Arbitral Tribunal Cannot Grant Interest Contrary To Express Terms Of Contract: Delhi High Court

The Delhi High Court, on Wednesday, 28 October, held that an arbitral tribunal cannot award interest contrary to an express contractual provision excluding interest on a performance bank guarantee (PBG), as such an award conflicts with the contract and the public policy of India.

A Division Bench comprising Justices Avneesh Jhingan and Shail Jain set aside the arbitral award in favour of Aust Grain against Metals and Minerals Trading Corporation of India Limited (MMTC) to the limited extent that it granted interest on the performance bank guarantee (PBG). The judges held:

“…the tribunal rejected counter-claim no.2 for interest on the PBG but without reason or justification ultimately in concluding part of the award granted interest. In the peculiar facts of this case, without revisiting the facts or re-appreciating the evidence, the award of interest on the PBG is in conflict with the public policy of India and falls within the ambit of Section 34(2)(b)(ii) of the Act.”

The dispute arose from a contract under which Aust Grain agreed to supply 35,000 metric tonnes of yellow peas to MMTC at USD 259 per metric tonne. Following a delay in shipment, MMTC claimed compensation and invoked the PBG, appropriating USD 271,950.

The arbitral tribunal rejected MMTC's claim for compensation for the delayed shipment but allowed Aust Grain's counter-claim for a refund of the PBG, along with interest at 9% per annum from 12 January 2010 until the date of the award.

MMTC challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge dismissed the application, prompting MMTC to file the present appeal.

Before the High Court, MMTC contended that Clause 13(2) of the contract provided for the release of the performance guarantee upon successful and satisfactory execution of the contract. It further argued that the clause expressly barred any claim for interest on the PBG against the buyer, irrespective of the time taken for its release.

The High Court held that awarding interest despite this express contractual bar was contrary to the agreed terms and the provisions of Section 31(7) of the Arbitration Act, which govern the arbitral tribunal's power to award interest.

It also clarified that Section 34(2A) of the Arbitration Act, which permits challenges to domestic arbitral awards on the ground of patent illegality, does not apply to international commercial arbitration. The remaining grounds under Section 34, however, continue to apply.

Relying on the Supreme Court's ruling in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., (2025) 7 SCC 1, the Bench noted that a severable portion of an arbitral award may be set aside if the invalid portion can be separated from the remainder of the award. It observed:

“The award of interest on the PBG is not intricately connected with the other claims and counter-claims dealt with by the tribunal and is severable, even from the direction to refund the PBG.”

Accordingly, the High Court set aside the award only to the extent that it granted interest on the PBG.