The High Court of Chhattisgarh at Bilaspur Bench has held that termination for short lifting had to comply with the agreement’s financial-year-based deadline, and the contractual interest bar defeated pendente lite interest, but did not warrant interference with post-award interest. For lifting below 30% of the annual contracted quantity, SECL had to comply with both the 60-day limit from the end of the relevant year and the requirement of at least 30 days’ prior written notice. These were integral contractual conditions, not dispensable formalities.
The Court clarified that the 24-month contractual duration did not change the defined meaning of “Year” as a financial year. The alleged default concerned 2011–12, and the termination notice issued on 22 March 2013 was beyond the prescribed period. SECL could choose whether to terminate, but once it elected to do so, it had to satisfy the stipulated triggering conditions, deadline and notice requirements.
Since Clause 3.1.2 prohibited interest on the security deposit, the High Court held that the arbitrator could not disregard that stipulation and set aside the award of pendente lite interest at 14% per annum. Also, the Court upheld post-award interest under Section 31(7), noting the absence of an express prohibition covering that period. It severed only the invalid pendente lite interest component, leaving the remainder of the award, including security deposit refund and 18% post-award interest, undisturbed.
Briefly, South Eastern Coalfields Limited (SECL) and Punjab Small Industries and Export Corporation entered into a Fuel Supply Agreement on 12 December 2011 for an annual contracted quantity of 1,02,000 tonnes of coal. The agreement was valid for 24 months. Following delays in furnishing additional bank guarantees and financial coverage, the purchaser submitted monthly purchase indents from July 2012 to April 2013, but SECL declined supplies on the ground that the financial year 2011–12 had expired. SECL subsequently issued a termination notice on 22 March 2013 for failure to lift coal and terminated the agreement on 23 April 2013, forfeiting the security deposit.
The arbitrator held that SECL had not followed the contractual termination procedure, which required action within 60 days of the end of the relevant year and at least 30 days’ prior written notice. The termination and consequential forfeiture were therefore set aside, and refund of the security deposit with interest was directed. The Commercial Court rejected SECL’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996.
The Division Bench comprising Justice Parth Prateem Sahu and Justice Sachin Singh Rajput observed that the contractual right to terminate for lifting below 30% of the annual contracted quantity was conditional and time-bound. The agreement defined “Year” as the financial year, including a truncated year. Its 24-month duration did not alter that definition or extend the deadline for terminating on account of a default relating to 2011–12. Although the words “may be terminated” gave SECL discretion to terminate, that discretion remained subject to the prescribed time limit and notice requirements. The notice issued in March 2013 was beyond the contractual period.
On interest, the Court noted that Clause 3.1.2 expressly prohibited the purchaser from claiming interest on the security deposit. The arbitrator could not disregard that prohibition while awarding pendente lite interest. However, the Court separately upheld post-award interest, finding that the agreement did not expressly bar it and that the arbitrator had acted within Section 31(7) of the Arbitration Act.
The Court observed that a discretionary contractual right of termination must be exercised within the conditions and time limits attached to it. The agreement’s overall tenure cannot override its express definition of the relevant financial year or the deadline governing termination for that year’s default. Judicial review under Sections 34 and 37 does not permit an independent reassessment of the award merely because another contractual interpretation is possible.
