Interest on a bank guarantee that was never encashed is cut out of the award, and the rest of it stands
Justices Parth Prateem Sahu and Sachin Singh Rajput severed the arbitral award, setting aside pendente lite interest on security deposit guarantees while upholding post-award interest.
A coal supply agreement that ran for barely three months produced an arbitration that ran for over a decade. South Eastern Coalfields Limited challenged the award in a commercial court at Naya Raipur and lost; on 9 October 2026 a Division Bench of the Chhattisgarh High Court gave it part of what it wanted. The award survives, except for one head: interest awarded for the period of the arbitration on bank guarantees the purchaser had furnished as security deposit. That part was found to be contrary to the agreement, found to be severable, and taken out.
A fuel supply agreement that never got going
On 12 December 2011 the respondent, a Government of Punjab undertaking, entered into a Fuel Supply Agreement with Coal India Limited for 2.18 lakh tonnes of coal for the year 2011-12, to be released from its subsidiaries and consumed by units in the small and medium sectors in Punjab. The agreement was for 24 months, extendable by up to 12 months by mutual agreement in writing. The annual contracted quantity to be supplied by South Eastern Coalfields was 1,02,000 tonnes.
Under the agreement the purchaser had to furnish a security deposit in cash or by bank guarantee. It furnished a guarantee of Rs 30,00,000 but did not deposit the balance of Rs 31,21,000 by 31 December 2011. The price of coal was then raised with effect from 1 January 2012, and the purchaser was called upon to furnish an additional bank guarantee towards both the security deposit and financial coverage, which it did on 23 March 2012.
Because of that delay, the purchase indents and the coal programme could not be accepted until 23 March 2012, and after that date the purchaser submitted no further indent or programme. A penal bill followed, and the dispute went to arbitration.
Post-award interest stays
The first question was whether the Arbitrator could award interest for the period after the award. The Court approached it through Section 31(7) of the Arbitration and Conciliation Act, 1996 and the decisions of the Supreme Court on it, and noted a feature of this contract: there is no provision in the Fuel Supply Agreement that expressly bars the grant of post-award interest.
On that footing the Bench held that the Arbitrator acted within the ambit of Section 31(7) in granting post-award interest in favour of the claimant. The reasoning runs with the grain of the statute, which treats interest as part of what keeps the arbitral process efficient rather than as a bonus.
Interest during the arbitration does not
The head that did not survive was pendente lite interest at 14 per cent per annum on the bank guarantees furnished towards the security deposit. The Court found that award contrary to the terms of the Fuel Supply Agreement. A bank guarantee lodged as security is not money in the hands of the party holding it, and the agreement did not provide for interest to run on it while the dispute was pending.
Whether an award can be taken apart
That left the question of what a court may do when only one head of an award is bad. The Bench took the answer from two decisions. In J.G. Engineers Pvt. Ltd. v. Union of India the Supreme Court held that where an award deals with and decides several claims separately and distinctly, a court that finds the award bad on some items will segregate the items that suffer from no infirmity and uphold the award to that extent.
The more recent authority is Gayatri Balasamy v. ISG Novasoft Technologies Ltd., in which the Supreme Court set out the limited power a court has under Sections 34 and 37 to modify an arbitral award: by severing the invalid portion from the valid portion where the award is severable; by correcting clerical, computational or typographical errors apparent on the face of the record; and, in some circumstances, by modifying post-award interest.
Measured against that, the Bench held the portion of the award granting pendente lite interest on the bank guarantees to be severable from the rest, and therefore capable of being removed without disturbing the remainder.
Order
The award was set aside to the extent that it grants pendente lite interest on the bank guarantees furnished towards the security deposit. The rest of the award remains as it is. The arbitration appeal was allowed in part and the award modified to that extent.