Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5820 OF 2011 [Arising out of SLP [C] No.24484/2010]

M/s. SMS Tea Estates Pvt. Ltd. … Appellant

Vs.

M/s. Chandmari Tea Co. Pvt. Ltd. … Respondent

J U D G M E N T

R.V.RAVEENDRAN, J.

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  

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Burahapahar  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  

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January 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  

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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.   

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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

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(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.  

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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  

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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,  

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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 ”

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Section  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 x

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.  

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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  

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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.  

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(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  

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under  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  

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jurisdiction 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.”  

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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  

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affecting  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.

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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)

New Delhi; ………………………..J. July 20, 2011. (A K Patnaik)

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