Bench: S. Ravindra Bhat and Dipankar Datta, JJ.
FACTS
The case of Larsen Air Conditioning and Refrigration Company v. Union of India was based on a contractual dispute between the appellant company and the Union of India. The exact terms of the contract are not outlined in the judgment, but it seems that Larsen Air Conditioning won some work on tender, which subsequently led to certain disputes.
Thereafter, on April 22, 1997, the Union of India referred the dispute to arbitration. The arbitration proceedings concluded on October 24, 1998, and the arbitral tribunal published its award on January 21, 1999. By the said award the Tribunal directed the first four respondents including the Union of India to pay 18% compound interest, both pendente lite and future interest, on the awarded amount in respect of Claim Nos. 1-8.
The Union of India, feeling aggrieved by the award, challenged the same under Section 34 of the Arbitration and Conciliation Act, 1996, before the district court. But the district court dismissed this challenge. The reason given by the court is that it cannot sit in appeal over the award, and the Union of India has wholly failed to file any proof of the grounds it had alleged for setting aside the award.[2]
Aggrieved by this dismissal, the Union of India filed an appeal before the Allahabad High Court in 2003. During the pendency of this appeal, on June 6, 2003, the Union of India deposited Rs. 10,00,000 in the District Court, Kanpur, against the Rs. 1,82,878.11 that was due at that time.
The High Court, in its judgment, partially allowed the appeal. It disapproved the reasoning of the arbitrator on Claim No. 6, holding that the sum of Rs. 3 lakhs awarded as compensation for loss caused due to non-issue of tender document and paralyzing business could not have been granted. More significantly for the present case, the High Court also reduced the interest rate from 18% compound interest to 9% simple interest per annum.
ISSUES
- Was the High Court justified in changing the arbitral award by reducing the interest rate from 18% compound interest to 9% simple interest per annum?
- What are the limits of judicial intervention in arbitral awards under the Arbitration and Conciliation Act, 1996, particularly concerning the modification of interest rates determined by arbitrators?
CONTENTIONS
The appellant argued that their original claim was for 24% pendente lite interest, which the arbitrator had already reduced to 18%. They pointed to the pre-amended Section 31(7)(b) of the 1996 Act, which prescribed a statutory interest rate of 18% per annum if the arbitrator did not specify otherwise. The appellant also drew attention to Clause 70 of the General Conditions of Contract, which stipulated that the arbitrator’s award shall be final and binding on both parties.
The respondent-state contended that the High Court had taken a holistic view of the matter and rightfully reduced the interest to a more reasonable rate. They argued that even the appellant’s counsel, before the High Court, had agreed that the statutory rate of interest should be 1 or 2% higher or lower than the bank rate, which in the last decade has been about 7-8%. Therefore, they argued, an 18% compound rate of interest was completely unjustified and out of step with economic realities.
RATIO DECIDENDI
The Supreme Court deliberated mainly on the laws of arbitration in India, and the facts and complexities of the present case, before arriving at its decision. It held that the Arbitration and Conciliation Act of 1996[3] was the relevant playbook, since the arbitration began in 1997, after the Act had been enacted. The Bench dwelled on Section 31(7)[4] of that Act, dealing with interest on arbitral awards. This portion states that where the arbitrator does not stipulate the rate of interest, it shall be considered 18 percent per annum. The Courts have only said it this way, “Now that we have this 18 percent interest rate provided for under the law, who informed the High Court that it should tamper with what the arbitrator had found?”
This has substantially added to the Court’s notion of limiting the intervention of courts in arbitration matters. They pointed out that whereas the old 1940 Act had courts tinker with awards, the new 1996 Act does not provide this option. The judges took this as Parliament saying, “Hands off!” to courts where altering the decisions of arbitration is concerned. For that they dragged in a load of their own previous decisions that had already established some ground rules as to when courts could and could not intervene in arbitral awards.[5]
The Court also noted that evidence was plentiful that Parliament had definitely not provided any power to modify awards under the 1996 Act. They took the same to be the clear evidence that the legislature never intended the courts to interfere with the awards in any form whatsoever. By the tail end of this rationalization, the Supreme Court summed up that the High Court had overreached by altering the interest rate fixed by the arbitrator. They thus reversed the High Court’s judgment regarding the interest rate and reinstated the arbitrator’s award of 18% per annum. It was like saying, “What the arbitrator says, goes – unless there’s a really good reason to say otherwise.”
DEFECTS OF LAW
The judgment brings out defects or inadequacies, if not flaws, in the present legislative framework of arbitration in India. One such defect is the omission to provide power to courts under the 1996 Act to correct arbitral awards, which though reasonable by and large, are shockingly high or low regarding a particular issue. This infirmity may potentially throw up situations where courts have to grudgingly accept awards which may appear to them partly unfair or unreasonable.
Another possible defect is the rigidity of the statutory interest rate of 18% per annum in Section 31(7) of the Act. This interest rate might have been reasonable at the time of enacting the Act in 1996, but it may not be appropriate at present times when economic conditions have totally changed. This rigidity in this provision leads to situations where arbitral awards include interest components that are out of sync with prevailing interest rates in the economy.
It also brings to the fore a conceivable conflict between the principle of least judicial interference in arbitration and the need for arbitral decisions to be just and reasonable. While the thrust of the Act is to reduce judicial interference in order to ensure efficiency and finality to the arbitration process, it is often done at the expense of substantial justice.
INFERENCE
In this respect, the impact of the Supreme Court decisions in the case of Larsen Air Conditioning and Refrigration Company v. Union of India is immense over the arbitration law and practice in India. At the very minimum, the judgment goes on to reiterate the principle of minimal judicial interference in arbitration issues already enshrined under the Arbitration and Conciliation Act, 1996. Interfering with the interest rate altered by the High Court and, by ipse dixit, reinstating the award of the arbitrator, the Supreme Court[6] has conveyed a very clear message as to the finality of arbitral awards and the limited scope for judicial interference.It, therefore, largely supports the autonomy of the arbitral process to eventually make arbitration a truly alternate dispute resolution mechanism, an independent branch of dispute resolution from the traditional court processes. This will increase the credibility and effectiveness of the arbitration process in India and might make it more attractive for both domestic and international parties to resolve disputes.
The judgment clarifies the 1996 Act—Section 31(7) among other things—on the interest rate interpretation and application. In holding that the statutory rate of 18% per annum is right, the Court has served notice that, while an arbitrator’s decision on interest rates may be high by any current economic standard, it should generally be shown respect. This may have implications for how parties approach interest-related issues in future arbitrations.The Court’s insistence on the distinctions between the 1940 and 1996 Acts, most notably concerning the courts’ discretion to vary awards, indicates that the new legislative framework requires exact adherence. This strict interpretive approach may be used by the lower courts in their assessment of challenges to arbitral awards, potentially limiting the scope for judicial interference in challenges.The judgment, however, does bring out the tensions between finality and fairness in arbitration. Since arbitration has an overriding consideration to efficiency and predictability with minimal intervention of the judiciary, it mostly leads to a result that seems unfair or unreasonable, hence challenging the confidence of some parties in the arbitral process.
It may lead to debate as to whether the Act needs amending to confer on the courts a limited power to modify awards in exceptional circumstances. Any such amendment would call for a careful balancing of the competing interests of finality, fairness, and efficiency in arbitration.The judgment, at best, brings Indian arbitration law closer to international standards of minimal interference by the court. This could indeed boost India’s reputation in being an arbitration-friendly country and have a lot more international arbitrations seat themselves in India.It may also affect the manner in which parties at least draft arbitration clauses and conduct arbitration proceedings. If it knows that courts are not likely to interfere, except on very limited grounds, with interest rates or other elements of awards, parties may give greater attention to these matters at the stage of the arbitration itself.
CONCLUSION
The judgment in Larsen broadly outlines the contours of arbitration in India. It reinforces the autonomy of the arbitral process, brings clarity to vital legal issues, and sets clear boundaries for judicial intervention. Even though it brings in efficiency and finality in arbitration, it remains opened to constant debate for its balance of this ideal with requirement of substantive justice in arbitral outcomes. The principles enunciated in this case are bound to play an important role in the future evolution of dispute resolution in the country as India emerges increasingly as a key venue for both domestic and international arbitration cases.
[1] 2023 SCC OnLine SC 982
[2] Indian Layer and Allied services,SUPREME COURT REITERATES THAT COURTS HAVE LIMITED SCOPE OF JUDICIAL INTERFERENCE IN ARBITRAL AWARDS,https://theindianlawyer.in/supreme-court-reiterates-that-courts-have-limited-scope-of-judicial-interference-in-arbitral-awards/
[3] Arbitration and Conciliation Act of 1996.
[4] Section 31(7),Arbitration and Conciliation Act of 1996.
[5]India Law,SUPREME COURT ECHOES CURTAILING POWER OF THE HIGH COURT WHILE ENTERTAINING APPEAL U/S. 34, (Aug 18,2023)
[6] LiveLaw,Court Has No Power To Modify Award U/Sec 34 Arbitration & Conciliation Act : Supreme Court
(12 Aug 2023)Ashok Km,https://www.livelaw.in/supreme-court/supreme-court-section-34-arbitration-modify-award-larsen-air-conditioning-and-refrigeration-company-vs-union-of-india-2023-livelaw-sc-631-235072