The Bombay High Court has partly allowed a petition filed by TJSB Sahakari Bank Ltd., upholding an Arbitral Award that directed the return of Fixed Deposit receipts and LIC policy amounts to a guarantor who had alleged coercion. Justice Sandeep V. Marne, while dismissing the Bank’s challenge on the grounds of res judicata and patent illegality regarding the finding of coercion, modified the interest rate awarded by the Arbitrator from 17.5% p.a. to 13.5% p.a., holding that granting interest higher than what was claimed constituted patent illegality.
Background of the Case
The dispute originated from financial facilities extended by TJSB Sahakari Bank Ltd. (Petitioner) to M/s. A. S. Constructions. The Respondent, Amritlal P. Shah, had allegedly furnished a personal guarantee and created a security interest over a flat, LIC policies, and fixed deposit receipts.
In 2001, the Bank filed a dispute before the Co-operative Court for recovery. Correspondingly, the Respondent filed Dispute Application No. 605 of 2005 seeking the release of security documents and discharge of his guarantee. The Co-operative Court allowed the Bank’s application and rejected the Respondent’s application in October 2017. While the Respondent’s appeal regarding the discharge of guarantee was eventually allowed by the Co-operative Appellate Court, he invoked arbitration under Section 84 of the Multi-State Co-operative Societies Act, 2002, claiming the return of the Fixed Deposit receipts and LIC policies.
The Sole Arbitrator, in an award dated May 2, 2024, held the Respondent entitled to recover Rs. 4,05,558/- for the fixed deposits and Rs. 14,07,409/- for the LIC policies, with interest at 17.5% p.a. The Arbitrator found that a handwritten letter dated April 7, 1998, relied upon by the Bank, was obtained through coercion.
Arguments of the Parties
The Petitioner-Bank, represented by Mr. Shadab Jan, challenged the award primarily on the ground of res judicata. It was argued that the issue of coercion regarding the letter dated April 7, 1998, had been conclusively determined by the Co-operative Court in the previous proceedings. The Bank contended that the Arbitral Tribunal re-adjudicated an issue that had attained finality. The Petitioner further argued that the award suffered from patent illegality as the finding of coercion was based on an alleged failure to deny correspondence, despite the service of such letters not being proved. Finally, the Bank submitted that awarding 17.5% interest when the claimant had only prayed for 13.5% was impermissible.
The Respondent, represented by Mr. Sharad Bansal, argued that the plea of res judicata was never raised in the Statement of Defence before the Arbitrator. He submitted that in the absence of pleadings and specific issues framed by the Co-operative Court regarding coercion, the principle of res judicata could not apply. It was further argued that the Arbitrator’s finding on coercion was a finding of fact based on evidence, including the Bank’s failure to reply to legal notices alleging coercion.
Court’s Analysis
On Res Judicata: The Court rejected the Bank’s contention that the arbitration was barred by res judicata. Justice Marne observed that the Bank had failed to raise this plea in its Statement of Defence and did not produce the pleadings of the previous Co-operative Court disputes before the Arbitrator.
The Court noted that in the previous proceedings (Dispute Nos. 605 of 2005 and 327 of 2005), no specific issue regarding the coercion in procuring the letter dated April 7, 1998, was framed. Citing the Supreme Court’s decision in Nand Ram vs. Jagdish Prasad, the Court held that mere reasoning recorded in a previous judgment on a different issue does not operate as res judicata.
“The issue of letter dated 7 April 1998 being procured by misrepresentation or coercion was not involved in the Disputes decided by the Co-operative Court… mere furnishing of reasons in previous round of litigation for recording findings on issues framed would not operate as res judicata.”
On Coercion: The Court upheld the Arbitrator’s finding that the letter dated April 7, 1998, was obtained by coercion. The Court observed that the Respondent had raised specific pleadings regarding letters dated April 22, 1998, and April 23, 1998, sent by his advocate alleging coercion, which the Bank failed to deny in its Statement of Defence.
“Despite above specific pleadings, Petitioner failed to raise the plea of non-receipt of the two letters… in the Statement of Defence. More importantly, one of the letters bears clear noting of official of the Petitioner-Bank… thereby belying the plea of non-receipt.”
On Interest: The Court found merit in the Bank’s objection regarding the interest rate. The Arbitrator had awarded 17.5% p.a. despite the Respondent claiming only 13.5% p.a., reasoning that “justice demands that the same rate of interest should be applied” as was claimed by the Bank in other proceedings.
Justice Marne termed this “patent illegality,” stating:
“Award of interest higher than the one claimed by the party clearly constitutes patent illegality in the Award. The Arbitral Award also breached the fundamental policy of Indian law by awarding relief not prayed for by the claimant.”
However, rather than setting aside the entire award, the Court relied on the recent Constitution Bench judgment in Gayatri Balasamy vs. ISG Novasoft Technologies Limited (2025) 7 SCC 1, which allows courts to modify arbitral awards, including the rate of interest, under Section 34 of the Arbitration Act.
“The bad part of the Award is not inseparably intertwined with the good part and that therefore, it is easily possible to severe the bad part of the Award.”
Decision
The High Court partly allowed the petition. It confirmed the award to the extent of the recovery of Rs. 4,05,558/- and Rs. 14,07,409/-. However, it set aside the interest rate of 17.5% p.a. awarded by the Arbitral Tribunal and substituted it with 13.5% p.a. payable at quarterly rests.
Case Details:
- Case Title: TJSB Sahakari Bank Ltd. vs. Amritlal P Shah
- Case No: Commercial Arbitration Petition No. 370 of 2024
- Bench: Justice Sandeep V. Marne
- Citation: 2025:BHC-OS:25458
