Arbitrator Can Declare Terms Of Contract Null, Even If No Declaration Is Sought By The Party In Its Pleadings: Delhi High Court

While holding that it is within the domain of the Arbitrator to interpret the terms of the contract, the bench of Justice Neena Bansal Krishna upheld the Majority Award and the findings made by the Majority Tribunal that since the relevant Clause providing for compound interest did not specify the rate of interest, the entire clause was void under Section 29 of the Indian Contract Act, 1872.

Noting that the Majority Tribunal had given a well-reasoned Award while granting simple interest on the Award amount to the claimant, the High Court ruled that it cannot substitute its own reasoning for that of the Arbitrators, especially when the same is reasonable.

The petitioner, M/s. Modi Construction Company, and the respondent, M/s Ircon International Ltd, executed Contracts for execution of a construction project awarded to the respondent by the Government of Andhra Pradesh. After certain disputes arose between the parties, the petitioner invoked the arbitration clause.

The Arbitral Tribunal passed a Majority Award awarding simple interest to the claimant/ petitioner on the awarded amount, while a Dissenting Award was passed by one Arbitrator awarding compound interest to the petitioner.

The petitioner filed a petition under Section 34 of the A&C Act before the Delhi High Court, challenging the grant of simple interest by the Majority Tribunal.

The petitioner, Modi Construction Company, submitted before the High Court that the Contract between the parties provided for two things, i.e., for compound interest and the rate of interest.

It pleaded that the grant of simple interest by the Majority Award was perverse since there were no pleadings made by the respondent seeking a declaration that the relevant clause providing for compound interest be declared null and void.

The petitioner added that compound interest should not have been denied merely because no rate of compound interest was mentioned in the relevant clause of the Contract.

It argued that the Majority Tribunal had failed to consider the severability of the clause and wrongly held the entire clause as void merely because the rate of compound interest was not specified.

The High Court reckoned that the Majority Tribunal had concluded that since in the relevant clause providing for compound interest, the rate of interest was left blank and was not specified, the entire clause suffered from uncertainty and was ineffective. Thus, the entire clause became defunct ipso facto and void under Section 29 of the Indian Contract Act, the Majority Tribunal had held.

“In the present case, the only controversy is whether the interest @ 9 % that has been awarded by the learned Arbitrator is to be calculated as simple interest as directed by the Majority decision or it should be compounded monthly as held in the dissenting opinion of the learned Arbitrator,” the Court observed.

Referring to the Award passed by the Majority Tribunal, the Court said, “The Arbitral Tribunal interpreted the terms of the contract and while rejecting the claim of the petitioner for compound Interest, it gave various reasons in which the clause providing for interest was also considered and held to be defunct, null and void being incomplete and vague.”

The bench rejected the contentions raised by the petitioner that the grant of simple interest by the Majority Tribunal was perverse since there were no pleading made by the respondent in its Statement of Defence to the effect that the relevant clause was null and void.

While ruling that it is within the domain of the Arbitrator to interpret the terms of the contract, the Court held, “The objections of the Appellant that there being no pleading seeking clause 60.8 (b) to be declared null and void, the Ld. Arbitrator has made out a 3rd case in itself, is totally not tenable as it was within the domain of the Arbitrator to interpret the terms of the contract. The Tribunal exercised its discretion on the rate of interest to be granted, in absence of an agreement to this effect. The Majority Award has given a well-reasoned Award while granting simple interest.”

The bench added that where two views are possible, the court cannot interfere in the plausible view taken by the arbitrator for which reasoning is provided.

It further referred to the decision of the Supreme Court in Indian Oil Corporation Ltd. vs. Shree Ganesh Petroleum, Rajgurunagar (2022), where it was held that where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award only because the Court is of the opinion that another possible interpretation would have been a better one.

The bench thus concluded that the court does not sit in appeal over the Award made by an Arbitral Tribunal and cannot substitute its own reasoning for that of the Arbitrators, especially when the same is reasonable.

Dismissing the claim of compound interest raised by the petitioner, and while upholding the Majority Award regarding grant of simple interest, the Court concluded, “The Arbitrator has interpreted the terms of contract and the petitioner’s claim of interest was based on the interpretation of the term of contract and clause 60.8 (b) of the COPA in particular and applied the principles of law in the impugned award. As established by the above-mentioned principles, this court does not sit in appeal over the Award made by an Arbitral Tribunal and cannot substitute its own reasoning for that of the Arbitrators, especially when the same is reasonable. This Court does not find merit in the claim of compound interest raised by the Petitioner herein.”

The Court thus dismissed the petition.

Case Title: M/s. Modi Construction Company vs. M/s Ircon International Ltd

Citation: 2023 LiveLaw (Del) 232

Counsel for the Petitioner: Mr. Ravi Shankar Dvivedi, Mr. Sushant Kumar Sarkar, Mr. Rishabh Jain, Ms. Arti Dwivedi, Advocates.

Counsel for the Respondent: Mr. Suman K. Doval and Mr. Hari Krishan Pandey, Advocates.

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