Arbitral Award Lacking Adequate Reasoning Is Inherently Flawed With Patent Illegality: Delhi High Court Allows Section 34 Petition

Brief Facts:

The matter pertained to dispute arising from security services provided by Gorkha Security Services (“Petitioner”) to Govt. Of NCT Of Delhi (“Respondent”) under the Agreement, with the initial contract period of two months, extended periodically until December 2014. The Contractor claimed non-receipt of payments under the Agreement and invoked the arbitration clause in the agreement. The arbitral tribunal, composed of a sole Arbitrator, rendered an award, awarding a total sum of Rs.1,66,62,496/- to the Petitioner, inclusive of a refund of Rs.1,00,000/- deposited as a security deposit. The arbitral tribunal directed the Respondent to pay the awarded amount within one month; failure to do so would result in liability for interest at the rate of 9% per annum from the date of the award until realization. The Respondent challenged the impugned award, but the challenge was dismissed by the District Judge, Commercial Court.

Thereafter, the Petitioner approached the Delhi High Court (“High Court”) and challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 on the ground of absence of pre-award interest. The Petitioner argued that it had sought interest at the rate of 18% per annum from the due date until realization. The arbitral tribunal, however, provided no explanation for restricting the interest period to the time from the date of the award until realization.

Contrastingly, the Respondent contended that the award of interest fell within the arbitral tribunal jurisdiction, and the court should not scrutinize the arbitrator's mental process or speculate about the reasons behind the award when no explanations are provided. It argued that the scope of interference under Section 34 is limited.

Observations by the High Court:

The High Court noted that the agreement does not prohibit either party from claiming interest, as it remains silent on the aspect of interest. Notably, it held the award lacked specificity in explaining the rationale behind the denial of pre-award interest, despite the explicit request made for such interest during the proceedings. It recognized that the Arbitrator possesses discretion to award interest, a discretion that must be reasonably exercised.

The High Court held that the examination of the impugned award revealed a striking absence of reasoning for the non-grant of pre-award interest. Unlike the situation where parties might have mutually agreed to forgo the requirement of providing reasons under sub-clause (a) of Section 31(3) of the Arbitration Act, no such agreement was there between the parties. Consequently, it held that an award lacking adequate reasoning suffers from the inherent flaw of patent illegality.

Consequently, the High Court sets aside the award to the extent that it only grants post-award interest.

Case Title: Gorkha Security Services vs Govt. Of Nct Of Delhi

Citation: 2024 LiveLaw (Del) 203

Case Number: O.M.P. (COMM) 328/2022.

Advocate for the Petitioner: Mr. Tarkeshwar Nath, Mr. Lalit Mohan, Mr. Harshit Singha and Mr. Akash Kumar, Advocates.

Advocate for the Respondent: Mr. Divyam Nandrajog, Mr. Jatin Dua and Mr. Mayan Kumar, Advocates.

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