Here we will discuss the following issues:

(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 parties and whether an Arbitrator should be appointed?

What is an Arbitration Agreement? Its provided in Section 7 of the Arbitration Act, 1996. It reads as under:

  1. Arbitration agreement.—(1) In this Part, “arbitration agreement” 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.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in— (a) a document signed by the parties; (b) exchange of letters, telex, telegrams or other means of telecommunication 1 [including communication through electronic means] which provide a record of the agreement; or (c) an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.

(5) 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.

Section 17 of Registration Act provides for compulsory Registration: https://indiankanoon.org/doc/561156/ ( click on the link for detailed provision.)

Section 49 of the said Act lays down the effect of the non-registration of documents. https://indiankanoon.org/doc/1768154/ ( click on the link for detailed provision.)

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. The second is as evidence of any collateral transaction which by itself is not required to be effected by a 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.

English Law Views on distinct identity and separation of Arbitration Clause:

Lord Wright in his opinion stated that: “An arbitration agreement is a collateral to the substantial stipulations of the contract. It is merely procedural and ancillary, it is a mode of settling disputes, though the agreement to do so is itself subject to the discretion of the court.”

Lord MacMillan in his opinion stated that “It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement. The purposes of the contract have failed, but the arbitration clause is not one of the purposes of the contract.”

[1993] 1 Lloyd’s Rep. 455 (CA) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms a part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

The law as it stands in U.K. today is that if the court while entertaining a plea to refer the parties to arbitration, is satisfied of the existence of the arbitration agreement, it is incumbent to refer the parties to arbitration, even if objections to the validity of the substantive contract are raised. Where the arbitration agreement is embedded in an underlying contract, the court would not entertain the dispute on the issue of jurisdiction until the arbitral tribunal has ruled on this issue.

FRENCH VIEW:

The French Cour de Cassation recognized the doctrine of separability in GOSSET V. CAPARELLIIN CASS. CIV. LERE, 7 MAY 1963 (DALLOZ, 1963), 545. wherein it was held that: “In international arbitration, the agreement to arbitrate, whether concluded separately or included in the contract to which it relates, is always save in exceptional circumstances, … completely autonomous in law which excludes the possibility of it being affected by the possible invalidity of the main contract.” This is where the Doctrine of Separability was laid down.

INDIAN VIEW AND EVOLUTION :

In M/S SMS TEA ESTATES P.LTD VS M/S CHANDMARI TEA CO.P.LTD on 20 July 2011 it was observed by Supreme Court that, 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 affecting such property. Therefore, the Arbitrator will not be able to entertain any claim for enforcement of the lease.

In GARWARE WALL ROPES LTD. COASTAL MARINE CONSTRUCTIONS & ENGINEERING LTD.  In this matter, sole arbitrator was appointed by Bombay High Court in an application made under Section 11 of the Arbitration Act,1996 to hear the disputes arising between the parties. The question raised before the Supreme Court appeal was,  what is the effect of an arbitration clause contained in a contract that requires to be stamped. Held: the appellant had to pay the stamp duty and cannot take advantage of his own wrong, are of no avail when it comes to the application of mandatory provisions of law

 In ANWAR HASAN KHAN V. MOHD. SHAFI, (2001) 8 SCC 540, Supreme Court laid down what is meant by the doctrine of harmonious construction, thus: “8. It is settled that for interpreting a particular provision of an Act, the import and effect of the meaning of the words and phrases used in the statute has to be gathered from the text, the nature of the subject matter and the purpose and intention of the statute. It is cardinal principle of construction of a statute that effort should be made in construing its provisions by avoiding the conflict and adopting a harmonious construction. The statute or rules made thereunder should be read as a whole and one provision should be construed with reference to the other provision to make the provision consistent with the object sought to be achieved. The well-known principle of harmonious construction is that effect should be given to all the provisions and a construction that reduces one of the provisions to a “dead letter” is not harmonious construction.”

ACCEPTANCE OF INTERNATIONAL VIEW BY SUPREME COURT FOR FIRST TIME:

 WHY THERE WAS A SHIFT?

In 2016 there came an amendment to Section11 of the Arbitration Act,1996. Sub-Section 6A was inserted which reads as under: [(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

This ratio continued till Supreme Court changed the paradigm in the matter of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd   11 January 2021 in which it was held that “ It is well settled in arbitration jurisprudence that an arbitration agreement is a distinct and separate agreement, which is independent from the substantive commercial contract in which it is embedded. This is based on the premise that when parties enter into a commercial contract containing an arbitration clause, they are entering into two separate agreements viz. (i) the substantive contract which contains the rights and obligations of the parties arising from the commercial transaction; and, (ii) the arbitration agreement which contains the binding obligation of the parties to resolve their disputes through the mode of arbitration.”  In Para 16 Court held that 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 declaring that while proceeding with the Section 11 application, the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Maharashtra Stamp Act, who will then decide issues qua payment of stamp duty and penalty (if any) as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the instrument. As soon as stamp duty and penalty (if any) are paid on the instrument, any of the parties can bring the instrument to the notice of the High Court, which will then proceed to expeditiously hear and dispose of the Section 11 application. This will also ensure that once a Section 11 application is allowed and an arbitrator is appointed, the arbitrator can then proceed to decide the dispute within the time frame provided by Section 29A of the 1996 Act.

Conclusion:

(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 parties and whether an Arbitrator should be appointed?

As Law stands today answers to all questions are in the affirmative.

Even if an agreement is not stamped or registered Arbitration Clause is independent and distinct. It is called the theory of kompetenze -kompetenze which originated way back in 1963 laid down by the French Court. It took nearly more than 50 years to adopt the international view. We will learn the theory of kompetenze -kompetenze   in our next blog.

Shruti Desai

14th November,2021