“Not Worth Paper It Was Written On”: Madras High Court Upholds Setting Aside Of ₹24-Crore Arbitral Award

Calling a Rs 24-crore arbitral award a “fraud” and “not worth the paper it had been written in”, the Madras High Court has upheld a 2019 order setting aside the award in a land dispute, holding that the Memorandum of Understanding on which the claim was based was an unlawful agreement opposed to public policy.

A Division Bench of Justice C.V. Karthikeyan and Justice K. Kumaresh Babu upheld a Single Judge's order dated 25 June 2019 which had set aside the arbitral award dated 23 March 2015.

Holding that the Memorandum of Understanding was unlawful as it contemplated securing favourable government and court orders through a third party without the property owners being parties to the agreement, the bench observed, “The Memorandum of Understanding which provided for obtaining favourable orders from the Government and engaging counsels to get favourable orders from the Court without the owners of the property being party to the said agreement is wholly an unlawful agreement. It was an exercise opposed to public policy, covenant in the said agreement is void ab initio.”

The dispute related to 6,800 sq. meters, equal to 22 grounds, of land in Mogappair Village, which was claimed to belong to K.M. Parameswaran. It was alleged that he had orally agreed to sell the land to M.K. Phandian and D. Balan.

After his death in 2005, his legal heirs Jyotheeswari, P. Ashok and Rama Srinivasan entered into an agreement of sale dated 17 February 2005 with Phandian and Balan for a total consideration of Rs 1 crore.

Nearly five years later, on July 28, 2010, Phandian and Balan entered into a Memorandum of Understanding with O. Muthu, a third party, under which Muthu agreed to take steps to negotiate with the government and pursue proceedings through counsel to retrieve the land from acquisition and urban land ceiling proceedings. The Memorandum of Understanding also provided that disputes would be referred to Anbalagan of Anna Nagar, a retired deputy collector, whose decision would be final.

After disputes arose, the said Anbalagan acted as sole arbitrator and passed an award on 23 March 2015 directing M.K. Phandian, D. Balan and the legal heirs of Parameswaran, namely Jyotheeswari, P. Ashok and Rama Srinivasan, to pay Rs 24 crore as compensation to O. Muthu. The award also directed refund of Rs 42.30 lakh deposit with interest at 12 percent per annum and costs of Rs 26,320.

The award was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 by M.K. Phandian in one petition and by P. Ashok and Rama Srinivasan in another. By a common order dated 25 June 2019, a Single Judge set aside the award, holding that the underlying agreement itself was opposed to public policy and that the award had been passed without evidence.

Challenging that order, O. Muthu filed an appeal before the Madras High Court.

Dismissing the appeals, the Division Bench found that even the original sale agreement was doubtful as no proof of title had been produced and the intending purchasers themselves had no enforceable rights over the property when they entered into the Memorandum of Understanding.

“They had no right or title, but entered into the said agreement. They were only agreement holders. The agreement in their favour itself is questionable. We hold that they can never claim any interest over the property”, the Court said.

The Court further noted that the Memorandum of Understanding itself recorded that the parties had “exhausted all their remedies to retrieve the land from the Land Acquisition Act and the Urban Land Ceiling Act” and had approached Muthu, who was stated to be influential with the government and experienced in engaging counsel to obtain favourable orders.

Holding such an arrangement to be unlawful, the bench said the Memorandum of Understanding was opposed to public policy, particularly since the alleged owners of the property were not parties to it.

The court also found that the arbitrator had granted Rs 24 crore compensation without any evidence and had bound persons who were not parties to the Memorandum of Understanding.

“It must be straight away stated that the said Award is not worth the paper it had been written in. The Memorandum of Understanding is an unlawful agreement. The learned Single Judge had categorised it as a champerty. The said arbitration Award is a fraud played on the respondents herein. It is neither enforceable nor can it be termed as a valid, legal and enforceable document”, the bench said.

Finding no reason to interfere with the Single Judge's ruling, the court dismissed both appeals and directed O. Muthu to pay costs of Rs 50,000 in each appeal to the Tamil Nadu State Legal Services Authority.

For Appellant (O. Muthu): Advocate V.K. Vijayaragavan

For Respondents: For P. Ashok and Rama Srinivasan: Advocate C.P. Sivamohan For M.K. Phandian and D. Balan: Advocate K. Ramkumar