Arbitrator Cannot Pass Award On Impounded, Unstamped Agreement; High Court Can Interfere Under Art 227: Orissa High Court - 2025-05-05

Orissa High Court Sets Aside Arbitral Award Citing Patent Illegality Over Unstamped Agreement

CUTTACK: The Orissa High Court, invoking its supervisory jurisdiction under Article 227 of the Constitution, has set aside an arbitral award amounting to over Rs. 4.31 crore, citing "patent illegality". Dr. Justice S.K.Panigrahi ruled that the sole arbitrator acted without jurisdiction by rendering an award based on a lease agreement that remained impounded due to insufficient stamping and non-registration, despite prior court directives.

The decision came in a writ petition (W.P.(C) No. 32426 of 2022) filed by M/S Hotel Sea Point Pvt. Ltd. (Petitioner) challenging the arbitral award dated August 1, 2022, passed in favour of M/s Blueline Resorts Pvt. Ltd. (Opposite Party).

Case Background: A Tangled Web of Litigation

The dispute originated from a 10-year lease agreement dated May 1, 2012, for hotel premises in Puri. Critically, this agreement was executed on a Rs. 100 stamp paper and was never registered. When disputes arose over rent payment, arbitration was initiated.

During the proceedings, the Petitioner highlighted the agreement's insufficient stamping and lack of registration, requesting the arbitrator to impound it. Initially refused, the High Court, in W.P.(C) No. 7893/2017, directed the arbitrator on May 8, 2017, to impound the agreement, citing the Supreme Court's ruling in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd .

The arbitrator complied on July 20, 2017, impounding the agreement. However, the judgment notes a complex history involving parallel civil suits filed by both parties, challenges to the impounding order's specifics (regarding who should pay the deficit duty), applications for extending the arbitration timeline, and allegations of "suppression of facts" and "forum hunting" against the Opposite Party, leading to the rejection of one such extension application by the District Judge, Puri. Despite the agreement remaining impounded and the deficit stamp duty unpaid, the arbitrator proceeded to pass the final award on August 1, 2022.

Arguments Presented

Petitioner's Stance: Mr. Surendra Routray, counsel for the Petitioner, argued that the arbitrator fundamentally erred by passing an award based on an agreement that was legally inadmissible and non-existent in the eyes of the law until the stamping defect was cured. He contended that this constituted a patent lack of jurisdiction, justifying interference under the High Court's writ powers (Articles 226/227), especially in exceptional circumstances, citing Deep Industries Ltd. v. ONGC and Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd.

Opposite Party's Stance: Senior Advocate Mr. D.P. Nanda, for the Opposite Party, countered that arbitral orders are generally not amenable to writ jurisdiction. He emphasized the principle of minimal judicial intervention enshrined in Section 5 of the Arbitration and Conciliation Act, 1996, arguing that parties should exhaust remedies within the Act itself (like challenging the award under Section 34) rather than derailing the process through writ petitions.

High Court's Analysis: Writ Jurisdiction and Patent Illegality

Issue A: Maintainability of Writ Petition

Dr. Justice Panigrahi undertook a detailed analysis of the interplay between the Arbitration Act and the High Court's constitutional powers. Key points included:

* Section 5 of the Arbitration Act: Acknowledged its non-obstante clause aims to minimize judicial intervention but affirmed it cannot oust the constitutional powers under Articles 226/227.

* Nature of Arbitral Tribunals: Citing Union of India v. R. Gandhi and Srei Infrastructure Finance Ltd. v. Tuff Drilling (P) Ltd. , the Court noted arbitral tribunals are private tribunals, thus falling under the High Court's supervisory jurisdiction (Art 227).

* Scope of Interference: Relying heavily on Deep Industries and Estralla Rubber , the Court reiterated that intervention under Article 227 in arbitration matters must be exercised with extreme circumspection, limited to "exceptional rarity," cases of "patent lack of inherent jurisdiction," "bad faith," or perversity that "stares one in the face."

The Court concluded that while the power to interfere exists, its exercise depends on the specific facts demonstrating exceptional circumstances.

Issue B: Propriety of Interference in this Case

The Court found the present case met the high threshold for interference:

* Impounded Agreement: The lease agreement, the very foundation of the arbitration, was impounded by the arbitrator himself under High Court direction due to insufficient stamping. Clause 19 of the agreement explicitly placed the onus of paying stamp duty on the Opposite Party.

* Arbitrator's Error: The Court found it "shocks the conscience" that the arbitrator proceeded to deliver an award based on this impounded document without the defect being cured.

* Suppression of Facts: The Court strongly criticised the Opposite Party for not bringing the impounding order to the Court's attention in related proceedings (W.P.(C) No. 3203/2022), terming it "jugglery, manipulation, manoeuvring or misrepresentation" and an "egregious abuse of process."

* Governing Law (Post- Interplay Judgment): Citing the authoritative 7-Judge Bench decision in In re: Interplay Between Arbitration Agreements under Arbitration, 1996 & Stamp Act, 1899 , the Court emphasized that while unstamped agreements are not void ab initio (overruling N.N. Global (2) ), they are inadmissible and cannot be acted upon until the defect is cured by paying the appropriate stamp duty and penalty as per the Stamp Act.

* Lack of Jurisdiction: Consequently, the arbitrator lacked jurisdiction to pass the award until the agreement was duly stamped and endorsed by the Collector under Section 42 of the Stamp Act. Proceeding otherwise constituted a "patent illegality."

> The Court observed: "...the Ld. Sole Arbitrator did not have jurisdiction to pass any award till the time the 'existence and validity' of the Lease Agreement has been revived by the payment of appropriate stamp duty... This Court believes that the present matter comes within the meaning of 'exceptional' and writ jurisdiction ought to be exercised in the face of such patent illegality, which necessitates interference."

Final Decision and Directions

The High Court set aside the impugned arbitral award dated August 1, 2022. It directed the Arbitral Tribunal to forward the impounded lease agreement to the Collector (if not already done) for determination and collection of the deficit stamp duty and any applicable penalty.

Crucially, the Court clarified that the liability for payment falls upon the parties as per their agreement (i.e., the Opposite Party). Once the duty is paid and the instrument is endorsed by the Collector under Section 42 of the Stamp Act, it shall be returned to the Sole Arbitrator.

The arbitration proceedings are to remain suspended until the stamping defect is cured, after which they shall be concluded expeditiously. No costs were awarded.