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.

The Supreme Court in the matter of M/s Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & other Charities & Ors. Vs. M/s Bhaskar Raju & Brother & Ors. Civil Appeal No.1599 Of 2020 (Arising out of SLP(C) No. 7088 of 2015) held that 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, 1899 and that the Court cannot act upon such a document or the arbitration clause therein.

Facts
The appellant No.1 is a registered charitable trust and rest of the appellants are trustees of the appellant no. 1. Appellant No.1 desired to develop the land owned by it and construct a multi-purpose community hall with office complex regarding which, they executed a lease deed with the Respondent No. 1 for a period of 38 years. The said lease deed was executed on 31.05.1996 and a subsequent lease deed was further executed on 12.03.1997 between the same parties. The terms of the new lease deed were identical to the old one.
The appellant- Trust filed Original Suit being O.S No. 8952/2010 before the City Civil Court on the ground that there was not much progress in the development of multi-purpose community hall with office complex and in the year 2008, certain re-negotiations took place between the parties but the same failed to materialize. Also, out of the initial fixed amount of Rs.55,00,000/- as an interest free deposit, only 25 lakhs were deposited by the Respondents. Respondents No. 1 & 2, after participating in the suit proceedings for almost a period of 2 years and 3 months, invoked the arbitration clause in the lease deed by filing a petition before the High Court of Karnataka.
Appellant raised the contention that the lease deed dated 12.03.1997 being insufficiently stamped had to be mandatorily impounded u/s 33 of the Karnataka Stamp Act, 1957 and it cannot be relied upon unless proper duty and penalty was paid. In this regard the Single Judge of Karnataka High Court referred the matter to registrar (Judicial) and the same held that the document in question is a lease deed and not an agreement to lease and therefrom, directed the respondents to pay deficit stamp duty. However, the High Court without consideration to the report of Registrar (Judicial) passed the order appointing an arbitrator to decide the dispute between the parties.
Appellant contented that the lease deed was insufficiently stamped and the respondents after contesting the suit for so long, had invoked the arbitration clause now, when the suit filed by the appellants already stands decreed by a judgment and decree dated 2.3.2015.
Issue
The question framed by the Hon’ble Supreme Court was as to whether clause 36 (arbitration clause) in the lease deed dated 12.3.1997 could be acted upon to enforce the arbitration clause contained therein.

Ratio
The Apex Court referred to the case of SMS Tea Estates Pvt. Ltd. Vs. Chandmari Tea Company Pvt. Ltd., (2011) 14 SCC 66, which dealt with the question as to what if the arbitration agreement is contained in an unregistered (but compulsorily registrable) instrument which is not duly stamped? The Court held that, having regard to Section 35 of the 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. 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.

The Court thus observed that, “It can thus clearly be seen, that this Court has in unequivocal terms held, that 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. It has further been held, that 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, 1899. It has also been held, that the Court cannot act upon such a document or the arbitration clause therein. However, if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act, 1899, the document can be acted upon or admitted in evidence.