Madras High Court
Madras High Court
Litigation News

Modification of arbitral awards and the scope of Court interference under Section 34, Arbitration and Conciliation Act: What Madras HC held

Meera Emmanuel

The Madras High Court recently made pertinent observations on the scope of Court interference when it comes to modifying arbitral awards, as well as the authority of arbitral tribunals to award interest on the payment of awards in the absence an agreement to that effect (M/s.J.K. Fenner (India) Limited v. M/s.Neyveli Lignite Corporation).

Justice PT Asha noted that there were limits to how far a Court can interfere under Section 34 of the Arbitration and Conciliation Act, 1996 when it comes to modifying an arbitral award.

In this regard, she cited a 2019 Madras High Court ruling in the case of SG Novasoft Technologies Limited v. Gayathri Balusamy, wherein it was held,

"A reasonable interpretation to Section 34 would only lead to an irresistible conclusion that the Court can modify or vary the Award of the Arbitrator if it is contrary to the material evidence adduced by the parties."

Earlier in the 2012 case of Sterlite Technologies Limited vs BSNL as well, Justice Asha had noted that the Court only has a supervisory role, whereby it can test the fairness of the award and that it was not called upon to correct the errors of the Arbitrator.

In that case, reliance had also been placed on the Supreme Court's observations in the case of Ssangyong Engineering vs. National Highways Authority.

Applying these principles, the Court found that there were reasons to modify parts of the arbitral award under challenge before it. This was particularly with respect to the arbitral tribunal's decision not to award interest on an amount found by it to be payable to the original claimant.

In this case, the claimant had set up a lignite handling and storage system (LHS) for a thermal plant. Disputes arose when the claimant sought payment for the work done under various heads.

As per the agreement between the two parties, the "After successful completion of performance test for equipment (LHS) and Certification of results by the purchases/Consultant - 10% to be paid."

After some delays, the LHS set up by the claimant was eventually taken over by the respondent provisionally in March 2004. However, the 10% refund of Rs.3,42,89,930 was withheld by the respondents, stating that the claimant had failed to complete the performance guarantee test on the scheduled date as per the contract.

The claimant contended that since the respondent had taken over the LHS in March 2004, the retention amount became payable from then onwards.

The arbitral tribunal ruled in the claimant's favour, pointing out that the equipment had been functioning satisfactorily from March 2003.

As such, a mere failure on the part of the respondent to issue a certificate could not stand in the way of the respondent refunding the retention money, it was held. Therefore, the tribunal directed the refund to be paid to the claimant.

However, the tribunal did not award interest from the date of takeover of the LHS by the respondent i.e., from March 1, 2004 till the date of payment. The tribunal declined to grant interest on the ground that the amount became payable only on the date of award.

On challenge, however, the High Court found that the tribunal's finding on this count was patent illegality. As noted in the judgment,

"The denial of interest post 01.03.2004 to the claimant on the ground that the retention amount became payable only on account of the award is a patently erroneous observation and contrary to the payment terms stipulated in the contract."

The Court reasoned that the arbitral tribunal could not have denied the grant of interest, when it had found that the retention amount was owed to the claimant. The amount, it pointed out, was payable on the day the respondent took over the LHS, and not on the day the arbitral tribunal settled the claim.

It was noted that "the respondent had taken over the LHS and started operating and maintaining the same ever since 01.04.2003. The respondent had therefore reaped the benefits therefrom the above date. Not only has the respondent retained 10% of the final dues but has also been utilizing the LHS to its capacity thereby enriching itself."

The Court proceeded to point out that arbitral tribunals are empowered to grant pre-reference and pendent lite interests on awards passed, even if the arbitral agreement was silent on this aspect.

In this regard, reference was made to the cases of Secretary Irrigation Department, Government of Orissa and others v. G.C. Roy, Executive Engineer, Dhenkanal vs N.C.Budharaj (Dead), Bhagawathi Oxygen Limited vs. Hindustan Copper Limited, Indian Hume Pipe Co. Limited vs. State of Rajasthan, Union of India vs Saraswat Trading Agency and others and Hyder Consulting (UK) Limited Vs. Governor, State of Orissa.

Summing up the position of law on this aspect, Justice Asha reasoned,

"The underlying principle conferring power on the arbitrator to grant interest for a pre-reference period in cases where there is no prohibition in the arbitration agreement is on account of the fact that the forum of arbitration is created by the consent of parties and is a substitute for a conventional civil court. Therefore by implication the Arbitrator would have the same power to award interest in the same way and same manner as a court. "
Madras High Court

Having established the tribunal's power to award interests on awards, the High Court proceeded to find that the arbitral tribunal's decision not to grant interest on the award passed in the claimant's favour had no legal basis.

"In the case on hand the contract is silent about the grant of interest. The learned Arbitrators have refused to grant interest not only for the pre reference period but also the pendente lite interest as well as the post award interest on the ground that the claimant became entitled to the payment of the retention money only with effect from the date of the award. This finding lacks a legal basis since the amount falls due on the commissioning of the LHS", the Court said.

The Court added,

"It is also surprising that having observed that the claimant is entitled to the amount on and from the date of the award, the learned Arbitrators have failed to grant interest post the award till date of payment. "
Madras High Court

As such, the judge proceeded to hold that the claimant was allowed to interest @ 9% p.a from March 1, 2004 (the date on which the respondent had taken over the LHS) till the date of award. Further, from the date of award till date of payment the Court directed that interest @ 18 % p.a.was payable.

The Court added that this order (regarding payment of interests) is being passed, "particularly in the light of the learned Arbitrators after examining the evidence on record coming to the conclusion that the retention was wrong. Therefore, this Court is not called upon to once again appreciate the evidence."

In all other respects, the Court held that the award of the arbitral tribunal stands confirmed.

Senior Counsel R Murari argued for the claimant, appearing for Advocate Preeti Mohan.

Senior Counsel TR Rajagopalan argued for respondent, appearing for Advocate N Nithianandam.

Read the Judgment:

Madras HC Judgment - J.K. Fenner (India) Limited v. .Neyveli Lignite Corporation.pdf
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