M/s. Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities & Ors. v. M/S Bhaskar Raju & Brothers & Ors. Civil Appeal No. 1599 of 2020, Supreme Court (decided on 14 February 2020)

Relevant Facts:

The Appellants had signed a lease deed with the Respondents.  A subsequent lease deed was also executed in the following year. As per the agreement in the lease deed, the Respondents had to pay money as an interest free deposit, which they failed to do. This resulted in disputes followed by filing of Civil Suit being filed by Appellant.

During continuance of the Suit, the Respondents invoked arbitration under the lease deeds (pre-2015 Amendment). A Section 11(6) Petition was filed before the High Court of Karnataka. The Appellants sought dismissal of the Section 11 Petition on the ground that the lease deed was insufficiently stamped and it should be mandatorily impounded. The High Court referred the matter to Registrar (Judicial) for determination of the issue. The Registrar held that the document was lease deed and not an agreement to lease and, therefore, directed the Respondents to pay deficit stamp duty. However, the High Court did not consider the Registrar’s report and appointed arbitrator allowing Section 11 Petition. The High Court order was challenged in the Supreme Court.

Issue:

Whether the arbitration clause in the lease deed not duly stamped, can be acted upon?

Judgment:

The Court relied on Division Bench judgment in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (2011) 14 SCC 66, wherein the provisions were in pari materia with the provisions of the Karnataka Stamp Act, 1957.

In short, SMS Tea Estate held that having regard to proviso to Section 49 of the Registration Act read with Section 16(1)(a) of the Arbitration Act, an arbitration agreement in a compulsorily registrable document (but not registered) can be acted upon and enforced for the purpose of arbitration as arbitration agreement does not require registration. However, it held that having regard to Section 35 of the Stamp Act, 1899 unless the stamp duty and penalty is paid, the Court cannot act upon it. If the Court concludes that it is not properly stamped, it should be impounded under Section 38 of the Stamp Act.

Following the above ratio, the Supreme Court held that the High Court erred in relying on arbitration clause as the lease deed was not sufficiently stamped.  The High Court order was set aside.

Comments:

Since the Judgement does not lay down any new principle of law, it would be worthwhile to visit recent history of two precedents on the topic though in the context of 2015 Amendment.

● United India Insurance Company Limited & Ors. v. Hyundai Engineering and Construction Company Limited & Ors. (2018) 17 SCC 607 – the existence of arbitration agreement includes enquiry into whether arbitration agreement can be said to ‘exist in law’. The possible triggering factors to bring such arbitration agreement into existence in law are relevant to consider.

● Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209 – post introduction of Section 11(6A) in 2015 Amendment, SMS Tea estate is not affected as an enquiry by Court on stamping is only enquiry into whether such arbitration agreement exists in law as it would not exist until such document is duly stamped. (The judgement elucidates the law in great detail and it worth reading to understand the nuances)

The objection as to the non-payment of stamp duty would not frustrate the arbitration in so far as the party pays the deficit duty and penalty because the same then can be acted upon or admitted in evidence.