Judgment Critique – SMS Tea Estates Pvt. Ltd. Versus Chandmari Tea Co. Pvt. Ltd.
: ANIL XAVIER
The Supreme Court of India was faced with two important questions relating to arbitration agreement in the case, “SMS Tea Estates Pvt. Ltd. Vs. Chandmari Tea Co. Pvt. Ltd.”(1) . The questions were:
(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?
Facts in brief:
The appellant and the respondent entered into a lease deed, whereby the appellant was granted lease of two tea estates for a term of 30 years. The respondent abruptly evicted the appellant from the estates and took over their management. The lease deed provided for settlement of disputes between the parties by arbitration and the appellant issued a notice calling upon the respondent to refer the matter to arbitration. The respondent contended that the unregistered lease deed 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 (‘Stamp Act’ for short); that the clause providing for arbitration, being part of the said lease deed, was also invalid and unenforceable. 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.
The appellant filed an application under section 11 of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’ for short) for appointment of an arbitrator. The learned Chief Justice of Guwahati High Court dismissed the appellant's application holding 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 the arbitration clause could not be relied upon for seeking reference to arbitration. The said order was challenged in appeal by special leave before the Supreme Court.
Supreme Court decision on Question No. (i):
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 sets out the effect of non-registration of documents required to be registered. The section 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 as evidence of a contract in a suit for specific performance, second 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.
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 Act. 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.
Supreme Court decision on Question No. (ii):
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 Stamp Act. Section 33 of the Stamp Act relates to examination and impounding of instruments. Section 35 of Stamp Act provides that instruments not duly stamped is inadmissible in evidence and cannot be acted upon.
Having 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.
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.
Before analysing the judgment, it would be worthwhile to look at the definition of “arbitration agreement” under the Arbitration Act, which is seen to be overlooked in the judgment. Section 7 defines arbitration agreement. It means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement shall be in writing and may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
Sub-section 4 of Sec. 7 states that an arbitration agreement is in writing if it is contained in –
(a) A document signed by the parties;
(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
Sub-section 5 of Sec. 7 also states that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
Clauses (a) and (b) of sub-section (1) of section 16 of the Arbitration Act also states that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract and that a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
Therefore, the Arbitration Act provides an extensive definition of an arbitration agreement and any understanding or consensus between the parties to refer any dispute to arbitration is given due effect. This definition has been made in consonance with the object of the Arbitration Act, i.e., to give party autonomy and to minimize the supervisory role of courts.
The Supreme Court while deciding Question No. (i) has held that an arbitration clause is an agreement independent of the other terms of the contract or the instrument. The court held that 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. For easier understanding, it could be stated as two sets of agreements pinned into one file for convenience. 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. This position was so held even earlier by the Supreme Court in its judgment, “Magma Leasing & Finance Limited & another Vs. Potluri Madhavilata & Another”(2).
If for this reason, the Court has found that the arbitration agreement has to be treated as a separate agreement independent of the deed which is unregistered (but compulsorily registrable) and therefore valid, why should not the same principle apply for a document which is not duly stamped. Since arbitration agreement is not compulsorily registrable or required to be stamped, the independent and separate arbitration agreement has to survive. This is also evident from the definition of “arbitration agreement” as specified in Sections 7 and 16 of the Arbitration Act.
The Court while examining the validity of an arbitration agreement contained in a contract which is not properly stamped, interpreted the legality based on Section 33 of the Stamp Act and concluded that 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.
Should the very essence or being of an “arbitration agreement” be interpreted as given under the Arbitration Act or based on the Stamp Act?
The Supreme Court had occasion to consider the interpretation of two different special enactments in “Life Insurance Corporation of India Vs. D.J. Bahadur and Others”(3). The Court held as follows, “When the legislature has given its attention to a separate subject and made provision for it, the presumption is that a subsequent general enactment is not intended to interfere with the special provision unless it manifests that intention very clearly. Each enactment must be construed in that respect according to its own subject matter and its own terms. The crucial question which demands an answer before we settle the issue is as to whether the LIC Act is a special statute and the ID Act a general statute so that the latter protanto repeals or prevails over the earlier one. What do we mean by a special statute and, in the scheme of the two enactments in question, which can we regard as the special Act and which the general?”
The Court further held, “In determining whether a statute is a special or a general one, the focus must be on the principal subject matter plus the particular perspective. For certain purposes, an Act may be general and for certain other purposes it may be special and we cannot blur distinctions when dealing with finer points of law. In law, we have a cosmos of relativity, not absolutes-so too in life. The ID Act is a special statute devoted wholly to investigation and settlement of industrial disputes which provides definitionally for the nature of industrial disputes coming within its ambit. It creates an infrastructure for investigation into, solution of and adjudication upon industrial disputes. It also provides the necessary machinery for enforcement of awards and settlements. From alpha to omega the ID Act has one special mission – the resolution of industrial disputes through specialised agencies according to specialised procedures and with special reference to the weaker categories of employees coming within the definition of workmen. Therefore, with reference to industrial disputes between employers and workmen, the ID Act is a special statute, and the LIC Act does not speak at all with specific reference to workmen. On the other hand, its powers relate to the general aspects of nationalisation, or management when private businesses are nationalised and a plurality of problems which, incidentally, involve transfer of service of existing employees of insurers. The workmen qua workmen and industrial disputes between workmen and the employer as such, are beyond the orbit of and have no specific, or special place in the scheme of the LIC Act. And whenever there was a dispute between workmen and management the ID Act mechanism was resorted to.”
The Court in the very same judgment went on to say, “What is special or general is wholly a creature of the subject and context and may vary with situation, circumstances and angle of vision. Law is no abstraction but realises itself in the living setting of actualities. Which is a special provision and which general, depends on the specific problem, the topic for decision, not the broad rubric nor any rule of thumb. The peaceful coexistence of both legislations is best achieved, if that be feasible, by allowing to each its allotted field for play. Sense and sensibility, not mechanical rigidity gives the flexible solution.”
In the instant case, the principal subject matter was with respect to the enforceability of an arbitration agreement and the special enactment which covers the principal subject matter was the Arbitration Act, When the Arbitration Act had defined an “arbitration agreement”, and when the same was defined to cover any written arrangement between the parties to refer a dispute to arbitration as legally valid and when an arbitration agreement is not statutorily required to be registered or stamped, the Court ought to have upheld the validity of the arbitration agreement, even if it is part of a contract which is improperly stamped. In this case Stamp Act is a general statute and Arbitration Act is a special statute. Stamp Act does not deal with matters coming under the provisions of Arbitration. Arbitration Act being a subsequent enactment and being a special enactment dealing exclusively with the provisions of arbitration, interpretation has to be made treating the Arbitration Act as the special enactment.
The Supreme Court in “J.K. Cotton Spinning & Weaving Mills Co. Ltd. V. State of Uttar Pradesh” (4) has also held, “The rule that general provisions should yield to specific provisions is not an arbitrary principle made by lawyers and judges but springs from the common understanding of men and women that when the same person gives two directions one covering large number of matters in general and another to only some of them his intention is that these latter directions should prevail as regards these while as regards all the rest the earlier direction should have effect”.
Under the scheme of appointment of arbitrators also, what is required and contemplated is to produce the original or true copy of the “arbitration agreement” and not the original or true copy of the contract or deed (which may contain an arbitration clause). When the parties agree that there is an arbitration clause, but when one party challenges it based on the technicality of insufficient stamp in the parent deed, the object of the Arbitration Act is defeated. While defining “arbitration agreement”, section 7 of the Arbitration Act has gone to the extent of stating that an arbitration agreement is in writing, if it is contained in an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
So, when the arbitration agreement is admitted, it has to be given effect to. The fact that the arbitration agreement forms part of a deed which is compulsorily registrable or required to be stamped should not and cannot defeat the intent of the parties to seek their resolution of disputes by way of arbitration.
(1) 2011 (4) CTC 574 / CDJ 2011 SC 684
(2) AIR 2010 SC 488
(3) AIR 1980 SC 2181
(4) AIR 1961 SC 1170
(Author: Anil Xavier is a lawyer and an IMI Certified Mediator. He is a charter member and the President of Indian Institute of Arbitration & Mediation (www.arbitrationindia.org). He is also a member of the Independent Standards Commission of the International Mediation Institute, The Hague, Netherlands and Committee Member of Asian Mediation Association. He can be reached at firstname.lastname@example.org)
The article was first published in the “Indian Arbitrator” – August 2011 (Volume 3, Issue 8), https://www.arbitrationindia.com/articles.html