Co-author: Ayushi Tandon
[The co-author was an intern and not an advocate working with S&A]

In a recent judgement passed by the Hon'ble Supreme Court of India in the matter of Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and Other Charities and Ors. vs. Bhaskar Raju and Brothers and Ors1, the apex court discussed the issue whether an arbitration agreement contained in an insufficiently stamped instrument valid and enforceable under law. As per factual matrix of the case, the parties had executed a leased deed for a period of 38 years on 31.05.1996. Under the terms of the said lease, the Respondent No.1- Bhaskar Raju and Brothers had to construct a multipurpose auditorium which would be used for weddings. The Respondent No.1 was also required to obtain vacant possession of the said land, with the assistance of the lessor in ejecting the existing tenants. A subsequent lease deed was executed on 12.03.1997 with similar terms and conditions found in the first deed entered into between the parties. The Appellant No.1, Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and Other Charities filed a suit before the City Civil Court at Bangalore for restraining Respondent No. 1 to 3 from interfering with the peaceful possession and enjoyment of the Appellant No. 1's property and thereby seeking to restrain Respondent No. 1 to 4 from entering into, executing or registering any lease deed. The suit was filed on the ground that the Respondent No.1 was trying to collude with Respondent No.4 so as to gain illegal lease deed. The Respondent No.1 and 2 participated for a period of about 2 years 3 months in the suit proceedings after which they issued a notice to Appellants on 06.09.2013 thereby invoking arbitration clause in the lease deed dated 31.05.1996 and 12.03.1997. On 11.10.2013 Respondent No. 1 and 2 filed a petition under section 11(6) of the Arbitration & Conciliation Act, 1996, before the High Court of Karnataka. Thereafter, the Appellants filed their statement of objection on 02.06.2014 praying for dismissal of the petition. It was contended by the Appellants that the lease deed dated 12.03.1997 was insufficiently stamped as per the Karnataka Stamp Act, 1957, and cannot be relied upon unless proper duty and penalty was paid. The matter was then referred to the Registrar by the Single Judge of the Karnataka High Court. The Registrar ordered Respondent No. 1 and 2 to pay the deficit stamp duty and penalty. However, the same was not taken into consideration by the High Court of Karnataka and the petition filed by the Respondent No. 1 and 2 for invoking the arbitration clause was allowed.

The Appellant approached the Hon'ble SC against the impugned order of the Karnataka HC on the ground that an insufficiently stamped deed containing arbitration clause cannot be acted upon for appointing arbitrator. The court was of the opinion that this issue does not fall in the gray area and reliance was placed on the division bench judgment in SMS Tea Estates Pvt. Ltd. vs. Chandmari Tea Company Pvt. Ltd2 wherein the court laid down the procedure to be followed in case an arbitration agreement is contained in an unregistered and unstamped instrument. In this case, the Hon'ble Court concluded that it is the duty of the court to examine any document containing an arbitration clause whether the said document is duly stamped or not. If the concerned document is not duly stamped, it cannot be acted upon and subsequently be impounded. Only after the deficit duty and penalty has been paid to the Registrar or to the court, then the court can admit the document. The court noted that the provisions of the Karnataka Stamp Act, 1957, were analogous to the provisions of the Stamp Act, 1899.

Following the above ratio, the court opined that the Karnataka HC erred in relying on the lease deed as the same was insufficiently stamped. An application under Section 11of the Arbitration & Conciliation Act, 1996, for appointment of arbitrators can only be made on satisfaction of payment of stamp duty for the main document as per the Indian Stamp Act, 1899.

A similar issue was considered by the Supreme Court in Naina Thakkar v. Annapurna Builders3 wherein a lease deed between the parties was not registered and inadequately stamped. However, the court distinguished the facts of the SMS Tea Estate4 with the case in hand. It was held, "the procedure where the arbitration clause is contained in a document which is not registered although compulsorily registrable and which is not duly stamped as summed up by this Court in M/s. SMS Tea Estates Pvt. Ltd. case (supra) shall not be applicable to the proceedings under Section 8 of the Act where the party making such application does not express his/ her readiness and willingness to pay the deficit stamp duty and the penalty."5

Although an arbitration clause in an agreement is considered as a separate agreement, however, for the purpose of stamp duty the whole contract has to be examined. Unless the stamp duty has been paid, the contract cannot be enforceable and hence, the arbitration clause contained therein also cannot be acted upon.6 It is evident from the above judgments that while considering an arbitration agreement the same must be read in consonance with the provisions of the Stamp Act. There are a plethora of cases which state that non-payment or insufficient payment of stamp duty would not frustrate the arbitration agreement and can be admitted in evidence as far as the party pays the deficit duty and penalty. Inadequate stamping of an agreement is a curable defect and can be enforceable once the penalty and duty has been paid.

Footnotes

1. (2020) 4 SCC 612

2. (2011) 14 SCC 66

3. (2013) 14 SCC 354

4. Supra note 2.

5. Ibid.

6. Garware Wall Ropes Ltd. vs. Coastal Marine Constructions and Engineering Ltd. (10.04.2019-SC): (2019) 9 SCC 209.

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