M/s. SMS Tea Estates
Pvt. Ltd. Vs. M/s. Chandmari Tea Co. Pvt. Ltd.
J U D G M E N T
R.V.RAVEENDRAN, J.
1.
Leave
granted. Heard.
2.
The
appellant filed an application under section 11 of the Arbitration &
Conciliation Act, 1996 (`Act' for short) for appointment of an arbitrator. The
averments made in the said application in brief were as under :
2.1.
On
7.10.2006 the appellant requested the respondent to grant a long term lease in respect
of two Tea estates (Chandmari Tea Estate and 2Burahapahar Tea Estate). A lease deed
dated 21.12.2006 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 said lease deed
provided for settlement of disputes between the parties by arbitration. As the
estates were hypothecated to United Bank of India, on 27.12.2006, the respondent
requested the said bank for issue of a no objection certificate for entering
into a long term lease. The Bank sent a reply dated 17.7.2007, stating that it
would issue a no objection certificate for the lease, if the entire balance
amount due to it was deposited by 14.8.2007.
2.2.
Prior
to the execution of the said lease deed, on 29.11.2006 the respondent had offered
to sell the two Tea estates to the appellant for a consideration of Rupees four
crores. The appellant agreed to purchase them subject to detailed verification.
The appellant wrote a letter dated 27.6.2007 to the respondent agreeing to
purchase the said two Tea estates.
2.3.
The
appellant invested huge sums of money for improving the tea estates in the
expectation that it would either be purchasing the said estates or have a lease
for 30 years. The respondent however abruptly and illegally evicted the appellant
from the two estates and took over their management in 3January 2008. The
appellant thereafter wrote a letter dated 28.3.2008 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.
2.4.
The
appellant issued a notice dated 5.5.2008 calling upon the respondent to refer the
matter to arbitration under section 35 of the lease deed. The respondent failed
to comply. According to appellant the dispute between the parties 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.
3.
The
respondents opposed the said application. The respondents contended that the
unregistered lease deed dated 21.12.2006 for thirty years was invalid,
unenforceable and not binding upon the parties, having regard to section 107 of
Transfer of Property Act 1882 (`TP Act' for short) and section 17 and section
49 of the Registration Act, 1908 (`Registration Act' for short); that the said lease
deed was also not duly stamped and was therefore invalid, unenforceable and not
binding, having regard to section 35 of Indian Stamp Act, 1899; that clause 35 providing
for arbitration, being part of the said lease deed, was also invalid and unenforceable.
The respondent denied that they had agreed to sell the two tea estates to the
respondent for a consideration of Rupees four crores. The appellant also denied
that the respondent had invested any amount in the tea estates. It contended
that as the lease deed itself was invalid, the appellant could not claim
appointment of an arbitrator under the arbitration agreement forming part of
the said deed.
4.
The
learned Chief Justice of Guwahati High Court dismissed the appellant's
application by order dated 28.5.2010. He held that the lease deed was compulsorily
registrable under section 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.
5.
On
the contentions urged the following questions arise for consideration : (i) Whether
an arbitration agreement contained in an unregistered (but compulsorily
registrable) instrument is valid and enforceable? (ii) Whether an arbitration
agreement in an unregistered instrument which is not duly stamped, is valid and
enforceable?(iii) Whether there is an arbitration agreement between the
appellant and respondent and whether an Arbitrator should be appointed? Re :
Question (i)
6.
Section
17(1)(d) of Registration Act and section 107 of TP Act provides that leases of immovable
property from year to year, or for any term exceeding one year or reserving a
yearly rent, can be made only by a registered instrument. Section 49 of the
Registration Act, 1908, sets out the effect of non-registration of documents
required to be registered. The said section is extracted below : "49.Effect
of non-registration of documents required to be Registered.- No document
required by section 17 or by any provision of the Transfer of Property Act,
1882 (4 of 1882)], to be registered shall—
(a) affect any
immovable property comprised therein, or (b) confer any power to adopt, or (c)
be received as evidence of any transaction affecting such property or conferring
such power, unless it has been registered: provided that an unregistered
document affecting immovable property and required by this Act or the Transfer
of Property Act, 1882 (4 of 1882), to be registered may be received as evidence
of a contract in a suit for specific performance under Chapter II of the
Specific Relief Act, 1877 (3 of 1877) as evidence of any collateral transaction
not required to be effected by registered instrument."Section 49 makes it
clear that a document which is compulsorily registrable, if not registered,
will not affect the immovable property comprised therein in any manner.
It will also not be received
as evidence of any transaction affecting such property, except for two limited
purposes. First is as evidence of a contract in a suit for specific
performance. Second is as evidence of any collateral transaction which by itself
is not required to be effected by registered instrument. A collateral
transaction is not the transaction affecting the immovable property, but a transaction
which is incidentally connected with that transaction. The question is whether
a provision for arbitration in an unregistered document (which is compulsorily
registrable) is a collateral transaction, in respect of which such unregistered
document can be received as evidence under the proviso to section 49 of the
Registration Act.
7.
When
a contract contains an arbitration agreement, it is a collateral term relating
to the resolution of disputes, unrelated to the performance of the contract. It
is as if two contracts -- one in regard to the substantive terms of the main
contract and the other relating to resolution of disputes -- had been rolled
into one, for purposes of convenience.
An arbitration clause
is therefore an agreement independent of the other terms of the contract or the
instrument. Resultantly, even if the contract or its performance is terminated
or comes to an end on account of repudiation, frustration or breach of
contract, the arbitration agreement would survive for the purpose of resolution
of disputes arising under or in connection with the contract. Similarly, when
an instrument or deed of transfer (or a document affecting immovable property)
contains an arbitration agreement, it is a collateral term relating to resolution
of disputes, unrelated to the transfer or transaction affecting the immovable
property.
It is as if two
documents - one affecting the immovable property requiring registration and the
other relating to resolution of disputes which is not compulsorily registrable
- are rolled into a single instrument. Therefore, even if a deed of transfer of
immovable property is challenged as not valid or enforceable, the arbitration
agreement would remain unaffected for the purpose of resolution of disputes arising
with reference to the deed of transfer. These principles have now found statutory
recognition in sub-section (1) of section 16 of the Arbitration and
Conciliation Act 1996 (`Act' for short) which is extracted below : "16. Competence
of arbitral tribunal to rule on its jurisdiction. –
(1) The arbitral
tribunal may rule on its own jurisdiction, including ruling on any objections
with respect to the existence or validity of the arbitration agreement, and for
that purpose,-- (a) an arbitration clause which forms part of a contract shall
be treated as an agreement independent of the other terms of the contract; and (b)
a decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause."
8.
But
where the contract or instrument is voidable at the option of a party (as for
example under section 19 of the Indian Contract Act, 1872), the invalidity that
attaches itself to the main agreement may also attach itself to the arbitration
agreement, if the reasons which make the main agreement voidable, exist in
relation to the making of the arbitration agreement also. For example, if a
person is made to sign an agreement to sell his property under threat of
physical harm or threat to life, and the said person repudiates the agreement on
that ground, not only the agreement for sale, but any arbitration agreement
therein will not be binding.
9.
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. Re :
Question (ii)
10.
What
if an arbitration agreement is contained in an unregistered (but compulsorily
registrable) instrument which is not duly stamped? To find an answer, it may be
necessary to refer to the provisions of the Indian Stamp Act, 1899 (`Stamp Act'
for short). Section 33 of the Stamp Act relates to examination and impounding
of instruments. The relevant portion thereof is extracted below : "33.Examination
and impounding of instruments.-
(1) Every person having
by law or consent of parties authority to receive evidence, and every person in
charge of a pubic office, except an officer of police, before whom any
instrument, chargeable, in his opinion, with duty, is produced or comes in the
performance of his functions, shall, if it appears to him that such instrument
is not dull stamped, impound the same.
(2) For that purpose
every such person shall examine every instrument so chargeable and so produced or
coming before him in order to ascertain whether it is stamped with a stamp of
the value and description required by the law in force in India when such
instrument was executed or first executed : x x x x " 1Section 35 of Stamp
Act provides that instruments not duly stamped is inadmissible in evidence and
cannot be acted upon. The relevant portion of the said section is extracted
below : "35. Instruments not duly stamped inadmissible in evidence, etc.
-- No instrument chargeable with duty shall be admitted in evidence for any purpose
by any person having by law or consent of parties authority to receive evidence,
or shall be acted upon, registered or authenticated by any such person or by
any public officer, unless such instrument is duly stamped : Provided that—
(a) any such instrument
shall be admitted in evidence on payment of the duty with which the same is
chargeable, or, in the case of an instrument insufficiently stamped, of the amount
required to make up such duty, together with a penalty of five rupees, or, when
ten times the amount of the proper duty or deficient portion thereof exceeds five
rupees, of a sum equal to ten times such duty or portion." x x x x xHaving
regard to section 35 of Stamp Act, unless the stamp duty and penalty due in respect
of the instrument is paid, the court cannot act upon the instrument, which means
that it cannot act upon the arbitration agreement also which is part of the
instrument. Section 35 of Stamp Act is distinct and different from section 49 of
Registration Act in regard to an unregistered document. Section 35 of Stamp Act,
does not contain a proviso like to section 49 of Registration Act enabling the
instrument to be used to establish a collateral transaction.
11.
The
scheme for appointment of arbitrators by the Chief Justice of Guwahati High
Court 1996 requires an application under section 11 of the Act to be accompanied
by the original arbitration agreement or a duly certified copy thereof. In fact,
such a requirement is found in the scheme/rules of almost all the High Courts.
If what is produced is a certified copy of the agreement/contract/instrument
containing the arbitration clause, it should disclose the stamp duty that has
been paid on the original. Section 33 casts a duty upon every court, that is a
person having by law authority to receive evidence (as also every arbitrator
who is a person having by consent of parties, authority to receive evidence) before
whom an unregistered instrument chargeable with duty is produced, to examine
the instrument in order to ascertain whether it is duly stamped. If the court comes
to the conclusion that the instrument is not duly stamped, it has to impound the
document and deal with it as per section 38 of the Stamp Act.
Therefore, when a
lease deed or any other instrument is relied upon as contending the arbitration
agreement, the court should consider at the outset, whether an objection in
that behalf is raised or not, whether the document is properly stamped. If it comes
to the conclusion that it is not properly stamped, it should be impounded and
dealt with in the manner specified in section 38 of Stamp Act. The court cannot
act upon such a document or the arbitration clause therein. But if the deficit
duty and penalty is paid in the manner set out in section 35 or section 40 of
the Stamp Act, the document can be acted upon or admitted in evidence.
12.
We
may therefore sum up 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 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. Re : Question (iii)
13.
Where
a lease deed is for a term of thirty years and is unregistered, the terms of such
a deed cannot be relied upon to claim or enforce any right 1under or in respect
of such lease. It can be relied upon for the limited purposes of showing that
the possession of the lessee is lawful possession or as evidence of some
collateral transaction. Even if an arbitrator is appointed, he cannot rely upon
or enforce any term of the unregistered lease deed. Where the arbitration agreement
is not wide and does not provide for arbitration in regard to all and whatsoever
disputes, but provides only for settlement of disputes and differences arising
in relation to the lease deed, the arbitration clause though available in theory
is of little practical assistance, as it cannot be used for deciding any
dispute or difference with reference to the unregistered deed.
14.
In
this case, clause 35 of the lease deed reads as under : "That any dispute
or difference arising between the parties in relation to or in any manner
touching upon this deed shall be settled by Arbitration in accordance with the provisions
of the Arbitration and Conciliation Act, 1996 which shall be final and binding on
the parties hereto. The Government law will be Indian. The venue of Arbitration
shall be at Assam and Court at Assam alone shall have jurisdiction for disputes
and litigations arising between the lessor/first party and the lessee/second
party in context with the above mentioned scheduled property." Having regard
to the limited scope of the said arbitration agreement (restricting it to
disputes in relation to or in any manner touching upon the lease deed), the arbitrator
will have no jurisdiction to decide any dispute which does not relate to the lease
deed. Though the Arbitrator will have 1jurisdiction to decide any dispute
touching upon or relating to the lease deed, as the lease deed is unregistered,
the arbitration will virtually be a non-starter. A party under such a deed may have
the luxury of having an arbitrator appointed, but little else. Be that as it
may.
15.
Before
an Arbitrator can be appointed under section 11 of the Act, the applicant should
satisfy the learned Chief Justice or his designate that the arbitration agreement
is available in regard to the contract/document in regard to which the dispute
has arisen. For example if the parties had entered into two agreements and arbitration
clause is found only in the first agreement and not in the second agreement,
necessarily an arbitrator can be appointed only in regard to disputes relating
to the first agreement and not in regard to any dispute relating to the second
agreement. This court in Yogi Agarwal vs. Inspiration Clothes & U - (2009)
1 SCC 372 held : "When Sections 7 and 8 of the Act refer to the existence
of an arbitration agreement in regard to the current dispute between the parties,
they necessarily refer to an arbitration agreement in regard to the current dispute
between the parties or the subject-matter of the suit. It is fundamental that a
provision for arbitration, to constitute an arbitration agreement for the
purposes of Sections 7 and 8 of the Act, should satisfy two conditions. Firstly,
it should be between the parties to the dispute. Secondly, it should relate to
or be applicable to the dispute."
16.
In
this case, the appellant seeks arbitration in regard to the following three
distinct disputes: (a) for enforcing an alleged agreement of sale of two tea
estates, (b) for enforcing the lease for thirty years; and (c) for recovery of
amounts spent by it in regard to the estates on the assumption that it was
entitled to purchase the property or at least have a lease of 30 years.
17.
It
is clear from the petition averments (Para 11 of the application) that the alleged
agreement of sale was entered prior to the lease deed dated 21.12.2006 and there
was no arbitration agreement in regard to such agreement of sale. When admittedly
there is no arbitration agreement in regard to the alleged agreement of sale,
the appellant cannot seek arbitration with reference to any dispute regarding
such agreement of sale, whether it is for performance or for damages for breach
or any other relief arising out of or with reference to the agreement of sale.
18.
An
Arbitrator can no doubt be appointed in regard to any disputes relating to the
lease deed. But as noticed above, as the lease deed was not registered, the Arbitrator
can not rely upon the lease deed or any term thereof and the lease deed cannot
affect the immovable property which is the subject matter of the lease nor be received
as evidence of any transaction 1affecting such property. Therefore, the Arbitrator
will not be able to entertain any claim for enforcement of the lease.
19.
Lastly
we may consider the claim for recovery of the amounts allegedly spent towards
the tea estates, as a consequence of respondents not selling the estates or not
permitting the appellant to enjoy the lease for 30 years. If this claim is treated
as a claim for damages for breach in not granting the lease for 30 years then
it would be for enforcement of the terms of the lease deed which is
impermissible under section 49 of the Registration Act. If it is treated as
claim de hors the lease deed then the arbitrator may not have jurisdiction to
decide the dispute as the arbitration agreement (clause 35) is available only
to settle any dispute or difference arising between the parties in relation to
or in any manner touching upon the lease deed and not in regard to disputes in
general.
20.
In
paras 18 and 19 above, we have considered and stated the general legal position
for guidance in arbitrations, even though the same does not directly arise for
consideration within the limited scope of the proceedings under section 11 of
the Act. Conclusion
21.
In
view of the above this 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.
.............................J.
(R V Raveendran)
.............................J.
(A K Patnaik)
New
Delhi;
July
20, 2011
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