Arbitration clause not enforceable if main instrument is not duly stamped: Supreme Court [Read Judgment]

The Supreme Court Bench comprising of CJI SA Bobde and Justices BR Gavai and Surya Kant recently observed that an agreement should be duly stamped if the arbitration clause it contains can be enforced. .The Bench reiterated that the agreement cannot not be acted upon by the Court when it is not sufficiently stamped. The observation was made while setting aside an order of the High Court of Karnataka which had appointed an arbitrator on the basis of an insufficiently stamped lease deed..The appellant before the Supreme Court had signed a lease deed with the respondent for a construction project. As per the agreement, the respondent was required to pay an amount of Rs 55 lakhs as an interest free deposit. The respondents failed to pay the security deposit in full and were trying to interfere with the possession of the project property, allegedly in collusion with one of the trustees..A suit was filed in the dispute. After participating in the suit proceedings for almost a period of about two years, the respondents issued a notice to the appellants, invoking arbitration clause in the lease deed. A petition was filed invoking Section 11(6) of the Arbitration and Conciliation Act, 1996 before the High Court of Karnataka..The appellants prayed for dismissal of the same on the ground that the lease deed was insufficiently stamped. It was argued that the deed could not be relied upon unless proper duty and penalty was paid under the Karnataka Stamp Act, 1957..The Karnataka High Court, however, directed the appointment of an arbitrator in view of the arbitration clause in the lease deed. This, despite a report filed by the Registrar (Judicial) of the High, opining that the remained of the stamp duty ought to be paid before the lease deed can be relied upon..The Supreme Court, in turn, set aside the appointment of the arbitrator, given that the appointment was on the basis of an arbitration clause in an insufficiently stamped agreement..In this regard, the Bench referred to the case of SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited wherein the Court had occasion to consider a similar issue. .In that case, the Court had held that “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.”.In view of this caselaw, the Bench in this case opined,."... when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. It has been held, that even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue."Supreme Court.Further, the Bench pointed out that if the main instrument containing the arbitration clause is not properly stamped, the Court cannot act in the arbitration clause it contains. As recorded in the judgment, .If the Court comes to the conclusion, that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in Section 38 of the Stamp Act ... the Court cannot act upon such a [insufficiently stamped] document or the arbitration clause therein.Supreme Court.The Court added that once the deficit stamp duty and penalty is paid in terms of the Stamp Act, the document can be acted upon or admitted in evidence..The appeal was thus allowed, with the Bench observing that "the High Court has totally erred in relying on the lease deed dated 12.3.1997, which was found to be insufficiently stamped.".[Read the Judgement here]