2025 Supreme(Online)(Bom) 247191

HIGH COURT OF BOMBAY
HON'BLE SHRI JUSTICE SANDEEP V. MARNE
SHETTY SUSHILA ANAND – Appellant
Versus
SARASWAT CO.OP. BANK LIMITED – Respondent
IA/3658/2024

An arbitral award that disregards the contractual rate of interest and imposes a higher rate without justification is patently illegal and contrary to public policy; courts can modify such awards under Section 34 by substituting the correct contractual rate.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Sections 34, 34(4), 34(2A), 28(3) - Multi State Co-operative Societies Act, 2002 - Section 84 - Challenge to arbitral award - Patent illegality - Award in conflict with public policy of India - Interest rate - Contractual rate of interest - Award ignoring terms of sanction letter - Charging interest at 18.30% with monthly rests contrary to agreed 13.5%/14% with quarterly rests - Arbitral tribunal rewriting contract - Award set aside - Modification of award - Power to modify under Gayatri Balasamy - Severability - Declaration of mortgage without prayer - Set aside. (Paras 19-21, 23, 27-28)

(B) Arbitration Act, 1996 - Section 34 - Grounds for setting aside award - Award in contravention of fundamental policy of Indian law - Arbitral tribunal must act judicially, not arbitrarily - Fidelity to judicial approach - Non-application of mind - Perverse and irrational - Wednesbury principle. (Paras 19-21, citing Indian Railways Catering, Batliboi, Ssangyong, PSA Sical)

Facts of the case:
The petition under Section 34 challenges an arbitral award dated 10.10.2023. The respondent-bank had sanctioned a term loan of Rs.2,00,000/- and a cash credit limit of Rs.80,000/- in 1984 at interest rates of 13.5% and 14% per annum with quarterly rests. The bank claimed an outstanding of Rs.7.23 crores as on 13.10.2022 with interest at 18.30% monthly rest. The sole arbitrator allowed the claim in full and declared an equitable mortgage over the property. The petitioner argued that the arbitrator ignored contractual terms and that no mortgage was created. The court found that the award was patently illegal, contravened public policy, and that the arbitrator had rewritten the contract. The court also found that no substantive prayer for declaration of mortgage was made.

Findings of Court:
The court held that the award of interest at 18.30% with monthly rests was invalid and ignored the terms of the sanction letter. The arbitrator failed to apply a judicial approach and acted arbitrarily. The court relied on the principle that an award can be set aside if it thrusts a new term into the agreement (PSA Sical). The court also held that the declaration of mortgage was granted without a substantive prayer, and thus that part was set aside. The court modified the award by substituting the correct interest calculation based on contractual rates, resulting in a reduced amount of Rs.41,86,716/- as on 13.10.2022 with future interest at 6% p.a. The court exercised power to modify under Gayatri Balasamy.

Issues: The main issues were: (1) Whether the arbitrator erred in awarding interest at a rate higher than contractually agreed and with monthly rests instead of quarterly rests. (2) Whether the arbitrator could grant a declaration of mortgage in the absence of a specific prayer. (3) Whether the court can modify the award.

Ratio Decidendi: The court ruled that an arbitral award that disregards the express terms of the contract between the parties and imposes a different rate of interest without justification is patently illegal and contrary to the fundamental policy of Indian law. The court has the power under Section 34 to modify an award by severing the invalid part, particularly where the contractual rate is evident, and to correct the rate of interest. Also, a substantive relief cannot be granted without a prayer.

Result: Arbitration Petition partly allowed. Operative clause (b) of the award set aside and substituted with a direction to pay Rs.30,06,944/- and Rs.11,79,772/- aggregating Rs.41,86,716/- with future interest @ 6% p.a. from 14.10.2022. Operative clause (c) set aside. No costs.

JUDGMENT :

SANDEEP V. MARNE, J.

1. The Petition is filed under Section 34 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) challenging the Award of the learned sole Arbitrator dated 10 October 2023. By the impugned Award, the learned sole Arbitrator has allowed the claim of the Respondent-Bank by directing the Petitioner to pay to the Respondent sum of Rs.7,23,44,313.54 forming part of two loan outstanding amounts of Rs.2,06,61,658.53 and Rs.5,16,82,655.01 as on 13 October 2022 with future interest @ 6% per annum from 14 October 2022 till realisation. In addition to arbitration fees of Rs.47,300/- and administrative costs of Rs.9,000/-, the learned Arbitrator has further declared that the awarded sum is secured by the equitable mortgage of the Unit No.7/19, Bharat Industrial Estate at Ram Mandir Road, Goregaon (East), Mumbai-400 060 and that the Bank can recover the dues by sale/disposal of the mortgaged property. The learned Arbitrator has also restrained the Petitioner from transferring, alienating and /or creating any third-party rights in the mortgaged property. It is further directed that the awarded sum is also secured by hypothecation of machinery, furniture, fixtures, dies and tools, stocks and book debts.

2. M/s. Chetna Metal Industries (CMI) was a proprietary concern of late Anand Sankappa Shetty, who passed away on 27 September 2013. Petitioner is the widow of late Anand Sankappa Shetty. The Respondent is a Cooperative Bank registered inter alia under the Multi State Co-operative Societies Act, 2002 (the MSCS Act). Petitioner’s husband was member of the Respondent-Bank and Petitioner was a nominal member. The CMI applied for Term Loan of Rs.2,00,000/- and Cash Credit Limit of Rs.1,00,000/- to the Respondent, which sanctioned Term Loan of Rs.2,00,000/- and Cash Credit Limit of Rs.80,000/- vide letter dated 13 June 1984. The loan facilities were secured by hypothecation of machinery, tools, etc. and personal guarantee of the Petitioner. A collateral security in the form of Life Insurance Policies was also given. CMI was the principal borrower and the Petitioner was the guarantor.

3. According to the Petitioner, the immovable property bearing Unit No.7/19, Survey Nos.14 and 15, Hiss Nos.3, 7, 8, Bharat Industrial Estate, Ram Mandir Road, Goregaon (East), Mumbai -400 060 (the Property) was not a collateral security for either of the credit facilities. On 26 May 1986, the Respondent-Bank issued notice to the Petitioner that the loan accounts were in arrears. In the year 1987 the Respondent-Bank filed dispute before Co-operative Court, Mumbai for recovery of sum of Rs.1,83,423.14 due under Term Loan and Rs.58,833.48 under Cash Credit facility aggregating Rs.2,42,256.62. On 2 December 2002, the Respondent -Bank withdrew the said dispute for unknown reasons.

4. On 31 December 2009, the Respondent-Bank issued possession notice for taking physical possession of the property. Petitioner objected to the notice. After demise of late Anand Sankappa Shetty, the Respondent-Bank issued symbolic possession notice dated 2 June 2014 and called upon the Petitioner to pay Rs.30,09,389.16 as on 30 September 2003. Petitioner filed Securitisation Application No.517 of 2016 against the Respondent before the Debt Recovery Tribunal-II, Mumbai (DRT). The Tribunal allowed the Application and restored possession of the property by order dated 18 March 2021. By notice dated 14 October 2022, the Respondent called upon the Petitioner to pay Rs.7.23 crores as outstanding amount in respect of both the loans. The Central Registrar of Co-operative Societies, New Delhi passed order dated 18 October 2022 under sub-section (4) of Section 84 of the MSCS Act appointing the sole Arbitrator. Respondent-Bank filed its statement of claim. Petitioner also filed statement of defence. Issues were framed based on pleadings. Parties led evidence in support of their respective cases. The learned sole Arbitrator has rendered Award dated 10 October 2023, o

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