Madras High Court Holds Memorandum of Understanding Is Champertous and Upholds Setting Aside of Arbitral Award

A bench of Justice C.V. Karthikeyan and Justice K. Kumaresh Babu heard appeals arising under Order XXXVI Rule 1 against a Single Judge's common order dated 25.06.2019 which had set aside an arbitral award dated 23.03.2015. The appeals by O. Muthu challenged the setting aside of an award in arbitration proceedings concerning disputed title and alleged transactions in respect of land at Mogappair, Ambattur Taluk.

The Court dismissed the Original Side Appeals and upheld the Single Judge's finding that the underlying Memorandum of Understanding (MOU) and the consequent arbitration award were unenforceable and opposed to public policy. The bench held that the persons who purported to transfer or deal with the land had not proved marketable title and that the MOU—by which a third party agreed to procure favourable orders from authorities and courts and to refer disputes to a named retired Deputy Collector as arbitrator—was void as champertous. The Court, in its reasoning, observed: "In the instant case, 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 High Court further recorded that the arbitral award directing payment of Rs.24,00,00,000/- was rendered "not worth the paper it had been written in" and described the award as neither enforceable nor valid.

Background The dispute related to a 6,800 sq. m. (22 grounds) parcel in S. No.259/1 at Mogappair. K.M. Parameswaran was said to be proprietor, who died in January 2005. His legal heirs—wife Jyotheeswari, son P. Ashok and daughter Rama Srinivasan—were alleged to have executed an agreement of sale dated 17.02.2005 in favour of M.K. Phandian and D. Balan. The purported purchasers later executed a Memorandum of Understanding dated 28.07.2010 with O. Muthu, by which Muthu agreed to obtain court and government orders to "retrieve" the property from acquisition and urban land ceiling processes and to engage a named person, Mr. R.S. Anbazhagan (a retired Deputy Collector), as sole arbitrator.

Disputes under the MOU led to arbitration (ACP No.1 of 2014) and an award dated 23.03.2015 directing compensation of Rs.24 crore, refund of certain deposits, interest at 12% and costs against the alleged owners and purchasers. Challenging the award, M.K. Phandian and others filed petitions under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge set aside the award on the grounds that the MOU amounted to champerty, was opposed to public policy, and that the award lacked evidentiary foundation and was perverse in awarding a sum far exceeding the stated contractual consideration.

On appeal, the Division Bench found no reason to interfere. The court held that no document established that K.M. Parameswaran possessed marketable title or authority to sell; the agreement of sale was unregistered and inadequately particularised; and the purchasers, being mere agreement-holders, lacked any enforceable interest to assign. The bench concurred with the Single Judge that the MOU’s covenant to procure favourable governmental or judicial orders and to refer disputes to a named arbitrator without making the owners parties was unlawful and void ab initio. The Court relied on established authority that champertous agreements were unenforceable and opposed to public policy.

The appeals were dismissed. The Court directed O. Muthu to pay costs of Rs.50,000 in each appeal to the Tamil Nadu State Legal Services Authority within two months and authorised recovery proceedings under the Revenue Recovery Act if costs were not paid.

Case Details: Case No.: OSA Nos.311 & 312 of 2019 Case Title: O. Muthu v. P. Ashok & Ors. Appearances: For the Petitioner(s): Mr. V.K. Vijayaragavan For the Respondent(s): Mr. C.P. Sivamohan (for R1 & R2); Mr. K. Ramkumar (for R3 & R4)