Madras High Court: Forfeiture of Security Deposit Unsustainable, Interest Slashed from 24% to 12%

The petitions under Section 34 arose from a commercial lease dispute governed by a registered lease deed executed in 2018. The lessor had claimed that the lessee terminated the agreement prematurely, resulting in substantial financial loss. Thereafter, the lessor invoked the arbitration clause and raised composite claims amounting to crores, including recovery of unpaid rent, liquidated damages, forfeiture of the security deposit, and interest at 24% per annum. The arbitral tribunal, by its award dated 22.03.2021, accepted the primary claims in part and directed payment of Rs. 11,88,16,397, along with interest at 24% per annum from the date of claim until realisation, as well as Rs. 5,00,000 towards arbitration costs.

The aggrieved lessee challenged the award on multiple grounds, asserting that the contract had been frustrated for want of necessary statutory approvals and that the forfeiture clause was penal in nature. It was contended that the tribunal had ignored settled principles under Sections 73 and 74 of the Indian Contract Act, and that the interest awarded was excessive and contrary to commercial fairness. The lessor, on the other hand, filed an application seeking enforcement of the award and deposit of the awarded sum.

Issue Raised: Whether the arbitral award suffered from patent illegality in (i) upholding liquidated damages without proof of actual loss, (ii) permitting forfeiture of the entire security deposit, and (iii) awarding exorbitant interest at 24% per annum.

HC Held: The Court observed that the arbitral tribunal’s findings regarding the validity of termination and quantification of rent and damages were supported by evidence and hence not open to reappraisal under Section 34. However, it found the direction permitting forfeiture of the entire security deposit of Rs. 75,75,480 to be contrary to law, holding that such forfeiture amounted to imposition of a penalty beyond the terms of compensation contemplated under Sections 73 and 74. That portion of the award was therefore set aside.

The Court noted that the grant of interest at 24% per annum was excessive and disproportionate. It modified the rate to 12% per annum, reckoning from the date of the claim till realisation. The arbitral award dated 22.03.2021 stood confirmed.

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