Awarding Further Interest On Penal Charges Is Contrary To Fundamental Policy Of Indian Arbitration Law: Bombay High Court

"Clause 1.1.1 Leaves No Room for Rebate on Damaged Buses" — In a significant decision under the Arbitration and Conciliation Act, 1996, the Bombay High Court partly set aside an arbitral award in Signpost India Private Limited vs. Brihan Mumbai Electric Supply And Transport Undertaking (Arbitration Petition No. 282 of 2024), while upholding the arbitrator’s interpretation on core contractual clauses related to advertising rights on municipal buses.

Justice Sandeep V. Marne, sitting singly, declined to interfere with the arbitral tribunal’s rejection of major monetary claims made by the Petitioner—Signpost India—for rebates due to damaged buses and Covid-19 disruptions. However, the Court found fatal legal flaws in the Tribunal’s acceptance of BEST’s counterclaims for interest on delayed payment charges and defacement charges, terming them contrary to public policy and unsustainable in the absence of proof of loss, respectively.

Damaged Buses Not a Ground for Rebate: Clause 1.1.1 Clearly Disentitles the Contractor

Rejecting Signpost’s primary grievance—denial of rebate for 966 allegedly damaged buses—the Court upheld the arbitrator’s reasoning that the contract was based on a “fleet-based” pricing model and not on buses actually plying or being fit for display.

Justice Marne observed:“The advertising rights were granted in respect of ‘fleet’ of buses available with BEST. The contract clauses specifically provided for payment of display charges even in respect of buses rendered inoperational due to maintenance work. Clause 1.1.1 of Schedule-VI clearly states that 100% buses may not be on road and no claims shall be raised in that respect.”

Signpost had argued that Clause 4.1 of the contract imposed an obligation on BEST to keep buses in good condition for advertisement purposes. However, the Court clarified: “The words ‘good condition’ are attached to ‘advertisement’, not to the ‘buses’ themselves. Clause 4.1 does not create a contractual right to rebate.”

The Court also rejected the argument of waiver, noting that BEST’s partial grant of rebate for 672 buses in 2022 was “a gratuitous act and not a matter of right”, and did not alter the contractual bar on claims.

Covid Rebate for 8-Day Lockdown Period Justifiably Denied

On the claim for additional rebate of ₹99.42 lakhs for the 8-day period between 24 March 2020 and 31 March 2020, the Court again sided with the arbitrator, observing that force majeure provisions under Clause 19 did not excuse the petitioner from paying fixed monthly charges. The rejection was found neither perverse nor in contravention of contract.

Refund Claim Based on Plying Buses Misconceived—Only ‘Fleet Size’ Is Relevant

The claim of ₹14.45 crores by Signpost for excess payments made on the basis that fewer buses were operational was dismissed as “misreading of the formula under Schedule IX”. The Court reiterated that monthly rental computation depended only on the “fleet of undertaking available for display”, and not on the actual buses running each month.

Award of Interest on Already Penal Delayed Charges Set Aside—‘Interest on Interest’ Not Contractually Tenable

One of the most consequential findings of the Court was in setting aside the arbitral award of ₹49.60 lakhs towards “interest on delayed payment charges” at 18% p.a., in addition to the hefty penal interest already paid by the Petitioner.

Justice Marne ruled: “Clause 24 of Schedule-III stipulates penal interest for delayed payments. Further imposing 18% on such interest transforms the clause into a provision for ‘interest on interest’, which is not only ambiguous but also contrary to the fundamental policy of Indian law.”

The Court faulted the arbitrator for failing to undertake any interpretative analysis of the clause and declared the award of interest on interest unsustainable.

Penalty of ₹1,000 Per Day Per Bus Cannot Be Levied Without Proof of Loss: Defacement Charges Set Aside

In another critical finding, the Court set aside the award of ₹37.29 lakhs towards defacement charges imposed on Signpost for failure to remove advertisements after expiry of the contract.

Holding that Section 74 of the Indian Contract Act, 1872 requires proof of actual loss before awarding penalties, the Court found that BEST had produced no evidence of damage or cost incurred.

Justice Marne cited the Supreme Court’s decision in Kailash Nath Associates v. DDA and the Bombay High Court’s ruling in Anila Gautam Jain v. HPCL, and observed: “Clause-21 imposes a penalty, not liquidated damages. There is no proof that any expenditure was incurred for defacement, or that any legal injury was suffered. Therefore, enforcing the clause without evidence results in unjust enrichment.”

Court Reduces Arbitration Costs and Restricts Post-Award Interest

The Court also reduced the arbitral costs from ₹48.20 lakhs to ₹25 lakhs, holding that BEST could no longer be termed as entirely successful after two of its counterclaims were struck down. Additionally, the post-award interest at 10% was upheld only with respect to the surviving counterclaim for RTO fees of ₹46.78 lakhs.

Legal Takeaways: Arbitrator’s Contractual Interpretation Upheld; But Award Must Comply With Fundamental Policy

This judgment offers clear judicial guidance on several legal fronts:

• Interpretation of arbitration awards will not be interfered with merely for being incorrect, so long as the view is plausible and rooted in contract.

• Awards contrary to public policy, such as those imposing interest on interest or penalties without proof of loss, remain open to judicial correction.

• Under Section 74 of the Contract Act, even where contracts specify penalties, courts must ensure that such penalties are awarded only upon proving reasonable compensation for loss suffered.

• Section 31A (Costs) requires proportional application. A party losing substantial counterclaims cannot recover entire arbitral costs.

The Bombay High Court’s decision exemplifies a balanced judicial approach to arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996—respecting contractual autonomy and arbitral finality, while intervening where statutory policy or fairness demands it.

While the rejection of Signpost’s major claims was upheld as per contract, BEST’s aggressive counterclaims—lacking contractual clarity and evidentiary support—did not survive judicial scrutiny. As the Court aptly summarized: “Bad part of the award can be severed from good part by modifying the award.”

Date of Decision: 04 December 2025