The arbitral tribunal must justify the setting of the interest rate; The prize holder is not entitled to interest for delay caused by the prize: Supreme Court

The Court further held that the law on arbitration and conciliation imposes on the arbitral tribunal the obligation to justify the way in which it considers that the interest rate is reasonable. In addition, the Court ruled that no interest would be payable for the period during which there were breaches on the part of the fellow.

Holding thus, a bench comprising Judges BR Gavai and BV Nagarathna invoked special powers under Section 142 of the Constitution to reduce interest awarded in a case.

Facts

The parties concluded an agreement dated 16.12.1971 for the construction of a 3 km long road. The project works were expected to be completed within a year, but there was a delay in completing the works. Therefore, a dispute arose regarding the payment due to the Respondent.

Accordingly, the defendant brought an action under section 20 of the 1940 Act seeking referral of the dispute to arbitration. The trial court granted the application subject to the respondent filing an original copy of the agreement. However, the Respondent did not comply with the requirement. In the meantime, the earlier statute was repealed by the A&C Act of 1996. Subsequently, the respondent filed a claim in the settled lawsuit seeking the appointment of an arbitrator which was dismissed due to a lack of competence. Finally, the respondent’s application under section 11 of the A&C Act was granted and the arbitrator was appointed.

The arbitrator upheld the respondent’s claim as well as pendente lite and future interest at the rate of 18% per annum. Injured by the award, the appellant challenged the award under sections 34 and 37 of the law, however , both requests were denied. Therefore, the petitioner appealed to the Supreme Court.

Reasons for challenge

The appellant challenged the sentence on the following grounds:

• The arbitrator erred in awarding interest for the period from 1977 to 1989 insofar as the respondent was put into a deep sleep for a period of twelve years and took no action to enforce his claim. It was not until 1989 that the respondent brought an action under section 20 of the 1940 Act.
• The arbitrator further erred in awarding interest for the period from 1990 to 2000 because the respondent took no steps to commence the arbitration by failing to comply with the requirement to file the original of the agreement.
• The arbitrator further erred in awarding interest at 18% per annum and the amount of interest is almost 5 times the principal amount.

The Respondent refuted the above arguments by raising the following arguments:

• The arbitrator has the discretion under section 31(7)(a) of the A&C Act to award any rate of interest it deems appropriate. Further, the interest rate has been upheld by the Magistrates Court as well as the High Court, therefore no interference is required.

Analysis by the Court

The Court held that there was no doubt that Article 31(7)(a) confers on the arbitrator the discretion to include in the sum for which the award is rendered interest, on the whole or on part of the money, for all or part of the period between the date the cause of action arose and the date the award is made, however, the section also requires the arbitrator to obligation to give reasons.

The Court held that a reading of the award reveals that the arbitrator gave no reason to award both pendente lite and future interest at the rate of 18% per annum. If he further held that the arbitrator could not have awarded interest for the period following the completion of the work up to the date of the proceedings because the respondent had not taken any action for 12 years to assert the claims, therefore, the respondent’s very conduct would render him ineligible for interest during the said period.

Then the Court held that the arbitrator had also erred in awarding interest for the period from 1990 to 2000. The Court observed that the suit under section 20 of the 1940 Act had been decreed in 1990, however, the respondent had not complied with the condition of filing the original agreement, but after a delay of 10 years filed a request for appointment of arbitrator. The Court held that if it had filed the original agreement immediately, the arbitration proceedings would have been concluded long ago, therefore, no interest could be awarded for the period when the defendant itself was responsible for the disqualifications.

The Court then ruled on the question of the interest rate. He referred to several judgments in which the interest rate was reduced due to a long lapse of time. Accordingly, the Court, to do complete justice, invoked Article 142 of the Indian Constitution to reduce the rate of interest from 18% per annum to 7.5% per annum. The Court found that there was a long lapse of time and several locks on part of the sentence. holder who justifies the reduction of the interest rate by exercising the powers provided for in Article 142.

Accordingly, the Court set aside the award to the extent that it allowed interest from 1977 to 2000 and reduced the interest rate to 7.5% per annum.

Case Title: Executive Engineer (R&B) v Gokul Chandra Kanungo, Civil Appeal No. 8990 of 2017

Reference: 2022 LiveLaw (SC) 824

Counsel for the Appellant: SIBO SANKAR MISHRA

Counsel for the Respondent: ASHOK PANIGRAHI

Arbitration and Conciliation Act 1996 – Section 31(7)(a) – the section itself requires interest to be at such rate as the arbitral tribunal considers reasonable. Where an arbitral tribunal has the discretion to award interest at a rate it deems reasonable, then it is for the arbitral tribunal to give reasons for how it considers the interest rate to be reasonable – Where the arbitral tribunal is vested with such discretion, the arbitral tribunal would be required to apply its spirit to the facts of the case and decide whether interest is due on all or part of the money and also whether it should be awarded on the whole or part of the period between the date the cause of action arose and the date the award is made – referred to Delhi Airport Metro Express Pvt. ltd. against Delhi Metro Rail Corporation 2022 LiveLaw (SC) 452

Arbitration and Conciliation Act 1996 – Interest – Party not entitled to interest for period during which proceedings were deliberately delayed – A party may not be permitted to derive benefit from its own shortcomings [Para 12 to 14]

Constitution of India – Section 142 – Powers under Section 142 may be exercised to reduce the amount of interest awarded. [Para 18]

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