INSTRUMENT CONTAINING AN ARBITRATION CLAUSE CANNOT BE RELIED UPON UNLESS IT IS DULY STAMPED
In M/s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities v. M / s Bhaskar Raju & Brothers & Ors, the Supreme Court reiterated the legal position on an arbitration clause contained in an unstamped instrument for the appointment of an arbitrator pursuant to Section 11(6) of the Arbitration & Conciliation Act 1996
The question before the Court was whether, in an application seeking appointment of an arbitrator under Section 11 of the Act, an arbitration clause contained in an insufficiently stamped lease deed can be relied on unless the applicant pays proper duty and penalty? Under Indian law, the issue is no longer res integrated. This was first taken up for Supreme Court consideration in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.
In that case, the conflicts between the parties sought to be adjudicated were connected to a lease arrangement under which the respondent before the Supreme Court granted the appellant a lease of two properties for 30 years. As on the date of its execution, the aforementioned deed of lease was not only compulsorily registrable the same was also chargeable to stamp duty. Nevertheless, the aforementioned deed was neither registered nor signed. Thus, when the appellant lodged an application before the Supreme Court under Section 11 of the Act for the appointment of an arbitrator to enforce the arbitration agreement contained in the said lease deed, it was held that the said lease deed was not duly stamped and was therefore clearly applicable to Section 35 of the Stamp Act, 1899 ('Stamp Act'). The Supreme Court thus upheld the Gauhati High Court's decision to dismiss the said application under Section 11 of the Act.
The ratio laid down by this case was that the inadequacy of stamp duty mandates impounding of such unstamped instrument and allows the concerned authority to proceed in compliance with Section 35 and 38 of the Stamp Act, for payment of proper stamp duty and penalty, if any, before the matter is taken up for the appointment of an arbitrator.
Recently another similar issue has arisen in Garware Wall Ropes Ltd v. Coastal Marine Constructions & Engineering Ltd for consideration by the Supreme Court. In that case, the Supreme Court dealt with the question whether the introduction of Section 11(6A) by the Arbitration & Conciliation (Amendment ) Act, 2015 removed the basis of the SMS Tea judgment, so that the stage at which the instrument is to be imposed is not by the Court hearing the Section 11 application, but by an arbitrator appointed by the Court pursuant to Section 11.
Although maintaining that the enactment of Section 11(6A) did not alter the law laid down in SMS Tea, the Supreme Court held, inter alia, that closer review of Section 11(6A) would reveal that when the Court considers an application under Section 11(4) to 11(6) and finds an arbitration clause in an unstamped agreement or conveyance, The terms of the Stamp Act specify that the arrangement or transportation be first enforced and that the stamp duty and tax (if any) be charged before the contract as a whole can be applied. Because the Stamp Act refers to the agreement or conveyance as a whole, the arbitration provision found in that agreement or conveyance cannot be bifurcated to give it a separate existence Furthermore, it was found that an arbitration clause does not occur in an agreement because it is not enforceable by law (i.e. because it is not a 'contract' because an agreement does not become a contract, i.e. it is not enforceable by law until it is properly stamped). Thus, until the sub-contract is duly stamped the arbitration clause contained in the subcontract would not "exist" as a matter of law.
In the instant case, the question which arose for the consideration of the Supreme Court was whether an arbitration clause contained in a lease deed which was insufficiently stamped can be relied upon by the Court for appointing an Arbitrator. The Court emphasized the law proposed in SMS Tea Estate and held that the Court is required to determine at the outset whether the document is duly stamped or not when a lease deed or some other instrument is relied on as containing the arbitration agreement. Even if an objection is not raised in that name it is the Court's duty to consider the matter. If the Court finds that the instrument is not properly signed, it will be impounded and dealt with in the manner required by the Stamp Act, and the Court can not rely on such a document or arbitration clause. However, if the deficit duty and penalty are paid in the manner laid down in the Stamp Act, the document will be acted upon or accepted as proof. Because of this, the Court rejected the request for the appointment of an arbitrator based on an arbitration clause found in an unstamped lease agreement.
 Civil Appeal No. 1599 of 2020, Supreme Court (decided on 14 February 2020)