Arbitration Clause in Insufficiently Stamped Lease Deed: Supreme Court Rules on Enforceability

Introduction

Date of the Judgment: 14 February 2020

Citation: 2020 INSC 144

Judges: S.A. Bobde, CJI, B.R. Gavai, J., and Surya Kant, J.

Can an arbitration clause within a lease deed be enforced if the deed itself lacks the required stamp duty? The Supreme Court of India recently tackled this crucial question in a case involving a charitable trust and a development company. This case clarifies the interplay between arbitration law and stamp duty requirements, setting a precedent for similar disputes. The judgment was delivered by a three-judge bench comprising of Chief Justice S.A. Bobde, Justice B.R. Gavai and Justice Surya Kant.

Case Background

The case revolves around a dispute between M/S Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram, a charitable trust (appellant No. 1), and M/S Bhaskar Raju & Brothers, a development company (respondent No. 1). The trust owned a piece of land and sought to develop it by constructing a multi-purpose community hall and office complex.

Respondent No. 1 offered to develop the property and renovate a Samadhi located on the land. Negotiations led to a lease deed executed on 31 May 1996, between the trust and the development company for a period of 38 years. The development company was to pay an interest-free deposit of Rs. 55,00,000, to be refunded at the end of the lease term, and a monthly ground rent. The company was also responsible for constructing a multi-purpose auditorium with a seating capacity of 1,000 people, along with other amenities. The company was also tasked with securing vacant possession of the property by evicting existing tenants.

A subsequent lease deed was executed on 12 March 1997, with similar terms. However, progress on the project stalled between 1997 and 2000. In 2008, renegotiations failed. The trust claimed that the company only paid an initial amount of Rs. 25 lakhs towards the security deposit and was interfering with the trust property. The trust filed a suit (O.S. No. 8952 of 2010) before the City Civil Court at Bangalore, seeking an injunction against the development company, alleging desecration of the Samadhi and attempts to illegally execute a new lease deed.

Timeline

Course of Proceedings

The City Civil Court at Bangalore granted a status quo order on the property. After participating in the suit for about two years and three months, the development company invoked the arbitration clause in the lease deeds on 6 September 2013. They then filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Karnataka on 11 October 2013, seeking the appointment of an arbitrator.

The trust objected to this, arguing that the lease deed dated 12 March 1997, was insufficiently stamped and should be impounded under Section 33 of the Karnataka Stamp Act, 1957. The High Court referred the matter to the Registrar (Judicial) to determine this issue. The Registrar concluded that the document was a lease deed, not an agreement to lease, and directed the development company to pay a deficit stamp duty and penalty of Rs. 1,01,56,388.

However, the High Court, without considering the Registrar’s report, allowed the company’s petition and appointed an arbitrator. Aggrieved by this, the trust appealed to the Supreme Court.

Legal Framework

The Supreme Court considered Sections 33 and 34 of the Karnataka Stamp Act, 1957, which deal with the examination and impounding of instruments and the admissibility of unstamped or insufficiently stamped documents.

Section 33 of the Karnataka Stamp Act, 1957, states:

“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 public 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 duly stamped, impound the same.”

Section 34 of the Karnataka Stamp Act, 1957, states:

“34. 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:”

These sections mandate that any instrument presented before a person with the authority to receive evidence must be examined for proper stamping. If found insufficiently stamped, the document must be impounded and cannot be acted upon until the required duty and penalty are paid.

Arguments

The appellants, represented by Shri Nikhil Nayyar, argued that the lease deed dated 12 March 1997, was insufficiently stamped and therefore could not be relied upon by the High Court to appoint an arbitrator. They also contended that the development company had failed to take any steps to further the lease deed for 16 years and only invoked the arbitration clause when the suit filed by the trust was nearing completion.

The respondents, represented by Shri Balaji Srinivasan, argued that the agreement was, in effect, an agreement to lease, which was to be stamped only after all tenants were evicted and permission to start construction was granted. They contended that they were negotiating with tenants all along and that the agreement was for developing the property immediately after it was vacated.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the arbitration clause in the lease deed dated 12.3.1997 could be acted upon to enforce the arbitration clause contained therein, given that the lease deed was insufficiently stamped.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited [(2011) 14 SCC 66] – Supreme Court of India. This case held that an arbitration agreement contained in an unstamped or insufficiently stamped document cannot be acted upon until the required stamp duty and penalty are paid.

The Supreme Court also considered:

• Section 33 of the Karnataka Stamp Act, 1957 – which deals with the examination and impounding of instruments.
• Section 34 of the Karnataka Stamp Act, 1957 – which deals with the admissibility of unstamped or insufficiently stamped documents.

Judgment

The Supreme Court, relying on SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited [(2011) 14 SCC 66], held that the High Court erred in relying on the lease deed dated 12 March 1997, as it was insufficiently stamped. The Court emphasized that as per Section 34 of the Karnataka Stamp Act, 1957, an insufficiently stamped document cannot be acted upon.

The Court noted that the Registrar (Judicial) of the High Court had already determined that the document was a lease deed and not an agreement to lease, and had directed the development company to pay the deficit stamp duty and penalty, which they failed to do.

The Court also observed that the development company had taken contradictory stands, admitting in their written statement before the City Civil Court that the document was a lease deed, while arguing before the High Court that it was an agreement to lease. The Court also noted that the lease deed clearly stated that the lease period was for 38 years from the date of signing of the lease deed.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legal requirement that an instrument must be properly stamped before it can be acted upon. The Court emphasized the mandatory nature of Sections 33 and 34 of the Karnataka Stamp Act, 1957, and the precedent set by SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited [(2011) 14 SCC 66]. The Court also considered the conduct of the respondents, who had failed to pay the deficit stamp duty and had taken contradictory stands in different courts. The court was also influenced by the fact that the respondents had not taken any action for 16 years and only invoked the arbitration clause when the suit filed by the appellants was nearing completion.

The court’s reasoning was primarily based on the legal principle that an insufficiently stamped document cannot be acted upon. The court also considered the facts of the case, including the contradictory stands taken by the respondent, and the delay in invoking the arbitration clause.

Key Takeaways

• Stamp Duty is Mandatory: Parties must ensure that all documents, especially lease deeds, are properly stamped as per the relevant state laws. Failure to do so can render the document inadmissible in evidence and unenforceable, including any arbitration clause contained within.
• Court’s Duty: Courts are obligated to examine whether a document is properly stamped, even if no objection is raised by the parties.
• Timely Action: Parties should not delay invoking arbitration clauses. Delay can be seen as a sign of bad faith, especially if the party has participated in other legal proceedings.
• Consistency in Pleadings: Parties should maintain consistency in their pleadings before different courts. Contradictory stands can negatively impact their case.

Directions

The Supreme Court allowed the appeal and quashed the High Court’s judgment and order dated 1 December 2014. The petition filed by the development company under Section 11 of the Arbitration Act was rejected.

Development of Law

The ratio decidendi of this case is that an arbitration clause in an insufficiently stamped document is unenforceable until the document is properly stamped as per the relevant stamp act. This judgment reinforces the principle laid down in the case of SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited [(2011) 14 SCC 66]. There is no change in the previous position of the law, but it has been reiterated with more clarity.

Conclusion

The Supreme Court’s judgment in this case clarifies that an arbitration clause within an insufficiently stamped lease deed cannot be enforced. The Court emphasized the mandatory nature of stamp duty requirements and the importance of adhering to legal procedures. This decision underscores the need for parties to ensure that all documents are properly stamped to avoid future legal complications.