Arbitral Tribunal duty bound to give reasons for determining the interest rate for delay caused by award holder

The Hon’ble Supreme Court [“Supreme Court”] through its bench comprising of BR Gavai and BV Nagarathna, JJ., in the matter of- “Executive Engineer (R and B) [Appellant] v. Gokul Chandra Kanungo [Respondent]” - has ruled that it would be appropriate for a Court, to use the authority provided under Art. 142 of the Indian Constitution to modify the amount of interest where the award holder was at fault for causing excessive delay in the arbitration proceedings. The Supreme Court has observed that when a discretion is vested on the Arbitral Tribunal in terms of Sec. 31 (7) (a) of the Arbitration & Conciliation Act, 1996 [“1996 Act”], then in that case a duty is also casted upon the Arbitral Tribunal to give reasons as to how it deems the rate of interest to be reasonable. The Supreme Court has further observed that a party is not entitled to claim interest for the period during which the proceedings were deliberately delayed by it, as a party cannot be permitted to derive benefits from its own lapses.

A contract dated December 16, 1971 was executed between the parties to build a 3 KM road. The project work was supposed to be finished in one year’s time, however there was a delay in the completion of the project. As a result, there was a disagreement between the parties in terms of the amounts due and payable to the Respondent. Accordingly, the Respondent filed a suit under Sec. 20 of the Arbitration Act, 1940 [“1940 Act”] for referring the dispute to arbitration, before the Court of Civil Judge (Senior Division), Bhubaneswar [“Trial Court”]. The Trial Court granted the application contingent upon the Respondent filing an original copy of the agreement. However, the Respondent did not to comply with the requirement of the Trial Court. In the meantime, the earlier act namely the 1940 Act was repealed by the 1996 Act. Thereafter, the Respondent filed an application in the aforesaid disposed suit praying for the appointment of an arbitrator. However, the same was dismissed due to lack of jurisdiction. Finally, the application filed by the Respondent under Sec.11 of the 1996 Act was allowed and the arbitrator was appointed.

The arbitrator granted 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 Sec. Nos. 34 & 37 of the 1996 Act, however, both the applications were rejected. Accordingly, the petitioner filed an appeal before the Supreme Court.

a) The Ld. Arbitrator has erred in awarding the interest at 18% p.a. and the interest amount is almost five times the principal amount.

b) The Ld. Arbitrator has erred in awarding interest for the period from 1977 to 1989 inasmuch as the Respondent was in stagnation for a period of 12 years and did not take any steps for raising his claim. It is only in the year 1989 that the Respondent filed a suit under Sec. 20 of the 1940 Act.

c) The Ld. Arbitrator has 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 with the Trial Court.

a) The learned Arbitrator has grossly 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 step for raising his claim.

b) Interest amount of Rs.46,90,000/- awarded at the rate of 18% per annum is totally unreasonable as it is almost five times that of the main award amount of Rs.9,20,650/-. In this regard and proposition that the exorbitant amount of interest awarded by the Arbitrator and would be contrary to the interest of justice, reliance was placed in the cases of Rajendra Construction Co. vs. Maharashtra Housing & Area Development Authority and Others, Krishna Bhagya Jalal Nigam Ltd. vs. G. Harishchandra Reddy and Anr. and Mcdermott International Inc. vs. Burn Standard Co. Ltd. and Ors.

a) There is no reason to interfere with the rate of interest awarded. On behalf of the Respondents it was sought to be contended that in view of the provisions of Section 31(7) of the 1996 Act, (which has been construed by a three-judges Bench of this Court in the case of Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa Through Chief Engineer, that no interreference would be warranted in the present case.

a) While interpretating provisions of Sec. 31(7)(a) of the 1996 Act, the Supreme Court emphasized on the wordings “…deems reasonable” and observed that, no doubt, a discretion is vested in the arbitral tribunal 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, it would reveal that the section itself requires interest to be at such rate as the arbitral tribunal deems reasonable.

b) The Supreme Court further observed that 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.

c) The Court also referred the case of Mcdermott International Inc. which inter-alia laid down the propositions that the Arbitral Tribunal will have to exercise its discretion as regards (i) at what rate interest should be awarded; (ii) whether interest should be awarded on the whole or part of the award money; and (iii) whether interest should be awarded for the whole or any part of the pre-award period.

d) The Ld. Arbitrator's decision to provide both pendente lite and future interest at the rate of 18% p.a. was not justified. It was further determined, that because the Respondent failed to take any action to assert his claims for a period of 12 years, the arbitrator was not permitted to award interest for the time following the completion of the work until the filing of the suit by the Respondent. Hence, the very conduct of the Respondent would preclude him to claim interest for the aforesaid period. 

e) The Court held that the Ld. Arbitrator erred in awarding interest for the period from 1990 to 2000. The Court observed that the aforesaid Suit filed under Sec. 20 of 1940 Act was decreed in 1990. However, the Respondent was unable to comply with the condition of filing the original agreement and that after a lapse of 10 years, the Respondent filed an application for appointment of arbitrator before the Trial Court. The Court held that had the Respondent filed the original agreement immediately, the arbitration proceedings would have already been concluded. Therefore, no interest could be given for the period where the Respondent itself was responsible for delays on his part.

f) On the point of deciding the issue in respect of the rate of interest, the Court invoked the provisions of Art. 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 prolongation and numerous latches on part of the award holder that makes it a fit case for reduction of rate of interest by exercising its powers under Article 142.

g) The Court passed the following directions:

• The Respondent would not be entitled to any interest for the period between 30^th  August, 1977 and 25^th July, 1989 and for the period between 14^th February , 2000 and 15^th October, 2001.

• In respect of the remaining period at all the three stages, that is pre-reference period, pendente lite and post-award period, the Respondent would be entitled to interest at the rate of 9% per annum.

The aforesaid decision of the Supreme Court is in aid of earlier Judgments i.e. Rajendra Construction Co.,  Mcdermott International Inc., Pure Helium India (P) Ltd. [(2003) 8 SCC 593] and other Judgments which further elucidates the position that it is the discretion of the Arbitral Tribunal to award interest at a rate that it deems reasonable and that Court can exercise power under Article 142 of the  Constitution of India to reduce the rate of interest. Further, the Arbitral Tribunal is duty bound to give cogent reasons as to how it deems the rate of interest to be reasonable and required to apply its mind to the facts of the case keeping in mind prospective claims and decide whether the interest is payable on the 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. Additionally, a party to the arbitration proceedings is not entitled to claim interest for the period during which the proceedings were deliberately delayed by such party, as observed by the Hon’ble Supreme Court.

Deepak Deshmukh is an Associate Partner and Vivek Dwivedi is a Senior Associate at Naik Naik and Co.