Supreme Court: In an appeal against Union of India v. Larsen Air Conditioning & Regrigeration Co., 2019 SCC OnLine All 7205 seeking to decide “whether the High Court erred in modifying the arbitral award to the extent of reducing the interest, from compound interest of 18% to 9% simple interest p.a.”, the Division Bench of S. Ravindra Bhat and Dipankar Datta, JJ. set aside the said decision while reiterating the scope of interference with arbitral award.
Legal Trajectory
The dispute arose between the appellant and Union of India from a contract entered after being awarded the tender during the course of work. The Union referred the dispute to arbitration on 22-04-1997, whose proceedings concluded on 24-10-1998 and the tribunal award was published on 21-01-1999 directing the respondents to pay 18% pendente lite and future compound interest on the award for specific claims.
The Union challenged the award under Section 34 of Arbitration and Conciliation Act, 1996 (‘1996 Act') before the District Court which was dismissed on the ground that it could not sit in appeal over the award while the Union failed to file any proof on the alleged grounds. The said decision was challenged before the High Court in 2003 and meanwhile, the Union deposited Rs 10 lakhs on 6-06-2003 in the District Court against the overall due amount of Rs 1,82,878.11. The High Court partly allowed the said appeal, disapproved the reasoning in the award at a specific pointer and held that “the sum of Rs 3 lakhs awarded towards compensation for loss caused due to non-issue of tender document and paralyzing business could not have been granted” and that “it could not be said that the proceedings (in the present case) were under the Arbitration Act, 1940, and therefore, the rate of interest granted should not be 18%.”. It further referred to K. Marappan v. TBPHLC, (2020) 15 SCC 401, Raveechee & Co. v. Union of India, (2018) 7 SCC 664 and Ambica Construction v. Union of India, (2017) 14 SCC 323 while deciding the question of pendente lite interest and held that bar to award interest on the amounts payable under the contract would be insufficient for denying the payment of interest pendente lite. The High Court reduced the rate of interest from 18% to 9% p.a. while clarifying that there was no scope for interference with the arbitral award.
Court's Analysis on Scope of Interference with Arbitration Award
The Court perused Section 31(7)(b) of the 1996 Act before amendment effected on 23-10-2015 and expressed that it empowered the arbitrator to award both pre and post award interests and specified that the awarded sum would carry an interest of 18% p.a. till the date of date of payment. The Court supported the appellant's reliance on Shahi & Associates v. State of U.P., (2019) 8 SCC 329 having similar facts and squarely applicable in the instant matter.
Since the arbitration in the instant matter commenced in 1997 and the 1996 Act came into effect on 22-08-1996, the Court clarified that the 1996 Act was applicable. As per Section 31(7) of the 1996 Act, the statutory rate of interest was contemplated at 18% p.a. in case the arbitration award lacks any direction towards the rate of interest. The Court commented that the High Court could not interfere with the arbitrator's findings on the said interest, unlike the older Act wherein, the Court was powerless to modify the award and could only partially or wholly set aside the award after finding that the conditions under Section 34 of 1996 Act could be established.
The Court cited the definition and delineation of scope of interference in Associate Builders v. DDA, (2015) 3 SCC 49, Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 and Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131. The Court relied on Oriental Structural Engineers (P) Ltd. v. State of Kerala, (2021) 6 SCC 150 wherein, the Court held that since the contract stipulated interest entitlement on delayed payments, but contained no mention of the rate of interest applicable — the Tribunal ought to have applied the principles laid down in Irrigation Deptt., Govt. of Orissa v. G.C. Roy, (1992) 1 SCC 508 and reduced the rate of interest awarded by the Tribunal while exercising power under Article 142 of Constitution of India.
Placing reliance on Associate Builders v. DDA, (2015) 3 SCC 49, the Court further elaborated that “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 of a trivial nature’; and that the tribunal ‘must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground'.”
Discussing another ground of ‘denial of natural justice', the Court highlighted that in appeal, Section 37 of 1996 Act leaves narrower scope for review of award by the appellate court if upheld, or substantially upheld under Section 34. The Court further explained that the older Act enabled the Court to modify an award, a power which was consciously omitted by Parliament while enacting the 1996 Act, hinting towards exclusion of power to modify an award, as iterated in NHAI v. M. Hakeem, (2021) 9 SCC 1.
Conclusion
Therefore, the Court resolved to interfere with the impugned judgment and set aside the same to the extent of modification of rate of interest and reinstated the interest @18% p.a. as awarded by the arbitrator on 21-01-1999. The Court accordingly directed the Union to pay the dues within 8 weeks.
[Larsen Air Conditioning & Refrigration Co. v. Union of India, 2023 SCC OnLine SC 982, decided on 11-08-2023]
Judgment authored by: Justice S. Ravindra Bhat
Advocates who appeared in this case :
For Appellants: Advocate R. K. Singh, Advocate Neeraj Singh, Advocate Kumar Gaurav, Advocate Aman Rastogi, Advocate on Record Sanjay Rastogi
For Respondents: Additional Solicitor General Vikramjeet Banerjee, Advocate Nachiketa Joshi, Advocate A K Kaul, Advocate Bhuvan Mishra, Advocate Akshit Pradhan, Advocate Sachin Sharma, Advocate on Record Arvind Kumar Sharma
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