Arbitration clause not enforceable if main instrument is not duly stamped

The Supreme Court (SC) recently in the case of 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 arising out of SLP(C) No. 7088 of 2015) (Judgement) observed that an agreement should be duly stamped in order to enforce the arbitration clause it contains. The Judgment is dated February 14, 2020. This Judgement overturns the judgement given by the Karnataka High Court (HC) in the matter of M/s. Bhaskar Raju and Brothers v. M/s. Dharmaratnakara Rai Bahadur dated December 1, 2014 by Justice Huluvadi G. Ramesh (CMP 167/2013) (Order).

The Judgment came about as a result of an appeal filed by the original respondents in the HC. In the case of the HC the original petitioners invoking the arbitration clause contained in the lease deed between the parties under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the HC. The appellants contended that the lease deed being insufficiently stamped had to be impounded under Section 33 of the Karnataka Stamp Act, 1957 and it could not be relied upon unless proper duty and penalty was paid by the respondents. The respondents argued that the agreement was in effect an agreement to lease the property which was required to be stamped only after all the tenants were evicted and the permission to start the construction was granted by the corporation. The matter was thereafter referred to the registrar of the HC who held that the document in question was lease deed and not an agreement to lease and therefore, directed the respondents to pay deficit stamp duty and penalty. The HC however passed the Order allowing the arbitration clause to be invoked without consideration of the report of the Registrar.

The SC referred to SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited ((2011) 14 SCC 66) which stated that according to Section 35 of the Stamp Act, 1899 (Stamp Act) unless the stamp duty and penalty due in respect of the instrument insufficiently stamped was paid, the court could not act upon the instrument which would leave the arbitration agreement (a part of the instrument) unenforceable. The SC further stated that even when an objection in this behalf was not raised, the court has the duty to consider the issue. The SC added that in case the court lands on the conclusion that the instrument wasn’t properly stamped, the defaulting party should be penalized and dealt with in the manner specified in Section 38 of the Stamp Act which states that the defaulting party shall send the Collector an authenticated copy of the instrument with a certificate in writing stating the amount of duty and penalty levied and shall send such amount to the Collector along with the documents.

In our considered view, the lease deed between the parties provided for an arbitration clause which could not be invoked since the said lease deed was insufficiently stamped and the same could not have been relied upon by the HC for appointing the arbitrator. The respondents had failed to take any steps in furtherance of getting the lease deed duly stamped or made an attempt to invoke the arbitration clause in the lease deed even though a period of almost sixteen (16) years had passed since the suit was instituted and only when it was in the final stages, had they invoked the arbitration clause.