Power Of An Arbitrator To Grant Interest And Scope Of Interference By The Courts

AUTHORED BY: GAURAV PURI (MANAGING PARTNER, GLS LAW OFFICES)

DHRUV SRIVASTAVA (LEGAL PROFESSIONAL)

INTRODUCTION:

The Arbitration Act, 1940 (The 1940 Act) [i] provided for no such prohibition for an arbitrator to award interest: pre-reference, pendente lite [ii] or post-award. The adoption of the Arbitration and Conciliation Act, 1996 (The  Act) [iii] has drawn a clear distinction between the old act and the new. Sec. 31(7) [iv] of the act provides for the specific circumstances for an arbitrator to grant interest in an arbitration proceeding. The article aims to clarify the position on the power of an arbitrator to grant an interest and to link it with scope of intervention of courts in Arbitration under sec. 34. [v]

JUDICIAL DICTUMS:

The Supreme Court (SC) overtime has laid down principles apropos granting of an interest.In Secretary Irrigation Department Government of Orissa and Ors. v. G.C. Roy, [vi] SC held that an arbitrator under the general law is empowered to award interest for the pre-reference, pendente lite or post award. The SC closely construed the importance of a contract in awarding of an interest. In The Board of Trustees for Theport of Calcutta v. Engineers-De-Space-Age,[vii]SC closely interpreted and held unless the clause explicitly bars the arbitrator from granting interest pendente lite, then he is free from granting interest. In Executive Engineer, Dhenkanal  Minor Irrigation Division, Orissa v. NC Budharaj [viii] held that “the arbitrator appointed with or without the intervention of the court, has jurisdiction to award interest, on the sums found due and payable, for the pre-reference period, in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest”.

The SC in Sayeed Ahmed & Co v. State of UP,[ix]in this case observed unless the interest awarded by the Arbitrator is found to be unwarranted, the court cannot alter the rate of interest awarded by the arbitrator. In the aforementioned case a clause clearly stipulated that the Government would not pay any interest, in this regard the interest up until the passing of the award was set aside, however the act does not provide for any bar of interest post passing of the award till the date of payment of the award in which case the interest as per arbitrator was upheld.  In Sree Kamatchi, [x] SC delivered a very sound reasoning saying that an Arbitral tribunal cannot award an interest against a party pre-reference or pendente lite when the agreement explicitly enunciates “unless otherwise agreed by the parties”

Sum has been a tricky aspect while dealing with interest in an award. The SC dealt with such question in Hyder Consulting (UK) Ltd. vs. State of Orissa [xi] of what construes a sum under Sec. 31(7). The judgment was passed with a ratio of 2:1. The majority judgment held “Arbitral Tribunal is empowered to include pre-award interest in sum for which the award is made. Once so included, pre-award interest loses its character of interest and becomes part and parcel of the sum awarded.” Justice S.A Bobde observed that the sum so awarded may be inclusive of the principal amount and the interest if so awarded otherwise the sum comprises solely of the principal amount.

SCwhile dealing with the question pertaining to arbitrators’ power to pass a pendente lite interest and an interest from the date of cause of action till the passing of the award in Union of India v. Bright Power Projects, [xii] held “Section 31(7)(a) of the Act, by using the words “unless specified by the parties”, categorically specifies that the arbitrator is bound by the terms of the contract so far as award of interest from the date of cause of action to date of award is concerned.”In Union of India v. M/s Ambika Construction [xiii] reaffirmed the view of arbitrators’ power to pass a pendente lite interest depends on several factors amongst which the nature of clause is one. The question posed in this case was under the 1940 Act. The view earlier laid down in Sayeed Ahmed, Sree Kamatchi and Bright Power Projects was upheld and affirmed in Chittaranjan Maity v. Union of India [xiv] and was distinguished in Ambica Construction v. Union of India, [xv] where the court hearing the appeal under sec. 29 of 1940 Act held, “bar to award interest on amounts payable under the contract would not be sufficient to deny payment of pendente lite interest.”

The following decision was followed in a recent case of Raveeche & Co. v. Union of India [xvi]. The case in question barred the arbitrator from granting interest on the following: earnest money, security deposit and amounts payable to contractors. It was held, “an arbitrator has the power to award interest unless specifically barred from awarding it; and the bare must be clear and specific.”

This rationale was relied on in law in Reliance Cellulose Products Ltd. v. ONGC  Ltd,[xvii]which held the same. The SC in the latest judgment of Jai Prakash Associates Ltd. v. Tehri Hydro Development,[xviii]reiterated the long lasting opinion of the court viz. that where the agreement prohibits the arbitrator from granting the interest, in such cases pendente lite interest in an award cannot be granted.

Intervention of Court in Arbitrators Award of Interest

The act mandates very limited intervention of Courts vis-à-vis arbitral award as mandated by Section 34 of the Act. In Sterlite Technologies Limited v. BSNL [xix] the court held enunciated the following principles with regard to the limits of Courts intervention under Section 34.

1. The Act casts merely a supervisory role for the Court reviewing the Arbitral Award only to test its fairness.
2. The Court was not vested with the power to correct errors of Arbitrators.
3. The power of the Court under Section 34 is almost like a revisional jurisdiction under Section 115 of the Code of Civil Procedure.
4. The Court has the power to correct Patent Illegalities.

Recently, the Supreme Court in Ssangyong Engineering v. National Highways [xx] held that the Court should not interfere with the substance of the Arbitration. The Court in this regard held, “Under no circumstance can any Court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of Section 34 of the 1996 Act.”

Therefore, the Court can only interfere with the Arbitral award where it is:

1. Against specific terms of the Contract
2. Contrary to the Substantive provision of law
3. It is so unfair and unreasonable that it shocks the conscience of the Court.
4. Prejudicial to the Rights of the Parties
5. Error Apparent on the face of the record
6. If the Award of the Arbitrator is contrary to the material evidence adduced by the parties.
7. a total perversity in the Award or the judgment is based on wrong proposition of law

Therefore, it can be concluded that the Court cannot replace the Arbitral Tribunal or act as a Court of Appellate Jurisdiction. The Court can only interfere with the award passed by the arbitrator in consonance with the grounds present in Section 34 and laid down by judicial dicta’s as laid out above. It is pertinent to note that the Courts have the power to re-examine evidence if the award is against any of the Grounds mentioned.

The Court has always held the view that the Arbitrators have wide discretionary powers with regard to interests or costs. In Indian Oil Corporation v. Indian Carbon Ltd, [xxi] the court held that if the reason as to how the Arbitrator has drawn the inference is apparent the same would be sufficient. In Naraindas R. Israni v. Union of India, [xxii] the Court observed that the learned Judge had held that the learned Arbitrator is not required to give detailed reasons like a Civil Court but what is expected of the Arbitrator is that he must give out the trend of his thought process and it is not necessary for the Arbitrator to give any arithmetic computation. In D.C.M Ltd. v. Municipal Corporation of Delhi, [xxiii] the Court has held that even in case of a non-speaking Award if the Arbitrator has proceeded without overlooking any term of the contract, the same cannot be considered as an error apparent on the face of the Award.

CONCLUSION:

Apropos interest it is clear from the aforementioned decisions of the court that an arbitrator can award interest on the following three aspects:

1. Pre-reference
2. Pendente lite
3. Post-award

However, the clauses so stipulated should explicitly mention the bar of interest; otherwise an arbitrator is free to pass an award with an interest in the aforementioned three categories.

In terms of intervention under sec. 34, the Courts intervention must remain to a minimum and unwarranted unless it is mandated by the above mentioned circumstances under the heading of Intervention of court in Arbitrators award of interest.

ENDNOTES

1. The Arbitration Act, 1940, Act. No. X of 1940.
2. U.S. Legal, Pendente Lite Law and Legal Definition, Available at: https://definitions.uslegal.com/p/pendente-lite/
3. The Arbitration and Conciliation Act, 1996, Act No. 26 of 1996.
4. Id., at s. 31(7).
5. Id., at s. 34.
6. (1992) 1 SCC 508.
7. 1996 SCC (1) 516.
8. (2001) 2 SCC 721.
9. (2009) 12 SCC 26.
10. (2010) 8 SCC 767.
11. (2013) 2 SCC 719.
12. (2015) 9 SCC 695.
13. (2017) 14 SCC 323.
14. (2017) 9 SCC 611.
15. MANU/SC/0846/2017, (C.A. No. 410 of 2008, disposed of on 26.04.2017).
16. Civil Appeal Nos. 15545 – 15546 of 2017 arising out of SLP (C) Nos. 39038 – 39039 of 2012 reported as 2018 SCC OnLine SC 654.
17. (2018) 9 SCC 266.
18. CIVIL APPEAL NO(S). 1539 OF 2019 (ARISING OUT OF SLP (C) NO. 13551 OF 2013) reported as 2019 SCC OnLine SC 143.
19. ARISING OUT OF O.P.Nos.200 of 2011 and 774 of 2012  dated 11.12.2019 [Mad.HC].
20. 2019 SCC OnLine SC 677.
21. 1988 SCR (3) 426.
22. AIR 1993 Delhi 78.
23. (1997) 7 SCC 123.