Section 11(6) of the Arbitration and Conciliation Act 1996 (the 1996 Act) provides for appointment of an arbitrator by the Chief Justice or his designate if the parties fail to do so.

Section 49 of the Indian Registration Act 1908 (the Registration Act) states that if a document (which is required to be mandatorily registered) is not registered, it cannot be received as evidence in relation to any transaction affecting an immovable property. The proviso to this section states that a collateral transaction, not required to be registered, can be received as evidence.

Section 35 of the Indian Stamp Act 1899 (the Stamp Act) states that instruments not duly stamped are inadmissible in evidence.

A lease deed was executed between SMS Tea Estates Private Limited (the appellant) and Chandmari Tea Company Private Limited (the respondent), under which the respondent leased tea estates to the appellant. The lease deed provided for disputes to be resolved by arbitration. Prior to the execution of the lease deed, the respondent offered to sell the tea estates to the appellant, which the appellant had agreed to purchase via a letter. Thereafter, the appellant began improving the tea estates. The respondent, however, illegally evicted the appellant from the tea estates.

Subsequently, disputes arose between the parties and the appellant called upon the respondent to refer the disputes to arbitration. The respondent failed to comply with this request. The appellant then filed an application under section 11 of the 1996 Act before the Guwahati High Court, in order to refer the disputes to arbitration. The Chief Justice of the Guwahati High Court dismissed the application on the ground that the lease deed was not registered and therefore the arbitration clause could not be acted upon. The appellant applied by way of special leave petition to the Supreme Court of India (Supreme Court).

The questions to be considered by the Supreme Court were:

The Supreme Court held that an arbitration clause in an unregistered instrument is valid and can be acted upon. The court observed that an arbitration clause does not require registration and that it is a "collateral" transaction for the purposes of the proviso to section 49 of the Registration Act. Therefore, considering the proviso to section 49 of the Registration Act, an arbitration clause is valid and enforceable.

However, the court further held that section 35 of the Stamp Act did not contain a proviso akin to that of section 49 of the Registration Act. Therefore, section 35 of the Stamp Act would render the arbitration clause inadmissible in evidence.

The court, therefore, rejected the appellant's claim, as the agreement did not contain an enforceable arbitration clause. Even though the arbitration clause had been concluded, any arbitrator appointed could not rely on the unregistered lease deed as it was not admissible in evidence. The court, therefore, set aside the Guwahati High Court's order and ordered the Chief Justice of the Guwahati High Court to examine whether the lease deed had been duly stamped and, if upon examination it was found to be duly stamped, to appoint an arbitrator.

This decision is an eye-opener for parties dealing with transactions related to immovable property as it confirms that parties should be vigilant about the registration and stamping of an instrument, in order to prevent the arbitration clause in the instrument becoming redundant.

SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd, Civil Appeal No. 5820 of 2011 (Arising out of SLP No. 24484 of 2010, decided on 20.07.2011).