Arbitral Tribunal Cannot Award Interest Higher Than What Is Claimed By Party: Bombay High Court
The High Court has held that an arbitral award granting interest at a rate higher than what was claimed by the party constitutes patent illegality and breaches the fundamental policy of Indian law by granting relief not prayed for.
Justice Sandeep V. Marne, Bombay High Court
The Bombay High Court has clarified that an arbitral tribunal cannot justify awarding a higher rate of interest than that claimed by invoking considerations of “justice”, as such an exercise amounts to granting relief beyond the pleadings.
The Court was hearing a petition under Section 34 of the Arbitration and Conciliation Act, 1996, filed by a cooperative bank challenging an arbitral award insofar as it granted interest at the rate of 17.5% per annum despite the claimant having sought interest only at 13.5% per annum.
Justice Sandeep V. Marne, while partly setting aside the award, observed that “award of interest higher than the one claimed by the party clearly constitutes patent illegality in the Award” and further held that such an award “breached the fundamental policy of Indian law by awarding relief not prayed for by the claimant”.
Advocate Shadab Jan appeared for the petitioner bank, while the respondent was represented by Advocate Sharad Bansal.
Background
The dispute arose out of recovery proceedings between the petitioner bank and the respondent, who had furnished guarantees and securities in connection with financial facilities extended to a borrower. Following proceedings before the cooperative courts and appellate forums, the respondent invoked arbitration under the applicable statutory framework.
By an arbitral award dated 2 May 2024, the learned sole arbitrator directed the petitioner bank to pay specified amounts in respect of fixed deposit receipts and LIC policies, together with interest at the rate of 17.5% per annum with quarterly rests. The award further provided for additional interest in the event of default.
Aggrieved by the award, the petitioner bank approached the High Court under Section 34 of the Arbitration Act, contending inter alia that the arbitral tribunal had committed patent illegality by awarding interest at a rate higher than that claimed by the respondent.
Court’s Observation
The Bombay High Court examined the arbitral award and noted that the claimant had expressly sought interest only at the rate of 13.5% per annum. Despite recording this fact, the arbitral tribunal proceeded to award interest at the rate of 17.5% per annum on the reasoning that “justice demands that the same rate of interest should apply to all dues payable to the disputant”.
The Court held that such an approach was impermissible. It was observed that an arbitral tribunal derives its jurisdiction from the pleadings and claims placed before it, and cannot travel beyond the reliefs sought by the parties. Awarding interest at a rate higher than that claimed, the Court held, amounts to granting relief not prayed for.
Justice Marne further held that the grant of interest at 17.5% per annum, despite the claimant having sought a lower rate, constituted patent illegality apparent on the face of the award. The Court also held that such a grant breached the fundamental policy of Indian law, as it violated the settled principle that no party can be granted relief beyond its pleadings. However, at the same time, the Court noted that the error was confined to the rate of interest awarded.
Relying on the decision of the Constitution Bench of the Supreme Court in Gayatri Balasamy v. ISG Novasoft Technologies Limited, in which the Apex Court had held that “the court exercising power under Section 34 of the Arbitration Act can modify the award even by altering the rate of interest”, the Bench held that, in the case at hand, since the “bad part of the Award is not inseparably intertwined with the good part and that therefore, it is easily possible to severe the bad part of the Award”.
Conclusion
Holding that the award of interest at the rate of 17.5% per annum was clearly erroneous, the Bombay High Court partly set aside the arbitral award to that extent and modified the rate of interest to align with the rate claimed by the respondent. The remainder of the arbitral award was upheld.
Cause Title: TJSB Sahakari Bank Ltd. v. Amritlal P. Shah (Neutral Citation: 2025:BHC-OS:25458)
Appearances
Petitioner: Advocate Shadab Jan, with Advocates Nikhil Rajani and Ajay Deshmane
Respondent: Advocate Sharad Bansal, with Advocate Laxman I. Jain