Duty Of Every Arbitral Tribunal & Court To Examine What The Contract Provides : Supreme Court

The Supreme Court recently emphasised that the courts and arbitral tribunals have the duty to examine the contract clauses in proceedings concerning arbitration.

While upholding Calcutta High Court's decision to set aside the arbitrator's decision to award the amount for loss due to idle machinery and labour despite it being prohibited under the contract, the Court said :

“In fact, High Court did what the Arbitrator should have done. Examine what the contract provides. This is not even a matter of interpretation. It is the duty of every Arbitral Tribunal and Court alike and without exception, for contract is the foundation of the legal relationship…The Arbitrator did not even refer to the contractual provisions and the District Court dismissed the objections under Section 34 with a standard phrase as extracted hereinabove.”

The bench of Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal also observed that under Section 31(7) of the Arbitration and Conciliation Act, 1996, the Arbitrator has the authority to grant interest for the pre-reference period unless the contract prohibited it.

“the High Court had no reason to interfere with the Arbitral Award with respect to grant of pre-reference interest, since the Contract between parties does not prohibit the same”, the Court observed.

Background

The State of West Bengal awarded the contract for widening and strengthening of the Egra Bajkul road to Pam Developments Pvt. Ltd. (appellant) with an 18-month completion deadline starting from December 23, 2010. The project, however, was delayed by about five months and completed on November 9, 2012. The appellant subsequently submitted a bill for Rs. 77,85,290, along with seven additional claims, citing delays by the respondent. The State denied liability, leading to arbitration.

Arbitration Award

On January 30, 2018, the Arbitrator awarded Rs. 1,37,25,252 with interest to the appellant. The claims awarded by the Arbitrator were –

Loss of business (Claim No. 1): Rs. 3,87,530

Uneconomic utilization of plant and machinery (Claim No. 2): Rs. 61,22,000

Labour charges for uneconomical stoppage of work (Claim No. 3): Rs. 5,80,500

Interest on delayed payment of running account bills and escalation bill (Claim No. 4): Rs. 54,84,024

Escalation (Claim No. 5): Rs. 11,51,198

Interest on the awarded sum (Claim No. 6): Interest at 12 percent per annum from April 12, 2016 (date when appellant claimed breach of contract) to January 30, 2018 (date of award), and at 9.25 percent per annum post-award until the actual payment.

Costs (Claim No. 7): Rs. 4 lakhs

The State of West Bengal challenged the arbitration award under Section 34 of the Arbitration Act, and the District Judge set aside Claims 1 and 2 but upheld Claims 3, 4, 5, and 6.

Both parties appealed the District Judge's decision under Section 37 of the Arbitration Act. The Calcutta HC set aside Claim 1, restored Claim 2, set aside Claims 3 and 4 as impermissible under the contract, retained Claim 5, and set aside the pre-reference interest under Claim 6.

This was challenged by the appellant in the Supreme Court. The appellant restricted its arguments to Claims 3, 4, and 6.

Supreme Court's Verdict

Claim No. 3: Loss Due to Idle Labour, Machinery, etc.

The Arbitrator had awarded Rs. 5,80,500 in favour of the appellant for Claim No. 3, relating to losses due to idle labour, machinery, and other expenses.

The HC examined the relevant contract clauses and found that the contract expressly prohibited claims for idle labour and additional establishment costs during an extended period.

The Supreme Court agreed with the HC's decision, holding that the Arbitrator had failed to consider the relevant contractual provisions, which prohibited such claims.

Claim No. 4: Interest on Delayed Payment of Running Account Bills

The Arbitrator awarded interest for delayed payments, holding that the appellant was entitled to compensation for any loss or damage to capital arising naturally from the breach or anticipated by the parties. The Arbitrator noted that the payments became due when the gross amount of work done exceeded Rs.1 crore, and there was no prohibition in the contract against the payment of interest on "blocked capital."

The High Court concluded that since the bills were paid soon after preparation, there was no basis for claiming interest. It also noted that the Arbitrator had not determined issues such as who was responsible for the delayed preparation of the running account bills, which running account bills were to be considered advances, whether notice under the Interest Act, 1978, was issued, and for which amounts and periods interest was granted.

The Supreme Court, however, held that the HC's conclusion that bills were paid soon after preparation did not constitute grounds for interference. The Supreme Court held that the HC's approach in holding that the Arbitrator did not address the issues was not sufficient to set aside the award.

“The conclusion of the High Court, “that it appears that the bills were paid soon after they were prepared” or that, “in that case there could not have been any claim for interest” cannot qualify as grounds for interference under Section 37. Equally, the approach of the High Court in holding that the Arbitrator neither established nor discussed the questions posed by it is not a ground to set aside the Award”, the Court stated.

The Supreme Court said that there was no perversity in the Arbitrator's reasoning, nor was the award against public policy. Thus, the Supreme Court restored the Arbitrator's award regarding Claim No. 4.

Claim No. 6: Interest Awarded

The Arbitrator had awarded interest at 12 percent per annum from the date when appellant claimed breach of contract (April 12, 2016) to the date of award (January 30, 2018), and at 9.25 percent per annum post-award.

The HC modified this to exclude the pre-reference period and allowed only pendente lite interest at 12 percent per annum from August 3, 2016, to the date of the award, and post-award interest at 9.25 percent.

Since the contract did not specifically prohibit pre-reference interest, the Supreme Court restored the original award of interest granted by the Arbitrator, including the pre-reference interest.

Case no. – Pam Developments Private Limited v. State of West Bengal & Anr.

Citation : 2024 LiveLaw (SC) 613

Case Title – Civil Appeal Nos. 9781-9782 of 2024