The Delhi High Court in a Division Bench decision has clarified that an arbitral award granting interest on a Performance Bank Guarantee (PBG) in direct contravention of an express contractual clause excluding such interest violates the public policy of India and is liable to be set aside under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996. The Court upheld the majority award on all other counts, including the rejection of liquidated damages for delayed shipment, while severing the offending interest component under the principle established in Gayatri Balasamy v. ISG Novasoft Technologies Ltd..
Background & Facts
The Dispute
The appellant, MMTC Limited (MMTC), a public sector undertaking, floated a tender on 30.03.2009 for the supply of 35,000 metric tonnes (+/-10%) of yellow peas. The respondent, Aust Grain Exports Pty Ltd, an Australian company engaged in agricultural commodity exports, emerged as the successful bidder. The parties executed a contract on 16.04.2009 at USD 259 per metric tonne with a shipment period of September - October 2009.
Key Facts
- The respondent initially nominated vessel MV Geeta, which was cancelled on 08.10.2009; vessel MV Star Lily was nominated thereafter.
- MMTC extended the shipment period subject to contractual terms and applicable penalty, first up to 15.11.2009 and subsequently up to 30.11.2009.
- Loading commenced on 23.11.2009 after delays due to weather and port congestion; goods were shipped on 27.11.2009 and arrived on 01.01.2010.
- MMTC claimed compensation for delayed shipment under clause 20 at USD 14 per MT on 31,924.572 MTs, amounting to USD 446,943.98.
- The respondent disputed the claim and invoked force majeure.
- On 24.12.2009, MMTC released payment of USD 8,268,464.15 to the respondent.
- On 12.01.2010, MMTC invoked the Performance Bank Guarantee (PBG) and appropriated USD 271,950.
- Disputes were referred to arbitration under clause 23 of the contract before a three-member tribunal constituted under the Indian Council of Arbitration (ICA).
Procedural History
- 05.03.2021: Majority award signed by two members of the tribunal.
- 16.06.2021: Dissenting opinion signed by the third member (103 days after the majority award).
- 22.06.2021: Both documents sent by ICA to the parties.
- 05.07.2021: MMTC received the award and dissenting opinion.
- 04.10.2021: MMTC filed petition under Section 34 challenging the award.
- 12.06.2023: Learned Single Judge dismissed the Section 34 petition.
- Present appeal: Filed under Section 37 of the Act against the dismissal order.
The Parties' Positions
MMTC contended that the arbitral proceedings suffered from procedural irregularities, including the absence of tribunal members during material hearings and non-signing of order sheets. It argued that the dissenting opinion delivered 103 days after the majority award rendered the tribunal functus officio, resulting in two separate awards. On merits, MMTC submitted that clause 20 provided for a 'rebate' for delay not dependent on proof of actual loss, and that the extension of shipment period was subject to contractual penalty. It also highlighted a contradiction in the award: counter-claim no.2 for interest on PBG was rejected based on clause 13(2), yet the operative part granted interest at 9% per annum on the PBG amount from 12.01.2010.
The respondent argued that the scope of interference under Section 37 is limited and does not permit re-appreciation of findings. It submitted that MMTC waived objections to procedural irregularities by participating without protest under Rule 58 of the ICA Rules. The majority award signed by two members constituted the tribunal's decision under Rule 61. The dissenting opinion, being merely an opinion, did not affect the award's validity. On merits, the respondent contended that MMTC sold the consignment at a higher price and failed to prove actual loss. The interest granted in the operative part was consequential to the refund of PBG under counter-claim no.1, distinct from the rejected counter-claim no.2.
Relief Sought
MMTC sought setting aside of the majority award in its entirety, or alternatively, modification of the award to allow its claim for compensation for delayed shipment (USD 861,963) and to delete the grant of interest on the PBG amount.
The Legal Issue
The central questions were: (1) Whether procedural irregularities in a three-member tribunal - including absence of members during hearings and a 103-day gap between the majority award and dissenting opinion - render the award liable to be set aside; (2) Whether the grant of interest on the PBG despite an express contractual exclusion under clause 13(2) constitutes a violation of public policy under Section 34(2)(b)(ii) in an international commercial arbitration; and (3) Whether the offending portion of the award is severable from the remaining valid determinations.
Arguments Presented
For the Appellant (MMTC)
MMTC relied on Faze Three Exports Ltd. v. Pankaj Trading Co. & Ors. to argue that all members of a multi-member tribunal must participate in material proceedings. Citing Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd., it contended that a dissenting opinion must be delivered contemporaneously with the final award and cannot be delivered after the tribunal becomes functus officio. On the contractual interpretation, MMTC invoked South East Asia Marine Engineering and Constructions Ltd. v. Oil India Ltd. to assert that an award contrary to contract terms is unsustainable. It emphasized that clause 20 provides for a rebate independent of actual loss, and that the extension was subject to penalty. The contradiction in the award - rejecting interest on PBG under counter-claim no.2 but granting it in the operative part - was argued to be a patent illegality. Reliance was placed on CRPF v. Fibroplast Marine (P) Ltd. for the proposition that inordinate delay renders an award liable to be set aside.
For the Respondent (Aust Grain Exports)
The respondent submitted that the scope of review under Section 37 is narrow, citing Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., Delhi Airport Metro Express Pvt. Ltd. v. DMRC, Power Grid Corporation of India Ltd. v. SAP Circle, MMTC Ltd. v. Vedanta Ltd., and Ssangyong Engineering & Construction Co. Ltd. v. NHAI. It argued that MMTC waived procedural objections under Rule 58 of the ICA Rules by participating with knowledge. Rule 61 provides that the majority award prevails and is the tribunal's decision. The dissenting opinion is not part of the award. On merits, the respondent relied on Fateh Chand v. Balkishan Das, Maula Bux v. Union of India, ONGC v. Saw Pipes Ltd., and Kailash Nath Associates v. DDA to argue that actual loss must be proved for damages. The interest awarded was consequential to the PBG refund, not the rejected counter-claim no.2. Delays were attributable to tribunal reconstitution and the COVID-19 pandemic.
The Court's Analysis
The Court first characterized the arbitration as an international commercial arbitration under Section 2(1)(f) read with Section 2(2) of the Act, since the respondent is an Australian body corporate and the seat is New Delhi. It held that the 2015 amendment excluding the ground of 'patent illegality' under Section 34(2-A) for international commercial arbitrations applies, as the Section 34 petition was filed on 04.10.2021, well after the amendment's commencement on 23.10.2015, following Ssangyong Engineering & Construction Co. Ltd. v. NHAI.
On the challenge to the tribunal's composition, the Court held that Section 31(2) expressly permits majority signatures to suffice, provided the reason for the omitted signature is stated. The third member's dissenting opinion constituted such a statement. The Court distinguished Dakshin Haryana Bijli Vitran Nigam on the ground that Section 29A, which imposes a time limit for rendering the award, does not apply to international commercial arbitrations. The tribunal becomes functus officio only upon passing the award; the majority opinion matures into an award only after the minority opinion determines whether it is unanimous or by majority. No statutory period governs the recording of a dissenting opinion; a reasonable time is permissible. The Court cited Russell on Arbitration (21st Edition) for the proposition that a dissenting member need not sign the award and may set out separate views.
The Court rejected the reliance on CRPF v. Fibroplast Marine, distinguishing it as a case where a stipulated period for rendering the award was fixed and proceedings continued thereafter. Here, the tribunal was reconstituted multiple times and hearings were conducted via video conferencing during the COVID-19 pandemic with parties' consent.
On the claim for liquidated damages under clause 20, the Court upheld the tribunal's finding that the shipment period was rescheduled to 30.11.2009 by mutual consent, consequently no loss was caused, and clause 20 was not triggered. The claim under clause 21 was neither pleaded nor proved, and the terms 'damages/LD' were used vaguely. These factual findings suffer from no legal error or perversity.
The critical holding concerned the PBG interest. Clause 13(2) expressly provides: "No claim shall be admissible against the Buyer in respect of interest on Performance Guarantee regardless of the time of the release." The tribunal rejected counter-claim no.2 for interest on the PBG based on this clause, yet in the operative part granted interest at 9% per annum on the PBG amount from 12.01.2010. The Court held that this is not a mere contradiction but a grant contrary to the statutory provisions and the parties' agreement. Under Section 31(7), the tribunal may grant pendente lite interest unless the parties have otherwise agreed - which they did under clause 13(2).
Invoking Associate Builders v. Delhi Development Authority, the Court held that an award granting relief without reason or justification, which shocks the conscience of the court, is contrary to 'justice' under the public policy ground in Section 34(2)(b)(ii). The illustration in Associate Builders - an award granting more than claimed without justification - was found directly applicable.
On severability, the Court relied on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., which held that the proviso to Section 34(2)(a)(iv) permits courts to sever non-arbitrable or invalid portions from valid ones. The doctrine omne majus continet in se minus applies: the power to set aside an award necessarily includes the power to set it aside in part. The interest component on the PBG is not intricately connected with other claims and is severable even from the direction to refund the PBG.
The Verdict
The appeal was partly allowed. The impugned award was set aside to the limited extent of awarding interest at 9% per annum on the PBG amount of USD 271,950 from 12.01.2010 till the date of the award. The remainder of the majority award, including the rejection of MMTC's claim for delayed shipment compensation (USD 861,963), the allowance of despatch money (USD 30,620 with 9% interest from 18.01.2010), the refund of PBG (USD 271,950), the rejection of counter-claim no.2 for interest on PBG, and the allowance of counter-claim no.3 (USD 42,815 for interest on delayed payment), was upheld. All pending applications were disposed of.
What This Means For Similar Cases
Contractual Exclusion of Interest Is Binding on Tribunals
Where parties expressly exclude interest on a Performance Bank Guarantee regardless of the time of release, an arbitral tribunal lacks jurisdiction to grant such interest under Section 31(7). The statutory power to award pendente lite interest is subject to party autonomy. A grant in violation of an express contractual term is not a mere error of law but a transgression of the parties' agreement that shocks the conscience and violates public policy under Section 34(2)(b)(ii). Practitioners must ensure that PBG clauses clearly exclude interest if that is the commercial intent, and must challenge any award granting interest contrary to such clauses.
Dissenting Opinions Need Not Be Contemporaneous in International Arbitrations
The requirement in Dakshin Haryana Bijli Vitran Nigam that dissenting opinions be delivered contemporaneously with the award applies only to domestic arbitrations governed by Section 29A. In international commercial arbitrations, Section 29A does not apply, and no statutory timeline governs dissenting opinions. A gap of 103 days (or any reasonable period) between the majority award and the dissenting opinion does not invalidate the award or render the tribunal functus officio. The majority award signed by two members constitutes the tribunal's decision under Section 29(1) and Rule 61 of the ICA Rules. Counsel should not raise technical objections to delayed dissenting opinions in international arbitrations.
Severability Preserves Valid Arbitral Determinations
Following Gayatri Balasamy, courts will sever and set aside only the offending portion of an award - such as an interest grant contrary to contract - while preserving the remaining valid determinations. This avoids the wasteful nullification of entire awards for isolated errors. Practitioners challenging awards should identify severable components and argue for partial setting aside rather than seeking wholesale invalidation, which courts are reluctant to grant in international commercial arbitrations given the limited grounds of review.
