2011 (7) TMI 1289 - SC - Indian Laws

Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument and which is not duly stamped is valid and enforceable - In this case, A lease deed was executed between the respondent and appellant under which respondent granted a lease to the appellant for a term of 30 years in regard to the said two Tea estates with all appurtenances. Clause 35 of the lease deed provided for settlement of disputes between the parties by arbitration. The respondent abruptly and illegally evicted the appellant from the two estates and took over their management. The appellant thereafter wrote a letter to the respondent expressing its willingness to purchase the said two estates for a mutually agreed upon consideration and also discharge the liability towards the bank. Here the dispute is related to the claim of the appellant that the respondent should either sell the estates to the appellant, or permit the appellant to continue in occupation of the estates for 30 years as lessees or reimburse the amounts invested by it in the two estates and the payments made to the Bank. The Guwahati High Court dismissed the appellant's application. He held that the lease deed was compulsorily registrable u/s 17 of the Registration Act and section 106 of the TP Act; and as the lease deed was not registered, no term in the said lease deed could be relied upon for any purpose and therefore clause 35 could not be relied upon for seeking reference to arbitration. The High Court also held that the arbitration agreement contained in clause 35 could not be termed as a collateral transaction, and therefore, the proviso to section 49 of the Registration Act would not assist the appellant. The said order is challenged in this appeal by special leave. HELD THAT - An arbitration agreement does not require registration under the Registration Act. Even if it is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument. Therefore having regard to the proviso to section 49 of Registration Act read with section 16(1)(a) of the Act, an arbitration agreement in an unregistered but compulsorily registrable document can be acted upon and enforced for the purpose of dispute resolution by arbitration. If the document is found to be not duly stamped, The court should then proceed to impound the document u/s 33 of the Stamp Act and follow the procedure u/s 35 and 38 of the Stamp Act. 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. 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. In present case, appeal is allowed, the order of the High Court is set aside and the matter is remitted to the learned Chief Justice of Guwahati High Court to first decide the issue of stamp duty, and if the document is duly stamped, then appoint an arbitrator in accordance with law.

Summary

Issues Involved:
1. Validity and enforceability of an arbitration agreement in an unregistered (but compulsorily registrable) instrument.
2. Validity and enforceability of an arbitration agreement in an unregistered instrument that is not duly stamped.
3. Existence of an arbitration agreement between the appellant and respondent and the appointment of an arbitrator.

Detailed Analysis:

Issue 1: Validity and Enforceability of an Arbitration Agreement in an Unregistered (but Compulsorily Registrable) Instrument
The court examined whether an arbitration agreement contained in an unregistered lease deed, which is compulsorily registrable under Section 17 of the Registration Act and Section 107 of the Transfer of Property Act, is valid and enforceable. The court referred to Section 49 of the Registration Act, which stipulates that an unregistered document required to be registered cannot affect any immovable property or be received as evidence of any transaction affecting such property, except for two limited purposes: as evidence of a contract in a suit for specific performance and as evidence of any collateral transaction not required to be effected by a registered instrument.

The court emphasized that an arbitration agreement is a collateral term relating to the resolution of disputes, independent of the substantive terms of the main contract. Thus, even if the main contract is unregistered and unenforceable, the arbitration agreement can still be acted upon for dispute resolution, as recognized in Section 16(1) of the Arbitration and Conciliation Act, 1996.

Issue 2: Validity and Enforceability of an Arbitration Agreement in an Unregistered Instrument that is Not Duly Stamped
The court addressed the scenario where an arbitration agreement is contained in an unregistered instrument that is also not duly stamped. Referring to Sections 33 and 35 of the Indian Stamp Act, the court noted that an instrument not duly stamped is inadmissible in evidence and cannot be acted upon. Therefore, unless the stamp duty and penalty due are paid, the court cannot act upon the arbitration agreement contained in such an instrument.

The court outlined the procedure to be followed:
1. Examine whether the instrument is duly stamped and whether it is compulsorily registrable.
2. If not duly stamped, impound the document and follow the procedure under Sections 35 and 38 of the Stamp Act.
3. If duly stamped or if the deficit duty and penalty are paid, treat the document as duly stamped.
4. If the document is compulsorily registrable but unregistered, de-link the arbitration agreement from the main document and act upon it, provided the arbitration agreement is valid and separable.

Issue 3: Existence of an Arbitration Agreement and Appointment of an Arbitrator
The court considered whether there was an arbitration agreement between the parties and whether an arbitrator should be appointed. The court noted that the arbitration clause in the lease deed was limited to disputes arising in relation to or touching upon the lease deed. Given that the lease deed was unregistered, the terms of the deed could not be relied upon to claim or enforce any right under the lease.

The court also examined the appellant's claims for enforcing an alleged agreement of sale of the tea estates, enforcing the lease for thirty years, and recovering amounts spent on the estates. It was determined that:
1. There was no arbitration agreement in regard to the alleged agreement of sale, hence arbitration could not be sought for disputes related to the sale agreement.
2. The arbitrator could not rely upon or enforce any term of the unregistered lease deed.
3. The claim for recovery of amounts spent could either be seen as a claim for damages for breach of the lease, which is impermissible under Section 49 of the Registration Act, or as a claim de hors the lease deed, which would fall outside the arbitrator's jurisdiction.

Conclusion:
The appeal was allowed, the High Court's order was set aside, and the matter was remitted to the Chief Justice of Guwahati High Court to first decide the issue of stamp duty. If the document is found to be duly stamped, an arbitrator should be appointed in accordance with the law.