A contract that was entered regarding a tender gave rise to the dispute between the respondent state and the appellant. The matter was sent for arbitration on April 22, 1997, and the arbitrator ordered the four respondents to pay 18% pendente lite and future compound interest on the claims in January 1999. When the respondent opposed this under section 34 of the Arbitration and Conciliation Act, 1996, It was dismissed in the District Court for lack of evidence supporting the alleged facts. After the aggrieved party took the matter to the Allahabad High Court, which issued the petition in part, it was decided that the 18% judgment should not have been awarded since the current case did not come under the Arbitration and Conciliation Act 1940. After consideration of all arguments, it reduced the rate of interest from compound interest of 18% to 9% simple interest per annum. The case was then appealed to the Supreme Court by the appellant.
Issues raised:
High court’s decision to amend the arbitral award and thus reduce the payable interest from 18% compound interest to 9% simple interest was right or not?
The case also raised the issue of how much judicial intervention in arbitral awards is permitted by the Act.
Contentions
The Appellant side counsel first argued that their claim was initially 24% pendente lite interest and it was already reduced to 18% by the arbitrator. They then referred to pre-amended section 31(7)(b) which laid down the statutory interest rate as 18% thus, the High Court erred in reducing this interest. The case of Shahi v. State of UP[1] was then referred to, wherein the court upheld the 18% per annum rate of interest, under section 31(7)(b) given by the arbitrator. They also referred to Clause 70 of the General Conditions of Contract, which talks about the final and binding nature of Arbitral awards on both parties. They cited Secretary Irrigation Department, State of Orissa v G.C. Roy[2] in which the arbitrator was permitted to award interest pendente since the parties’ agreement did not prohibit interest awards.
The respondent held that at the time, before the High Court, even the appellants had agreed that the statuary rate of interest should be 1-2% higher or lower than the bank rate, which was 7-8%, making the 18% compound interest rate unjustified and warranted revision. They held that the High Court had inherent powers as a constitutional court as referred in the Municipal Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd. & Ors. They also gave examples of previous judgments wherein the court had reduced the rate of interest from 18%. (Chandigarh v. Kalsi Construction Company[4] and Oriental Structural Engineers Pvt Ltd. v. State of Kerala)
Rationale
The Supreme Court held that section 31(7)(b) of the Arbitration and Conciliations Act 1996 was amended by the Act 3 of 2016. Arbitration proceedings began between the parties on 22.04.1997 after the act of 1996 came into force, therefore it was subject to this statute. Under the act of 1996, section 31 (7)(b) states that whenever the arbitrator cannot award any specific interest rate, the parties will be awarded a statutory rate which is 18% per annum. When the arbitrator’s award mentioned the interest rate, the High Court could not change the award based on this section.
The Court agreed with the similarity of the situation between the current case and the case of Shahi and Associates as mentioned by the appellants. It also held that in the Kalsi Construction Company case, the court had exercised its power under Article 142 because of the specific conditions which were the awards were passed 20 years ago and were related to the construction of a Pediatrics center in a medical college wherein the matter was left to the discretion of the court by both the parties. As stated by the respondents in the Municipal Corporate case, the Supreme Court asserted that the case describes the inherent powers of the court but jurisdiction for recalling its orders upon and not concerning the given case.
The Court further stated that the ‘The limited and extremely circumscribed jurisdiction of the court under Section 34 of the Act, permits the court to interfere with an award, sans the grounds of patent illegality, i.e., that “illegality must go to the root of the matter and cannot be trivial”; and that the tribunal “must decide by the terms of the contract, but if an arbitrator construes a term of the contract reasonably, it will not mean that the award can be set aside on this ground”.[6]’ It stated that the other ground for denial of the arbitral award is neglect of the principles of natural justice. The Supreme Court also held that the Parliament had consciously omitted the court’s power to modify an award in the Act of 1996 which was iterated decisively in the NHAI vs, Hakeem[7]. Therefore, it held that the impugned judgment of the High Court warrants interference and reinstated the award by the arbitrator on 21.01.1999.
Defect of Law
There were no legal defects in the present situation. The Arbitration and Conciliation Act, 1996 was infringed upon by the High Court when it changed the arbitrator’s decision and decreased the statutory interest granted thereon, as the Supreme Court correctly concluded. The Supreme Court clarified that the 1996 Act was also applicable in this instance because the arbitration processes began after the Act’s implementation.
Inference
The Supreme Court’s decision on reinstating the 18% interest award, signifies the binding nature of arbitral awards and limits the court’s powers to interfere with such awards. This case acts as an example that the parties are bound by the terms of the awards they voluntarily accept and that arbitration. The court also explains the ambit and application of Article 34 of the Arbitration and Conciliation Act, 1996. It states that Article 34 can be used by courts only when there is a case of denial of national Justice or on the grounds of Patent illegality. Thus, laying down a precedent for the rest of the Courts. This decision also enhances confidence in the usage of Arbitration as an alternative grievance redressal mechanism and its legitimacy is also increased by this ruling. The Apex Court drew attention to a clause in the previous Arbitration Act that gave the court the authority to change an award. Nevertheless, the parliament purposefully left out that authority when it passed the current Arbitration Act. This indicates that the legislative purpose was to prohibit the ability to change an award made to the court in any way.
Author-
Khushi Awana
Amity University Noida
[1] [2019] 11 SCR 640
[2] [1991] Supp. 3 SCR 417
[3] (2018) 14 SCR 1143
[4] (2019) 8 SCC 726
[5] 9 (2021) 4 SCR 137
[6] M/s Larsen Aur Conditioning and Refrigeration Company V. Union of India (2023) SCC 3798 (India)
[7] (2021) 5 SCR 368