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Monday, November 21, 2011


Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable? An arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable? Held Yes.

The Court cannot act upon a document or the arbitration clause therein, if the document is unregistered and not duly stamped. But if the deficit duty and penalty is paid in the manner set out in section 35 or section 40 of the Indian Stamp Act, 1899 the document can be acted upon or admitted in evidence, the Supreme Court had ruled in SMS Tea Estates Pvt Ltd V M/s Chandmari Tea Co. Pvt. Ltd.15.  The Supreme Court provided the procedure to be adopted where the arbitration clause is contained in a document which is not registered (but compulsorily registrable) and which is not duly stamped:
(i)  The Court should, before admitting any document into evidence or action 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 sections 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 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. 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 reply 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.

Prepared by: S. Hemanth

Advocate at Hemanth & Associates