India: Dispute Resolution And Arbitration Update

Background facts

• The Respondent was awarded a contract dated December 16, 1971 for construction of a 3 km missing link on NH-6 from Kanjipani to Kuntala (Project). The Project was supposed to be completed within one year i.e., before December 15, 1972. The contract amount was INR 4,59,330 (Contract Amount).
• However, there was a delay in completing the Project and the Project was only completed on August 30, 1977. The Respondent was paid a sum of INR 3,36,465 upon completion of the Project in August 1977.
• On July 25, 1989 the Respondent issued a notice to the Appellant demanding the remaining balance of the Contract Amount due and payable to the Respondent. The Appellant responded to the notice and stated that the Respondent had been paid for his work. Evidently, there was a dispute between the parties regarding the amount payable to the Respondent.
• Accordingly, the Respondent filed a Suit under Section 20 of the Arbitration Act, 1940 (1940 Act) seeking reference of the dispute to arbitration before the Court of Civil Judge (Senior Division), Bhubaneswar (Trial Court).
• By order dated February 14, 1990, the Trial Court decreed the Suit in favor of the Respondent and directed the Respondent to file the original copy of the agreement executed between the parties. However, the Respondent did not to comply and in the meantime, the earlier act i.e., the 1940 Act, was repealed by the Arbitration and Conciliation Act, 1996 (1996 Act).
• Thereafter, the Respondent filed an application in the disposed of Suit before the Trial Court seeking appointment of an Arbitrator. The same was dismissed due to lack of jurisdiction.
• The Respondent, thereafter, moved an application under Section 11 of the 1996 Act before the High Court seeking appointment of the Arbitrator. The same was allowed and Shri SK Mohanty, former judge of the same High Court, was appointed as the arbitrator on October 15, 2001.
• On March 15, 2002, the Respondent filed his claim of INR 1,45,28,198 under 15 various heads and demanded 19.5% interest from April 01, 1976 to March 15, 2002.
• The Arbitrator vide award dated August 24, 2004 awarded a sum of INR 9,20,650 under heads 1 to 14 along with pendente lite with effect from April 01, 1976 to the date of the award at the rate of 18% per annum which came out to a sum of INR 46,90,000 (Award). The Arbitrator also directed the future interest to be paid at the same rate of interest on the total of the aforesaid two amounts till actual payment.
• Aggrieved by the Award, the Appellant challenged the award under Sections 34 & 37 of the 1996 Act before the District Court and High Court, both of which were rejected/dismissed. Accordingly, the Appellant filed an Appeal before the Supreme Court.

Issue at hand?

• Can a High Court exercise its discretionary powers under Article 142 of the Constitution of India to reduce the rate of interest?

Decision of the Court

• The Supreme Court interpretated provisions of Section 31(7)(a) of the 1996 Act and emphasized on the wordings '...deems reasonable'. The Apex Court observed that there is no doubt that a discretion is vested in the Arbitral Tribunal to include interest in the sum for which the award is made, 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 requires the Arbitral Tribunal to determine the interest at such rate as the Arbitral Tribunal deems reasonable.
• The Supreme Court further observed that when a discretion is vested to the Tribunal to award interest at a rate which it 'deems reasonable', then a duty would be cast upon the Tribunal to give reasons as to how it deems the rate of interest to be reasonable.
• n this regard, the Supreme Court referred to and relied on 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 the following:
  • At what rate interest should be awarded?
  • Whether interest should be awarded on the whole or part of the award money?
  • Whether interest should be awarded for the whole or any part of the pre-award period?
• After carrying out this analysis, the Supreme Court was of the view that the Arbitrator's decision in the present case to award both pendente lite and future interest at the rate of 18% per annum was not justified. It was further determined and observed by the Apex Court that because the Respondent failed to take any action to assert his claims for a period of 12 years, the Arbitrator should not have awarded interest for the time period following the completion of the work until the filing of the Suit by the Respondent. Hence, the conduct of the Respondent would preclude him to claim interest for the aforesaid period.
• The Supreme Court held that the Arbitrator erred in awarding interest for the period from 1990 to 2000. The Court observed that the Suit filed under Section 20 of 1940 Act was decreed in 1990. However, the Respondent was unable to comply with the directions i.e., 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.
• Regarding rate of interest, the Court invoked the provisions of Article 142 of the Indian Constitution to reduce the rate of interest from 18% per annum to 7.5% per annum. 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 of the Indian Constitution.

Executive Engineer (R&B) & Ors v. Gokul Chandra Kanungo (Dead) through his Lrs

Background facts

• The Respondent was awarded a contract dated December 16, 1971 for construction of a 3 km missing link on NH-6 from Kanjipani to Kuntala (Project). The Project was supposed to be completed within one year i.e., before December 15, 1972. The contract amount was INR 4,59,330 (Contract Amount).
• However, there was a delay in completing the Project and the Project was only completed on August 30, 1977. The Respondent was paid a sum of INR 3,36,465 upon completion of the Project in August 1977.
• On July 25, 1989 the Respondent issued a notice to the Appellant demanding the remaining balance of the Contract Amount due and payable to the Respondent. The Appellant responded to the notice and stated that the Respondent had been paid for his work. Evidently, there was a dispute between the parties regarding the amount payable to the Respondent.
• Accordingly, the Respondent filed a Suit under Section 20 of the Arbitration Act, 1940 (1940 Act) seeking reference of the dispute to arbitration before the Court of Civil Judge (Senior Division), Bhubaneswar (Trial Court).
• By order dated February 14, 1990, the Trial Court decreed the Suit in favor of the Respondent and directed the Respondent to file the original copy of the agreement executed between the parties. However, the Respondent did not to comply and in the meantime, the earlier act i.e., the 1940 Act, was repealed by the Arbitration and Conciliation Act, 1996 (1996 Act).
• Thereafter, the Respondent filed an application in the disposed of Suit before the Trial Court seeking appointment of an Arbitrator. The same was dismissed due to lack of jurisdiction.
• The Respondent, thereafter, moved an application under Section 11 of the 1996 Act before the High Court seeking appointment of the Arbitrator. The same was allowed and Shri SK Mohanty, former judge of the same High Court, was appointed as the arbitrator on October 15, 2001.
• On March 15, 2002, the Respondent filed his claim of INR 1,45,28,198 under 15 various heads and demanded 19.5% interest from April 01, 1976 to March 15, 2002.
• The Arbitrator vide award dated August 24, 2004 awarded a sum of INR 9,20,650 under heads 1 to 14 along with pendente lite with effect from April 01, 1976 to the date of the award at the rate of 18% per annum which came out to a sum of INR 46,90,000 (Award). The Arbitrator also directed the future interest to be paid at the same rate of interest on the total of the aforesaid two amounts till actual payment.
• Aggrieved by the Award, the Appellant challenged the award under Sections 34 & 37 of the 1996 Act before the District Court and High Court, both of which were rejected/dismissed. Accordingly, the Appellant filed an Appeal before the Supreme Court.

Issue at hand?

• Can a High Court exercise its discretionary powers under Article 142 of the Constitution of India to reduce the rate of interest?

Decision of the Court

• The Supreme Court interpretated provisions of Section 31(7)(a) of the 1996 Act and emphasized on the wordings '...deems reasonable'. The Apex Court observed that there is no doubt that a discretion is vested in the Arbitral Tribunal to include interest in the sum for which the award is made, 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 requires the Arbitral Tribunal to determine the interest at such rate as the Arbitral Tribunal deems reasonable.
• The Supreme Court further observed that when a discretion is vested to the Tribunal to award interest at a rate which it 'deems reasonable', then a duty would be cast upon the Tribunal to give reasons as to how it deems the rate of interest to be reasonable.
• In this regard, the Supreme Court referred to and relied on 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 the following:
  • At what rate interest should be awarded?
  • Whether interest should be awarded on the whole or part of the award money?
  • Whether interest should be awarded for the whole or any part of the pre-award period?
• After carrying out this analysis, the Supreme Court was of the view that the Arbitrator's decision in the present case to award both pendente lite and future interest at the rate of 18% per annum was not justified. It was further determined and observed by the Apex Court that because the Respondent failed to take any action to assert his claims for a period of 12 years, the Arbitrator should not have awarded interest for the time period following the completion of the work until the filing of the Suit by the Respondent. Hence, the conduct of the Respondent would preclude him to claim interest for the aforesaid period.
• The Supreme Court held that the Arbitrator erred in awarding interest for the period from 1990 to 2000. The Court observed that the Suit filed under Section 20 of 1940 Act was decreed in 1990. However, the Respondent was unable to comply with the directions i.e., 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.
• Regarding rate of interest, the Court invoked the provisions of Article 142 of the Indian Constitution to reduce the rate of interest from 18% per annum to 7.5% per annum. 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 of the Indian Constitution.

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