A&C Amendment Act of 2015 Applies Even If Arbitration Commenced Prior, In Case It Is Stated That Amendment Act Applies: Bombay High Court

The bench of Justices Mangesh S. Patil and Abhay S. Waghwase were dealing with an arbitration agreement that provided for the applicability of the A&C Act, 1996, along with any modification introduced in the Act. The Court concluded that the said agreement clearly conveyed the intention and understanding between the parties to be bound by the 2015 Amendment Act, and that it was not merely an understanding in respect of the procedural aspects of the arbitration proceeding.

Thus, the Court ruled that the substituted provisions of Section 31(7)(b) of the A&C Act, 1996, regarding award of interest, were applicable to the arbitrable proceedings commenced in 2014, which culminated by passing of an award in 2016.

The appellant- M/s Skoda Auto Volkswagen India, an automobile manufacturing company, appointed the respondent- M/s Commercial Auto Products, as a dealer. After the respondent allegedly committed defaults under the dealership agreement, the appellant terminated the contract between the parties. Thereafter, the respondent invoked the arbitration clause. The Arbitrator passed an award, allowing the respondent's claim partly. The Arbitrator awarded a sum in favour of the respondent along with interest. The appellant challenged the award under Section 34 of the A&C Act before the Commercial Court, who dismissed the application. Against this, the appellant filed an appeal under Section 37 of the A&C Act before the Bombay High Court, challenging the interest awarded to the respondent.

The appellant- Skoda Auto Volkswagen India, submitted before the High Court that since there was no stipulation contained in the contract between the parties regarding payment of interest, the provisions of Section 31(7)(b) of the A&C Act were attracted.

The appellant added that the interest awarded by the Arbitrator was contrary to the statutory provisions contained in Section 31(7)(b) of the A&C Act, which provides that an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award. Thus, the appellant argued that the respondent was entitled to the pendente lite and future interest, only at the rate of 9% per annum and not 18% per annum.

The respondent- Commercial Auto Products, contended that the provisions of Section 31(7)(b) were substituted by the Arbitration and Conciliation (Amendment) Act, 2015, with effect from 23.10.2015, in place of the earlier provision, which empowered the arbitral tribunal to award interest at the rate of 18% per annum.

Placing reliance on Section 26 of the A&C (Amendment) Act, 2015, the respondent submitted that since the arbitral proceeding had commenced in 2014, i.e., prior to the cut-off date of 23.10.2015, even if the award was passed in 2016, the amended provisions of Section 31(7)(b) were not applicable to the arbitration proceedings.

Section 26 of the A&C (Amendment) Act, 2015 provides that nothing contained in the A&C (Amendment) Act, 2015 shall apply to the arbitral proceedings commenced before the commencement of the 2015 Amendment Act, i.e., 23.10.2015, unless the parties otherwise agree.

The respondent Commercial Auto Products argued that there was no such agreement executed between the parties, as contemplated by Section 26 of the A&C (Amendment) Act, 2015 and thus, the amended Section 31(7)(b) of the A&C Act, 1996 was not applicable.

The Court noted that by the Arbitration and Conciliation (Amendment) Act, 2019, Section 26 of the 2015 Amendment Act was retrospectively deleted with effect from 23.10.2015. However, it observed that the Supreme Court in Hindustan Construction Company Ltd. versus Union of India & Ors. (2019) has struck down the A&C (Amendment) Act, 2019 to the extent it retrospectively deleted Section 26 of the 2015 Amendment Act. Therefore, Section 26 of the 2015 Amendment Act still continues on the statute book, the Court ruled.

The bench added that the legislature has given an option to the parties, by virtue of Section 26 of the 2015 Amendment Act, to apply the provisions of the 2015 Amendment Act even to the pending arbitrations.

Referring to the relevant clause contained in the arbitration agreement, the Court noted that the parties had agreed that the arbitration shall be in accordance with, and be subject to, the "provisions of the Arbitration & Conciliation Act, 1996 or any statutory modification or re-enactment there-of for the time being in force".

The Court reckoned that the word 'modification', as provided in the arbitration agreement, clearly indicated an understanding between the parties that the provisions of the A&C Act, as amended or modified from time to time, were to govern the arbitration proceedings that would subsequently commence between the parties.

Further, the bench ruled that the words 'for the time being in force' clearly conveyed the understanding between the parties that the application of the A&C Act, 1996 to the arbitral proceedings, had no nexus with the date of commencement of the arbitral proceedings.

"The ingenious argument of Mr. Sabnis that the aforementioned wordings only demonstrate understanding between the parties as far as procedure to be adopted by the arbitrator, in our considered view, is not correct. When the parties had not agreed for payment of any interest and the Act of 1996 contains the provision regarding payment of interest in the form of section 31 sub-section (7), clause (b), and particularly when there is no stipulation in the contract specifically stipulating that neither party would be entitled to claim any interest, a plain reading of this clause would clearly indicate that the parties had agreed to the applicability of the Act of 1996 as was to be amended from time to time and it was not merely an understanding in respect of the procedural aspects at the arbitration proceedings."

Thus, the Court concluded that the relevant clause contained in the arbitration agreement was an agreement between the parties, as contemplated under Section 26 of the 2015 Amendment Act, evincing the intention and understanding to be bound by the 2015 Amendment Act.

Therefore, the bench held that all the amendments effected in the A&C Act, 1996, including the provisions of the substituted Section 31(7)(b), were applicable while determining the rival claims in the arbitral proceedings between the parties.

"In view of such an interpretation, arbitrator had no power to award interest @ 18% per annum purportedly invoking the predecessor of clause (b) of sub-section (7) of section 31 of the Act of 1996. In-fact, the learned arbitrator has not even assigned any specific reason why he was awarding interest at that rate", the Court said.

The Court thus allowed the appeal in part, modifying the award granting 18% interest per annum, by reducing it to 9% per annum.

Case Title: M/s Skoda Auto Volkswagen India Private Limited versus M/s Commercial Auto Products Private Limited

Dated: 02.12.2022 (Bombay High Court, Aurangabad)

Counsel for the Appellant: Mr. S.V. Adwant

Counsel for the Respondent: Mr. A.N. Sabnis with Mr. Satyajit R. Vakil

Citation: 2022 LiveLaw (Bom) 480  

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