Recent Supreme Judgment in M/S Sms Tea Estates P.Ltd. vs M/S Chandmari Tea Co.P.Ltd. CIVIL APPEAL NO. 5820 OF 2011 addressed two significant uncertainties pertaining to Arbitration Law. The issues framed by the court are as follows –
(i) Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable?
(ii) (ii) Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable?
While addressing the first issue, court aptly figured out that a clause in a lease deed citing Arbitration agreement between the parties work only as a collateral transaction. Collateral transaction, in its essence, can only be testified as agreement in addition to the original contract between the parties, which survives in its own distinctiveness. Not depending on the nature of the original lease agreement between the parties, arbitration clause will remain intact. In the instant case, it has been alleged by the respondent that unregistered lease deed cannot make him obliged to comply with the agreement formed between him and the appellant. Stout reliance was placed on Section 49 of Registration Act, 1908 which states that a document which is compulsorily registrable, if not registered, will not affect the immovable property comprised therein in any manner, and also it would not be received as an evidence. Albeit this, there exists certain proviso to this particular section, which on construction denote that if there exists a collateral transaction, then it could be used as an evidence because of its individuality. Another connotation which can be drawn is the use of the agreement in matters linked to specific performance, which had no relevance in this case. Furthering the discussion, it is critical to understand as to how an arbitration clause is not integrated to the central agreement. Arbitration clause, which is present in a majority of commercial documents, is essentially an agreement between the parties irrespective of the nature of the contract formulated between them. Even if a contract turns out to be void at a later stage, it would not in any way affect the very nature of the arbitration clause.
This is primarily because of the reason that central agreement and Arbitration agreement, each having its own identity, assimilated into a single document so as to avoid inconvenience. Just because both agreements have been incorporated into a single doesn’t change their individuality. It can be easily understood after reading out the relevant provisions of the Arbitration and Conciliation Act, 1996. Section 16(1)(a) reads as an arbitration clause which forms part of a contract shall be treated as an agreement independent of theother terms of the contract; and Section 16(1)(b) as a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
Despite all these provisions, there survive certain scenarios when contract along with its arbitration clause can be avoided in wholesome. One of them is the voidability of the agreement i.e. they very basis on which the agreement has been formed is not genuine, and one of the parties was not attentive. Voidability can find its basis on several grounds, coercion and fraud among few of them. It would be undoubtedly evident, removing every kind of ambiguity, from this dictum of the Supreme Court that an arbitration clause would not in any way affected just because of the reason that the core contract was not registered, and hence it would render arbitration clause void along with it.
Addressing the second issue, it was held by the Supreme Court that an instrument must be duly registered, if law entails so, before admitting it as evidence in the court of law and its admissibility cannot be justified in the same manner as in last issue. Discreteness of Registration Act and Indian Stamp Act was pointed out by the court. Section 33 of the Indian Stamp Act requires a document to be duly registered, and if it is not duly registered, the same should be impounded by the court or any competent authority before which the document is being presented. Section 35 of the same act forbids admissibility of such a document, with a proviso which affirms that the same document, which has not been duly registered, can be made admissible after reimbursing the required amount to the competent authority. Following this, court promulgated certain tenets on the issue here the arbitration clause is contained in a document which is not registered (but compulsorily registrable) and which is not duly stamped, which can be read as follows:
“(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.”
“On the contrary, all the world would point to that nation as violating a treaty, by going to war with a country with whom they had engaged to enter into arbitration” - Richard Cobden
Click Here for the Supreme Court Judgment in this case.
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