract or the instrument. The court also in this context referred to and relied upon Section 16 (1) (a) of the A&C Act, 1996.

The court concluded that having regard to the proviso to Section 49 of the Registration Act read with Section 16 (1) (a) of the Act, an arbitration agreement in an unregistered but compulsorily registerable document can be acted upon and enforced for the purpose of dispute resolution by arbitration.

The court then dealt with the second issue pertaining to the issue of an arbitration clause in a contract on which stamp duty has not been paid as required by the provisions of Stamp Act, 1899. In this context the Supreme Court referred to Section 33 and Section 35 of the Stamp Act. Section 33 of the Stamp Act relates to examination and impounding of instruments if the instrument is not duly stamped as required by the Act. Section 35 of the Stamp Act provides that instruments not duly stamped or insufficiently stamped are inadmissible in evidence and cannot be acted upon.

The Supreme Court held that in such a situation unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the instrument, which means it cannot act upon the arbitration agreement also which is part of the instrument. The court held that Section 35 of the Stamp Act 1899 is distinct and different from Section 49 of the Registration Act in regard to an unregistered document in that it does not contain a proviso like Section 49 of the Registration Act enabling the instrument to be used to establish a collateral transaction. The court thus observed that the lease deed in that case or any other instrument which is relied upon as containing 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 the 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.

In the present context, it is also significant to point out that the decision of the Supreme Court in SBP Vs. Patel Engineering Ltd. reported in (2005) 8 SCC 618 had considerably expanded the scope of judicial interference while dealing with an application under Section 11 of the A&C Act, 1996. This was further explained by the Supreme Court in the case of National Insurance Company Ltd. vs. Bogara Polyfab reported in 2009 (1) SCC 267 wherein the Supreme Court explained what are the issues which the court must decide before appointing an arbitrator and what are the issues which can be left to be dealt with by the Arbitrator post appointment, while dealing with an application under Section 11 of the A&C Act, 1996.

The Parliament vide Amending Act of 2015, amended Section 11 of the Act by inserting sub-Section (6A) after sub-Section (6) which reads as follows:-

"Section-11. [(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."

The Supreme Court had occasion to consider the scope of this amendment in the context of a works contract which was not duly stamped as per the provisions of the Maharashtra Stamp Act in Garware Wall Ropes Ltd. The Bombay High Court had taken the view that in view of the amendment, the decision of the Supreme Court in SMS Tea Estate would not be applicable in the changed circumstances and appointed an Arbitrator in a petition filed under Section 11, overruling the objection that the arbitration clause could not be enforced or acted upon since the same was contained in a contract which was not duly stamped.

It is also interesting to note that a Full Bench of Bombay High Court in the decision reported as Gautam Landscapes Pvt. Ltd. Vs. Sailesh S. Shah reported in 2019 (3) Mh.LJ 231 also had occasion to deal with the scope of the amendment to Section 11 by insertion of sub-Section 6A. The question inter alia, posed before the Bombay High Court was whether the court would be disabled to deal with an application under Section 9 of the A&C Act, 1996 if the arbitration clause is contained in a contract which is not duly stamped or insufficiently stamped. Section 9 of the A&C Act gives power to the court to pass interim orders of the nature specified therein for protection or preservation of the subject matter of the arbitration agreement or securing of the amount in dispute and such other matters. This power, it is significant to note, can be exercised at the instance of a party before or during the arbitral proceeding or at any time after making of the arbitral award.

The Full Bench discussed the decision of the Supreme Court in Firm Ashok Traders and another vs. Gurumukh Das Saluja and others 2004 (3) SCC 155 which is also interesting. The question which arose for decision is the effect of bar created by S. 69 (3) of the Partnership Act on maintainability of an application under Section 9 of the A&C Act, 1996. Section 69 (1) & (2) is set out hereinbelow.

"Section 69. Effect of non-registration . – (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

(2) No suits to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm. "

The court opined as under:-

"….under the scheme of A&C Act, the arbitration clause is separable from other clauses of the Partnership deed. The arbitration clause constitutes an agreement by itself…. The relief sought for in an application under Section 9 is neither in a suit not a right arising from a contract."

The Full Bench of the High Court distinguished the judgment of the Supreme Court in SMS Tea Estates in view of the amendment to Section 11. It opined that the scope and ambit of Section 9 and Section 11 is different and further the consequences thereof are also different i.e Section 11 deals with appointment of an Arbitrator while Section 9 deals with power of court to grant interim relief. The Full Bench was of the view that the consequence of not granting ad-interim relief in an application under Section 9 pending the arbitral proceedings may at time be drastic and would cause severe hardship to the parties especially because issue of appropriate stamp duty itself could lead to litigation and by which time the party may suffer damage and it would be without any remedy in respect of seeking protection under Section 9. The Full Bench opined that defect of nonpayment of stamp duty is not an incurable defect and that Stamp Act is only a physical measure to secure revenue for the state on certain classes of instrument. The Full Bench relied upon the decision in Firm Ashok Traders which had taken the view that arbitration clause in a contract is a separate agreement in itself and court while deciding a petition under Section 9 does not act upon the contract. The Full Bench was further of the view that issue of insufficiency of stamp duty if any, can be raised by the other party at the stage when instrument containing an arbitration agreement is tendered in evidence before the Arbitral Tribunal.

The Supreme Court in Garware Wall Ropes Ltd. (2019)9 SCC 209 considered the 2015 amendment by which sub-Section 6A was inserted to Section 11 of A&C Act, 1996. It further referred to the Law Commission Report as well the Statement of Objects and Reasons appended to the Amendment Bill, 2015. The Supreme Court was of the view that the amendment by way of insertion of sub-Section 6A was only to get over the judgment of the Supreme Court in SBP & Co. and Bogara Polyfab inasmuch as the same had expanded the scope of interference under Section 11 while considering an application under Section 11 (4) to 11 (6) and that the amendment was to address the aforesaid two judgments. The court was of the view that amendment had confined the consideration of the court while dealing with an application under Section 11 only to the existence of an arbitration agreement. The Supreme Court was of the view that the decision of the Supreme Court in SMS Tea Estate continues to hold the field in so far as it had taken the view that an arbitration clause in an unstamped contract could not be enforced or acted upon unless and until it is duly stamped. The Supreme Court in Garaware further held that in so far as Section 16 (1) (a) is concerned which posits that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract has full play only after the arbitral tribunal is constituted , without intervention of the court.

The court thereafter referred to the provision of the Maharashtra Stamp Act which are akin to the provision of the Stamp Act 1899. The court was of the view that when an arbitration clause is contained in a contract, the agreement only becomes a contract, if it is enforceable at law. Under the Indian Stamp Act, an agreement does not become a contract, namely, it is not enforceable in law, unless, it is duly stamped. Therefore, reading Section 11 (6A) alongwith Section 7 (2) of A & C Act 1996 read with Section 2 (h) of the Contract Act makes it clear that an arbitration clause in an agreement would not exist when it is not enforceable at law. The view taken by the Full Bench has partly been overruled by the decision of the Supreme Court in Garware Wall Ropes Ltd. v/s Coastal Marine Construction and Engineering Ltd. only in so far as the view rendered by the Full Bench qua Section 11 is concerned and its opinion that an arbitration clause contained in a contract which is unstamped or not adequately stamped is nevertheless a separate and independent agreement by itself.

It is significant that the decision of the Supreme Court in SMS Tea Estate has recently been affirmed by a bench of three judges in Dharmaratnakara Rai Charities and others vs. M/s Bhaskar Raju & Others, Civil Appeal No. 1599 of 2020.

The aforementioned decisions of the Supreme Court have been rendered in the context of power of the court under Section 11 for appointment of an arbitrator.

The impact of the view taken by the Supreme Court in the above decisions on the exercise of power by the court under Section 9 is yet to be settled by the Supreme Court as the same was not subject matter in issue before the Supreme Court in the decisions in SMS Tea Estates as well as Garware Wall Ropes Ltd.

As previously noticed, the view of the Full Bench of Bombay High Court is that the arbitration clause in a contract is a separate agreement and can be acted upon by the court for the purpose of passing an interim order in a petition or application filed under Section 9 and that the issue of insufficiency of the stamp duty, if any can be raised by the other party at the stage when the instrument containing arbitration agreement is tendered in evidence before the Arbitral tribunal.

The Supreme Court will, in due course, examine the impact of its decisions as discussed hereinabove on the power of court under Section 9 of A&C Act, 1996, where objection is raised that the instrument containing the arbitration agreement is unstamped or inadequately stamped.

The Supreme Court would have to consider whether to apply the raison d'etre of aforementioned decisions, i.e. SMS Tea Estates and Garware Wall Ropes Ltd. supra, in which case, the court will have to impound the unstamped instrument and direct the party to present it before the competent authority and/or Collector for adjudication of the Stamp Duty payable thereon and only after the stamp duty and penalty is paid thereon, the said instrument containing the arbitration clause can be acted upon by the court for the purpose of passing orders and/or interim reliefs of the nature specified in the said statutory provision. However, as pointed out by the Full Bench of Bombay High Court that many a time, urgent interim orders are required by a party under Section 9 even before the commencement of arbitration proceedings. The idea being to preserve the subject matter of dispute or property etc. If the court cannot act upon a Section 9 petition in view of the bar under Section 35 of the Indian Stamp Act, it would in many cases have the effect of frustrating the remedy available under the statute.

How the Supreme balances the right available to a party to seek relief under Section 9 of A&C Act, 1996 in the face of statutory prohibition under the provisions of Indian Stamp Act would have to be seen.