Power To Award Interest As Per S. 31 Of Arbitration Act, Applies Only In Absence Of An Agreement: Delhi High Court
The Delhi High Court has ruled that Section 31 (7) (a) of the Arbitration and Conciliation Act, 1996 (A&C Act), which deals with the Arbitrator’s discretion while awarding interest in respect of the pre-reference period, applies only where there is no agreement between the parties with respect to the rate of interest to be awarded. The bench of Justice Chandra Dhari Singh...
The Delhi High Court has ruled that Section 31 (7) (a) of the Arbitration and Conciliation Act, 1996 (A&C Act), which deals with the Arbitrator’s discretion while awarding interest in respect of the pre-reference period, applies only where there is no agreement between the parties with respect to the rate of interest to be awarded.
The bench of Justice Chandra Dhari Singh remarked that the Arbitral Tribunal may not resort to Section 31(7)(b), while awarding post-award interest, when express provisions regarding the rate of interest are present in the agreement between the parties.
While noting that the agreement between the parties has primacy over the powers of the Arbitral Tribunal under Section 31(7), the bench concluded that since the Arbitral Tribunal had gone beyond the contract and awarded interest at a rate that was different from the rate the parties had agreed upon, the award suffered from patent illegality and was contrary to the fundamental policy of India.
As per Section 31 (7) (a) of the A&C Act, unless otherwise agreed by the parties, the Arbitral Tribunal may award interest for the pre-reference period, at such rate as it deems reasonable, on the whole or any part of the award money.
Section 31(7)(b) provides that the sum awarded by the Tribunal shall, unless otherwise directed, carry a post-award interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award.
The petitioner/ claimant, M/s Bawana Infra Development Private Limited, and the respondent, Delhi State Industrial & Infrastructure Development Corporation Limited (DSIIDC), executed a ‘Concession Agreement’, under which the petitioner was required to re-develop, construct, operate, and maintain the Bawana Industrial Area in Delhi.
After some disputes arose between the parties, the matter was referred to arbitration. The petitioner challenged the Arbitral Award by filing a petition under Section 34 of the A&C Act before the Delhi High Court.
The claimant/ petitioner, Bawana Infra, submitted before the Court that while adjudicating upon the claims raised by it, the Sole Arbitrator had committed a grave error by ignoring the contractual obligations between the parties.
In the arbitral proceedings, the Sole Arbitrator, while dealing with the petitioner’s claim relating to excess rental charges fixed and recovered by DSIIDC, concluded that, as per the Agreement, the rental had to be fixed by DSIIDC in consultation with the claimant. Since DSIIDC had failed to hold any such consultation, the Tribunal had directed DSIIDC to fix the rent of the office premises used by the claimant in consultation with it- within 2 months from the date of the Award.
Upholding the Award with respect to the said claim, the Court remarked that, if necessary, the Sole Arbitrator can take an unconventional approach to ensure that there is a conclusive solution to the issue, provided that the approach is not contrary to the public policy of India or patently illegal.
While dealing with the petitioner’s claim seeking interest on the withheld amount, the Tribunal concluded that the claimant was not entitled to interest on the withheld amount because the amount was withheld for just and sufficient reasons.
Perusing the Agreement between the parties, the High Court reckoned that there was no contractual provision that authorised the respondent, DSIIDC, to withhold the amount of maintenance and other charges. Withholding the amount in the absence of express provisions permitting the same is a breach of contract, the High Court ruled.
Holding that the Arbitral Tribunal is bound to adjudicate on the lines of the Contract, the Court ruled that the Tribunal had, evidently, erred in adjudicating the said claim and had deviated from the contract. Further, the Award with respect to the said claim was not well-reasoned as required under Section 31(3) of the A&C Act.
The petitioner/ claimant, Bawana Infra, further submitted before the Court that the Sole Arbitrator- while adjudicating its claim seeking interest on the delayed reimbursements- awarded interest in terms of Section 31 (7)(a) and 31 (7)(b) of the A&C Act, at a rate which is contrary to the provisions of the Agreement.
Noting that the Concession Agreement between the parties expressly stipulated the rate of interest when there is a delayed payment, the Court concluded, “A bare reading of Section 31 (7) (a) makes it evident that the Section applies only where there is no previous Agreement as to the rate of interest to be awarded. It is as plain as a pikestaff that the learned Arbitral Tribunal has gone beyond the contract and awarded an interest rate that is quite clearly not the rate the parties had previously agreed upon.”
Further, the Court added that the Arbitral Tribunal may not resort to Section 31(7)(b), while awarding post-award interest, when express provisions regarding the rate of interest are present in the Concession Agreement.
Observing that the rate of interest granted by the Arbitrator is the rate provided under Section 31(7)(b), and it is not in accordance with the provisions of the Concession Agreement, the Court said, “It is thus transparent from the aforementioned reasons that claim 11 is liable to be set aside with regards to the rate of interest awarded being contrary to the rate of interest agreed upon by the parties vide Concessionaire Agreement. Thus, the impugned arbitral award in terms of Claim no. 11 is not in consonance with Section 31(7)(a) of the Act.”
“The lack of adequate reasoning regarding the award in Claim 7 and the deviation from the Agreement in fixing the rate of interest in Claim 11 shows that there wasn’t adequate reasoning and the decision was perverse, respectively. Thus, the award of these claims is found to be patently illegal and contrary to the fundamental policies of India,” the Court ruled.
While holding that the award suffered from patent illegality only with respect to certain claims, the bench added, “Since the Patent Illegality has been observed in the impugned award with respect to certain claims only, the impugned award will not be set aside in its entirety.”
The Court thus partly allowed the petition and set aside the award only with respect to certain claims which suffered from patent illegality.
Case Title: Bawana Infra Development Pvt Ltd vs. Delhi State Industrial & Infrastructure Development Corporation Limited (DSIIDC)
Citation: 2023 LiveLaw (Del) 251
Counsel for the Petitioner: Mr. Rajshekhar Rao, Senior Advocate with Mr. Dheeraj P. Deo, Mr. Yasuraj Samant and Mr. A. Peter, Advocates
Counsel for the Respondent: Ms. Anusuya Salwan and Ms. Nikita Salwan, Advocates