The Delhi High Court has ruled that an arbitral tribunal lacks the authority to award interest on a performance bank guarantee when the underlying contract contains an express prohibition against such claims. In a significant decision regarding the scope of judicial interference in international commercial arbitration, the Division Bench of Justices Avneesh Jhingan and Shail Jain set aside a portion of an arbitral award that had granted nine percent annual interest to an Australian exporter, holding that the directive was in direct conflict with both the agreed terms of the contract and the public policy of India.

The dispute stemmed from a 2009 agreement between the public sector undertaking MMTC Limited and the Australian firm Aust Grain Exports Pty Ltd for the supply of 35,000 metric tonnes of yellow peas. Following delays in the shipment schedule, the parties engaged in a protracted legal conflict, leading to the initiation of arbitration proceedings under the aegis of the Indian Council of Arbitration. While the tribunal ultimately rejected MMTC’s claim for compensation regarding the delayed shipment, it favored Aust Grain Exports by ordering a refund of the performance bank guarantee, which MMTC had previously appropriated, and further awarded interest on that sum at nine percent per annum from January 2010.

The High Court’s intervention centers on the sanctity of contractual terms, specifically Clause 13(2) of the contract, which explicitly stated that “no claim shall be admissible against the buyer in respect of interest on Performance Guarantee regardless of the time of release.” The court emphasized that the tribunal’s decision to award interest in the face of this clear contractual bar constituted a departure from its mandate and violated the fundamental legal principles governing interest awards under the Arbitration and Conciliation Act, 1996.

Disputed Interest on Performance Bank Guarantees

The litigation reached the High Court after a Single Judge dismissed an initial challenge under Section 34 of the Arbitration and Conciliation Act. During the appellate proceedings, MMTC argued that the tribunal had not only disregarded the express prohibition on interest but had also produced an inconsistent award, as it had simultaneously rejected a specific counter-claim for interest on the guarantee while including the interest amount in the final operative order.

The High Court observed that the tribunal’s decision to include the interest component in the final award lacked any logical justification, especially given that the members had specifically dealt with and rejected the claim for interest on the guarantee in earlier segments of the award. The court noted: “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.”

By labeling the award of interest as contrary to the public policy of India, the court underscored that the threshold for interference in international commercial arbitration—while narrow—remains intact when an award shocks the conscience of the court or blatantly disregards binding contractual terms that the tribunal was bound to uphold.

Contractual Terms and Public Policy Challenges

Throughout the appeal, the bench examined the interplay between the power of arbitrators to grant interest under Section 31(7) of the Arbitration Act and the autonomy of parties to restrict such powers through explicit contract clauses. The court clarified that while arbitrators generally possess the discretion to award interest, this power is not absolute and is subservient to the specific agreements made by the parties. Because the parties had mutually agreed that no interest would be payable on the performance bank guarantee regardless of the time taken for its release, the tribunal had exceeded its jurisdiction by imposing a liability that MMTC had never contractually accepted.

Furthermore, the High Court clarified the applicability of the 2015 amendments to the Arbitration Act, noting that the ground of "patent illegality" is reserved for domestic arbitrations and cannot be invoked in international commercial disputes. However, this limitation did not prevent the court from correcting the error through the lens of public policy, as the inclusion of interest in the final award was viewed as a deviation from the justice and morality standards required of any binding adjudication.

Separating Valid Awards from Impermissible Directions

A critical aspect of the ruling was the court's reliance on the doctrine of severability. By invoking the precedent established in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. , the bench determined that the erroneous portion of the award was not so intricately connected to the rest of the tribunal’s findings that it would require setting aside the entire decision.

The court stated: “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.” This pragmatic approach allowed the court to uphold the refund of the principal amount while excising the interest, thereby preserving the valid determinations of the tribunal while nullifying the portion that contravened the contract.

Following this ruling, the final order of the High Court confirmed that the award stands modified, with the interest component at nine percent per annum removed entirely. The decision reinforces the position that arbitral tribunals must strictly adhere to the specific limitations set forth in commercial agreements, particularly regarding financial liabilities, and provides a clear mechanism for courts to excise severable, legally invalid components of an award without undermining the finality of the overall arbitration outcome. As a result, the dispute concludes with the principal refund remaining intact, but the contested interest charge has been formally vacated, ensuring the final outcome aligns with the original intent of the contracting parties.