Arbitral Tribunal Must Give Reasons For Fixing Interest Rate; Award Holder Not Entitled To Interest For Delay Caused By It : Supreme Court

The Court further held the Arbitration and Conciliation Act casts a duty upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable. Moreover, the Court held that no interest would be payable for the period on which there were lapses on the part of the award holder.

Holding so, a bench comprising Justices BR Gavai and BV Nagarathna invoked the special powers under Article 142 of the Constitution to reduce the interest awarded in a case.

Facts

The parties entered into an agreement dated 16.12.1971 for the construction of a 3KM long road. The project work was to be completed within a period of one year but there was a delay in the completion of the work. Consequently, a dispute arose related to the payment due to the respondent.

Accordingly, the respondent filed a suit under Section 20 of the 1940 Act seeking reference of the dispute to arbitration. The trial court allowed the application subject to the respondent filing an original copy of the agreement. However, the respondent failed to comply with the requirement. In the meantime, the earlier act got repealed by the A&C Act of 1996. Thereafter, the respondent filed an application in the disposed suit praying for the appointment of arbitrator that was dismissed due to lack of jurisdiction. Finally, the application filed by the respondent under Section 11 of the A&C Act was allowed and the arbitrator was appointed.

The arbitrator allowed the claim of the respondent along with pendente lite and future interest at the rate of 18% p.a. Aggrieved by the award, the appellant challenged the award under Section 34 & 37 of the Act, however, both the applications were rejected. Therefore, the petitioner filed an appeal before the apex court.

Grounds of Challenge

The appellant challenged the award on the following grounds:

• The arbitrator erred in awarding interest for the period from 1977 to 1989 inasmuch as the respondent was in deep slumber for a period of twelve years and did not take any steps for raising his claim. It is only in 1989 that the respondent filed a suit under Section 20 of the 1940 Act.
• The arbitrator further erred in awarding interest for the period from 1990 to 2000 as the respondent did not take any steps to commence the arbitration by not complying with the requirement of filing the original copy of the agreement.
• The arbitrator has further erred in awarding the interest at 18% p.a. and the interest amount is almost 5 times the principal amount.

The respondent countered the above submissions by raising the following arguments:

• The arbitrator has been given discretion under Section 31(7)(a) of the A&C Act to award any rate of interest as it deems fit. Moreover, the rate of interest has been affirmed by the trial court as well as the High Court, therefore, no interference is called for.

Analysis by the Court

The Court held that no doubt that Section 31(7)(a) confers discretion on the arbitrator to include in the sum for which the award is made interest, on the whole, or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made, however, the section also casts a duty on the arbitrator to assign reasons for the same.

The Court held that a perusal of the award reveals that the arbitrator has not assigned any reasons for awarding both the pendente lite and future interest at the rate of 18% p.a. If further held that the arbitrator could not have awarded interest for the period after the completion of the work till the date of suit as the respondent did not take any step for 12 years to raise the claims, therefore, the very conduct of the respondent would disentitle him to interest during the said period.

Next, the Court held that the arbitrator also erred in awarding interest for the period from 1990 to 2000. The Court observed that the suit under Section 20 of 1940 Act was decreed in 1990, however, the respondent did not comply with the condition of filing the original agreement but after a lapse of 10 years filed an application for appointment of arbitrator. The Court held that had it filed the original agreement immediately, the arbitration proceedings would have been long concluded, therefore, no interest could be given for the period where the respondent itself was responsible for lapses.

The Court then decided on the issue of rate of interest. It referred to several judgments wherein the rate of interest was reduced due to long lapse of time. Accordingly, the Court, to do complete justice, invoked Article 142 of the Indian Constitution to reduce the rate of interest from 18% p.a. to 7.5% p.a. The Court held that there was a long lapse of time and several latches on part of the award holder that makes it a fit case for reduction of rate of interest by exercising powers under Article 142.

Accordingly, the Court set aside the award to the extent it allowed interest form 1977 to 2000 and reduced the rate of interest to 7.5% p.a.

Case Title: Executive Engineer (R and B) v. Gokul Chandra Kanungo, Civil Appeal No. 8990 of 2017

Citation : 2022 LiveLaw (SC) 824

Counsel for the Appellant: SIBO SANKAR MISHRA

Counsel for the Respondent: ASHOK PANIGRAHI

Arbitration and Conciliation Act 1996- Section 31(7)(a)- the section itself requires interest to be at such rate as the arbitral tribunal deems reasonable. When a discretion is vested to an arbitral tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable -When the arbitral tribunal is empowered with such a discretion, the arbitral tribunal would be required to apply its mind to the facts of the case and decide as to whether the interest is payable on whole or any part of the money and also as to whether it is to be awarded to the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made -referred to Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation 2022 LiveLaw (SC) 452

Arbitration and Conciliation Act 1996- Interest - Party not entitled to interest for the period during which the proceedings were deliberately delayed-A party cannot be permitted to derive benefits from its own lapses [Para 12 to 14]

Constitution of India - Article 142- Powers under Article 142 can be exercised to reduce the amount of interest awarded. [Para 18] 

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