The Delhi High Court has clarified that an arbitrator cannot grant indirect relief flowing from a claim that has been formally withdrawn by a party, even if framed as compensation. This ruling reinforces the principle of minimal judicial interference and strict adherence to the scope of arbitral jurisdiction under the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
The appellants, Parveen Kapoor and others, entered into an agreement with Omaxe Limited on 23.08.2007 for the purchase of Shop No. 16A in the Omaxe Novelty Mall, Amritsar. The sale consideration was Rs. 87,83,967.82, of which Rs. 80,40,596.72 (95%) was paid upfront. On the same date, an Addendum was executed, stipulating that Omaxe would pay an Assured Monthly Return (AMR) of Rs. 1,05,788.80 per month until possession was offered. The Addendum contained no arbitration clause.
Key Facts
- The project site abutted the protected Rambagh monument, prompting objections from the Archaeological Survey of India (ASI) on 27.04.2007.
- ASI issued a conditional NOC on 28.07.2007, revoked it on 23.07.2008, and granted final permission for construction up to 24 meters on 22.02.2012.
- Construction resumed in 2012; Completion Certificate was issued on 08.07.2015.
- Omaxe offered possession on 16.07.2015, but demanded payment of the remaining 5% sale consideration and additional charges totaling Rs. 10,05,294.06.
- AMR payments were made until January 2010, then suspended. Omaxe’s letter dated 17.02.2010 purported to cancel the Addendum, but resumed payments after a legal notice on 11.03.2010. Payments ceased again after May 2010.
- The appellants issued legal notices on 16.01.2012 and 18.09.2017 invoking arbitration under Clause 44(b) of the allotment letter.
Procedural History
- 23.08.2007: Allotment letter and Addendum executed.
- 17.02.2010: Omaxe attempted unilateral cancellation of Addendum.
- 11.03.2010: Legal notice from appellants challenging cancellation.
- 16.07.2015: Omaxe offered possession subject to payment of balance dues.
- 30.05.2018: First Statement of Claims filed before Arbitrator, including Claim No. 1 for AMR from June 2010 to July 2015 (Rs. 65,58,905.60 + 18% interest).
- 25.08.2018: Appellants filed application to withdraw Claim No. 1 (AMR) with liberty to pursue in another forum.
- 05.09.2018: Arbitrator allowed withdrawal of Claim No. 1.
- 11.02.2019: Appellants filed petition before NCLT, Chandigarh (C.P. No. (IB)-116/Chd/Hry/2019) seeking AMR recovery.
- 14.09.2018 & 27.02.2019: Amended Statements of Claims filed, omitting AMR claim but seeking compensation for delay.
- 19.09.2019: Arbitrator awarded Rs. 5,00,000 for litigation costs and 10% interest on unpaid AMR as "compensation" under "ends of justice."
- 12.12.2023: Single Judge of Delhi High Court set aside the 10% interest award and direction to adjust AMR against dues, holding it flowed from a withdrawn claim.
- 04.05.2026: Division Bench dismissed appeal under Section 37 of the Arbitration Act.
The Parties' Positions
Appellants: Argued that the 10% interest was not an award of AMR but compensation for delay, and that the Arbitrator had jurisdiction to award it under Section 31(7) of the Act. They contended the withdrawal was procedural and did not extinguish the underlying right.
Respondent: Contended that the Addendum was outside the arbitration agreement, the AMR claim was formally withdrawn, and the Arbitrator’s award of interest on AMR was a disguised revival of a non-arbitrable claim.
Relief Sought
Appellants sought: (a) setting aside of the Single Judge’s order dated 12.12.2023; (b) reinstatement of the Arbitral Award dated 19.09.2019; (c) direction to hand over possession and execute sale deed without insisting on balance payment; (d) payment of 10% interest on unpaid AMR as compensation.
The Legal Issue
Can an arbitrator award interest on a monthly return (AMR) as compensation for delay, when the underlying claim for AMR has been formally withdrawn by the claimant and the Addendum containing the AMR term is expressly outside the arbitration agreement?
Arguments Presented
For the Appellant
The appellants relied on Sepco Electric Power Construction Corpn. v. GMR Kamalanga Energy Ltd. (2025 SCC OnLine SC 2088) and Punjab State Civil Supplies Corporation Ltd. v. M/s Sanman Rice Mills (2024 INSC 742) to argue that courts must not reappreciate evidence or substitute views under Section 34. They contended that the 10% interest was not an award of AMR but a separate remedy for breach of contractual obligation to deliver possession, permissible under Section 31(7) of the Act. They emphasized that the Arbitrator had found the delay attributable to Omaxe’s negligence and that the interest was awarded to meet the ends of justice, not to revive the withdrawn claim.
For the Respondent
The respondent relied on Ghaziabad Development Authority v. Balbir Singh (2004) 5 SCC 65 to argue that compensation for delay requires proof of actual loss, which was absent. They stressed that the Addendum was a separate contract without an arbitration clause, and the withdrawal of Claim No. 1 was deliberate and final. The NCLT petition confirmed the appellants’ intent to pursue AMR outside arbitration. The respondent argued that the Arbitrator’s award of interest on AMR was a patent illegality under Section 34(2)(a)(ii) as it exceeded the scope of the reference.
The Court's Analysis
The Division Bench examined the sequence of events with precision. It noted that the Addendum, which contained the AMR obligation, was explicitly not subject to the arbitration clause in the allotment letter. The appellants, aware of this jurisdictional limitation, voluntarily withdrew Claim No. 1 on 25.08.2018, with liberty to pursue the claim elsewhere. The Arbitrator accepted this withdrawal without objection.
"The claim for AMR was not merely reduced or modified - it was formally withdrawn with liberty to proceed in another forum. The Arbitrator’s subsequent award of 10% interest on the very same amount, framed as compensation, was a backdoor revival of a claim he had no jurisdiction to decide."
The Court held that the Arbitrator’s reasoning in paragraph 51 of the award revealed a clear contradiction: he acknowledged the AMR as the sole contractual compensation mechanism, yet awarded interest on it as additional relief. This was inconsistent with his own finding that the AMR was adequate. The Court further noted that the appellants’ filing of a petition before the NCLT on 11.02.2019 conclusively demonstrated their intent to abandon the AMR claim in arbitration.
The Bench rejected the appellants’ argument that the interest was a separate claim for delay, observing that the quantum of interest (10% on Rs. 1,05,788.80/month) was directly tied to the withdrawn AMR amount. The Arbitrator had no authority to award relief that was inextricably linked to a non-arbitrable and withdrawn claim. The Single Judge’s conclusion that the award suffered from patent illegality under Section 34(2)(a)(ii) was upheld.
The Court also declined to invoke Section 34(4) to remit the matter for rehearing, noting that such provision permits only curative corrections, not merit-based reconsideration.
The Verdict
The appeal was dismissed. The Delhi High Court upheld the Single Judge’s order dated 12.12.2023, setting aside the Arbitrator’s award of 10% interest on unpaid AMR. The direction to hand over possession and execute the sale deed within 30 days of possession was reinstated. The appellants were directed to pay the balance 5% of the sale consideration (Rs. 4,39,198.39) and allied charges upon possession. No interest was awarded on the balance payment. Costs of Rs. 5,00,000 awarded by the Arbitrator were upheld.
What This Means For Similar Cases
Withdrawn Claims Are Irrevocable in Arbitration
- Practitioners must treat withdrawal of claims under Section 34 as final and binding unless expressly conditioned otherwise.
- Any attempt to reintroduce withdrawn claims under the guise of "compensation" or "interest" will be struck down as a patent illegality.
- Arbitrators must strictly confine awards to claims pending before them at the time of final hearing.
Arbitration Clauses Do Not Extend to Ancillary Agreements
- Addenda, side letters, or oral understandings not incorporated into the arbitration agreement are outside the arbitrator’s jurisdiction.
- Parties must ensure all material terms are included in the main contract or a separate arbitration agreement.
- Where a term is excluded from arbitration, parties must pursue remedies in appropriate forums without seeking indirect enforcement through arbitration.
Compensation Must Be Independent of Non-Arbitrable Claims
- Interest or damages awarded must be traceable to the arbitrated contract, not to a withdrawn or non-arbitrable obligation.
- Arbitrators cannot use "ends of justice" to circumvent jurisdictional limits.
- Courts will not permit arbitral awards that functionally revive claims explicitly abandoned by the claimant.
