The Supreme Court of India recently examined the validity and effect of an arbitration clause contained in an unregistered and unstamped lease deed.
In its judgment of July 20, 2011 (in SMS Tea Estates v. Chandmari Tea Co.), the Court held that an unregistered lease deed cannot affect the underlying immoveable property if the lease is of a kind that is compulsorily registerable under Indian law. (In other words, if a lease is required to be registered and is not registered, the result is as good as if the lease did not even exist.)
However, the Supreme Court found that the validity of an arbitration clause in such unregistered lease deed would remain unaffected. The Court reasoned that the arbitration clause was a collateral term relating to dispute resolution, and was "unrelated to the transfer or transaction affecting the immoveable property." (Emphasis in original.)
This said, the Court went on to point out that the surviving validity of the arbitration clause would be of little value—"[a] party under such a deed may have the luxury of having an arbitrator appointed, but little else."
The Supreme Court held that because of provisions in India's Registration Act of 1908, the lease deed cannot affect the underlying property. In addition, the lease deed cannot be admitted as evidence of any transaction affecting the property.
As a result, the arbitrator would not be able to entertain any claim to enforce the lease. The Court also explained that an arbitrator is effectively prevented from entertaining any claim to recover amounts spent in connection with the lease.
With regard to non-payment of stamp duty on the lease deed, the Supreme Court noted that the consequences were different—the non-payment of stamp duty affected both the property transaction and the arbitration clause.
The Court pointed out that under provisions of the relevant stamp duty law, if a court or a person in charge of a public office or even a private arbitrator comes across a document on which the required stamp duty has not been paid, then such person is required by law to impound the document and the document cannot be acted upon.
The Court ruled, however, that once the defect of non-payment is cured (e.g., by payment of the stamp duty and a penalty) the document might be subsequently acted upon by an arbitrator or court.
This judgment is likely to have wide practical application; not just for arbitrations connected with various property transactions but in other transactions too, where the documents require registration or the payment of stamp duty. Moreover, the judgment highlights the importance of ensuring that all such documents are properly registered and duly stamped.