[2023] 11 S.C.R.
86 : 2023 INSC 708
M/S LARSEN AIR CONDITIONING AND REFRIGRATION
COMPANY
v.
UNION OF INDIA AND ORS.
(Civil Appeal No. 3798 of 2023)
AUGUST 11, 2023
[S. RAVINDRA BHAT* AND DIPANKAR DATTA, JJ.]
Issue for consideration : Whether the High Court erred in
modifying the arbitral award to the extent of reducing the interest,
from compound interest of 18% to 9% simple interest per annum.
Arbitration and Conciliation Act, 1996 – s.31 – Modification
of interest by the High Court – Propriety of:
Held : In the instant case, given that the arbitration commenced
in 1997, i.e., after the Act of 1996 came into force on 22.08.1996,
the arbitrator, and the award passed by them, would be subject
to this statute – Under the enactment, i.e. s.31(7), the statutory
rate of interest itself is contemplated at 18% p.a. – This is in the
event the award does not contain any direction towards the rate
of interest – Therefore, there is little to no reason, for the High
Court to have interfered with the arbitrator’s finding on interest
accrued and payable – Unlike in the case of the old Act, the court
is powerless to modify the award and can only set aside partially,
or wholly, an award on a finding that the conditions spelt out u/s.
34 of the 1996 Act have been established. [Para 13]
Arbitration and Conciliation Act, 1996 – s.34 – Jurisdiction
under:
Held : The limited and extremely circumscribed jurisdiction of
the court u/s. 34 of the Act, permits the court to interfere with an
award, sans the grounds of patent illegality, i.e., that “illegality
must go to the root of the matter and cannot be of a trivial nature”;
and that the tribunal “must decide in accordance with the terms of
the contract, but if an arbitrator construes a term of the contract
in a reasonable manner, it will not mean that the award can be
set aside on this ground”– The other ground would be denial of
natural justice. [Para 15]
* Author
[2023] 11 S.C.R. 87
M/S LARSEN AIR CONDITIONING AND REFRIGRATION
COMPANY v. UNION OF INDIA AND ORS.
Arbitration and Conciliation Act, 1996 – s.37 – Scope of
Appellate Court to review findings:
Held : In appeal, s.37 of the Act grants narrower scope to the
appellate court to review the findings in an award, if it has been
upheld, or substantially upheld u/s. 34 – It is important to notice
that the old Act contained a provision which enabled the court to
modify an award – However, that power has been consciously
omitted by Parliament, while enacting the Act of 1996 – This means
that the Parliamentary intent was to exclude power to modify an
award, in any manner, to the court. [Para 15]
K. Marappan v. Superintending Engineer TBPHLC Circle
Anantapur [2019] 5 SCR 152; M/s Raveechee & Co. v.
Union of India [2018] 5 SCR 138; Ambica Construction
v. Union of India (2017) 14 SCC 323; Shahi v. State
of UP & Ors. [2019] 11 SCR 640; Secretary, Irrigation
Department, State of Orissa v. G.C. Roy [1991] Supp.
3 SCR 417; Municipal Corporation of Greater Mumbai
and Anr v. Pratibha Industries Ltd. & Ors. [2018] 14 SCR
1143; Oriental Structural Engineers Pvt. Ltd. v. State of
Kerala [2021] 4 SCR 137; Post Graduate Institute of
Medical Education and Research, Chandigarh v. Kalsi
Construction Company (2019) 8 SCC 726; Associate
Builders v. Delhi Development Authority [2014] 13 SCR
895; Ssangyong Engineering Construction Co. Ltd v.
National Highways Authority of India (NHAI) [2019] 7
SCR 522; Delhi Airport Metro Express Pvt. Ltd. v Delhi
Metro Rail Corporation Ltd [2021] 5 SCR 984; National
Highways Authority of India v M. Hakeem [2021] 5 SCR
368 – referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No.3798 of 2023.
From the Judgment and Order dated 17.07.2019 of the High Court of
Judicature at Allahabad in FAFO No.1227 of 2003.
R.K. Singh, Mrs. Neeraj Singh, Kumar Gaurav, Ajay Chaudhary,
Praveen Pathak, Aman Rastogi, Sanjay Rastogi, Advs. for the Appellant.
Vikramjeet Banerjee, A.S.G., A K Kaul, Nachiketa Joshi, Bhuvan
Mishra, Akshit Pradhan, Sachin Sharma, Siddhartha Sinha, Shivam
Singhania, N. Chamwibo Zeliang, Suraj Mishra, Ms. Akansha, Arvind
Kumar Sharma, Advs. for the Respondents.
88 [2023] 11 S.C.R.
SUPREME COURT REPORT: DIGITAL
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. Aggrieved by the impugned judgment1 of the Allahabad High Court,
the appellant has approached this court with a simple question of
law, as to whether the High Court erred in modifying the arbitral
award to the extent of reducing the interest, from compound interest
of 18% to 9% simple interest per annum.
Facts
2. The dispute between the appellant and Union of India (hereafter
‘respondent-state’) arose from a contract entered into pursuant to
being awarded the tender. In the course of work, certain disputes
arose. On 22.04.1997, the respondent-state referred the dispute
to arbitration, and the proceedings closed on 24.10.1998. The
tribunal published its award on 21.01.1999 and directing the first
four respondents to pay 18% pendente lite and future compound
interest on the award in respect of Claim Nos. 1-8.
3. The respondent-state challenged the award under Section 34 of the
Arbitration and Conciliation Act, 1996 (hereafter ‘the Act’). The district
court2, dismissed the challenge on the ground that it could not sit
in appeal over the award and since the respondent-state had failed
to file any proof of the grounds alleged. Aggrieved, the respondent-
state, preferred an appeal before the High Court in 2003. In the
interim, the respondent-state deposited ₹10,00,000 in the District
Court, Kanpur on 06.06.2003 against ₹1,82,878.11 due at the time.
4. Partly allowing the appeal, the High Court disapproved the reasoning
in the award on Claim No. 6; it held that the sum of ₹3 lakhs awarded
towards compensation for loss caused due to non-issue of tender
document and paralysing business could not have been granted. The
High Court held that it could not be said that the proceedings (in the
present case) were under the Arbitration Act, 1940, and therefore,
the rate of interest granted should not be 18%. The High Court
referred to this court’s judgments in K. Marappan v. Superintending
1 Judgment dated 17.07.2019 passed by Allahabad High Court in First Appeal from Order No.
1227/2003.
2 Judgment dated 06.03.2003 passed by the District Judge, Kanpur Nagar in Misc. Case No. 64/70 of
1999.
[2023] 11 S.C.R. 89
M/S LARSEN AIR CONDITIONING AND REFRIGRATION
COMPANY v. UNION OF INDIA AND ORS.
Engineer TBPHLC Circle Anantapur3, M/s Raveechee & Co. v. Union
of India4 and Ambica Construction v. Union of India5 while deciding
this question of pendente lite interest; it was held that the bar to
award interest on the amounts payable under the contract would
not be sufficient to deny the payment of interest pendente lite. The
High Court proceeded to reduce the rate of interest from 18% (as
ordered by the arbitrator), to 9% per annum. The remaining amount
was directed to be deposited by the appellants as expeditiously as
possible, with the interest accrued, not later than 12 weeks from the
date of the judgment. On other grounds, it was held that there was
no scope for interference in the arbitral award.
Contentions of parties
5. The ground pressed by the appellant in the present proceedings,
relates to the modification of the rate of interest (relating to award in
Claim No. 9), and the scope of this appeal is limited to this question.
6. Mrs. Neeraj Singh, counsel appearing on behalf of the appellant,
submitted that their claim was in fact for 24% pendente lite interest,
and the arbitrator had already reduced it to the 18% granted. Pointing
to pre-amended Section 31(7)(b) of the 1996 Act, it was contended
that the High Court erred in reducing the ‘statutory interest rate’; this
provision prescribed that in the event the Arbitrator did not give any
specific directions as regards rate of interest on amount awarded,
such amount ‘shall’ carry interest of 18% per annum. The Arbitrator
had properly considered the matter and accordingly granted 18%
past pendente lite and future compound interest on 8 claims, which
was affirmed by the district court. Counsel also pointed out Clause
70 of the General Conditions of Contract (GCC), which stipulates
that the award of the arbitrator shall be final and binding on both
parties. It was urged, therefore, that there was no justification for
judicial interference so as to reduce the statutory interest rate from
18% to 9% per annum. Counsel drew attention to Shahi v. State of
UP & Ors.6 wherein this court, in light of Section 31(7), upheld 18%
per annum as rate of interest, as justifiable.
3 [2019] 5 SCR 152
4 [2018] 5 SCR 138
5 (2017) 14 SCC 323
6 [2019] 11 SCR 640
90 [2023] 11 S.C.R.
SUPREME COURT REPORT: DIGITAL
7. Further, reliance was placed on this court’s judgment in Secretary,
Irrigation Department, State of Orissa v. G.C. Roy7 to argue that
when the agreement between the parties does not prohibit grant of
interest and where the party claims interest in the dispute referred
to an arbitrator, then the arbitrator does have the power to award
interest pendente lite.
8. Mr. Vikramjit Banerjee, Additional Solicitor General (ASG), appearing
on behalf of the Respondent-state, argued that the impugned
judgment had taken a holistic view of the matter, and rightfully reduced
the interest from 18% compound interest to 9% simple interest, in
addition to disallowing Claim No. 6 of ₹ 3,00,000 awarded by the
arbitrator for non-issuance of tender. The High Court, it was urged,
had considered all the aspects of the Indian Contract Act, 1872 and
the Arbitration and Conciliation Act, 1996 before deciding to reduce
the interest to a more reasonable rate.
9. It was asserted that even the counsel for the appellants at the time,
before the High Court, had agreed that the statutory rate of interest
should be 1 or 2% higher or lower than the bank rate, which in the
last decade has been about 7-8%. As a result, 18% compound rate
of interest was completely unjustified, and warranted revision.
10. The ASG relied on several judgments of this court: Municipal
Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd.
& Ors.8 to stress on the scope of the inherent powers of the High
Court as a constitutional court; Oriental Structural Engineers Pvt. Ltd.
v. State of Kerala9 wherein the contract did not stipulate a rate of
interest, and 18% awarded by the tribunal was held to be excessive
and therefore, reduced to 8% simple interest by this court; and
similarly Post Graduate Institute of Medical Education and Research,
Chandigarh v. Kalsi Construction Company10 wherein this court
reduced the rate of interest from 18% awarded by the tribunal, to
9% simple interest, despite 18% having been the agreed upon rate
of interest, given that the award was passed roughly 20 years prior.
7 [1991] Supp. 3 SCR 417
8 [2018] 14 SCR 1143
9 [2021] 4 SCR 137
10 (2019) 8 SCC 726
[2023] 11 S.C.R. 91
M/S LARSEN AIR CONDITIONING AND REFRIGRATION
COMPANY v. UNION OF INDIA AND ORS.
Analysis and conclusion
11. Section 31(7)(b) of the 1996 Act, was amended by Act 3 of 2016, w.e.f.
23.10.2015. The pre-amended provision, empowers the arbitrator to
award both pre-award and post-award interest, and specifies that
the awarded sum would carry an interest of 18% per annum, unless
provided otherwise, from the date of award till the date of payment.
The pre-amended section, as it stood on the date of award by the
arbitrator (21.01.1999), read as follows:
“31. Form and contents of arbitral award
[…]
(7) (a) Unless otherwise agreed by the parties, where and in so far
as an arbitral award is for the payment of money, the arbitral tribunal
may include in the sum for which the award is made interest, at such
rate as it deems reasonable, 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.
(b) A sum directed to be paid by an arbitral award shall, unless the
award otherwise directs, carry interest at the rate of eighteen per
centum per annum from the date of the award to the date of payment.”
(emphasis provided)
12. This court in Shahi & Associates (supra), which was relied upon by
the appellants, dealt with a similar situation as the present factual
matrix, and is squarely applicable:
“11. Section 31(7)(b) of the 1996 Act clearly mandates that, in the
event the arbitrator does not give any specific directions as regards
the rate of interest on the amount awarded, such amount “shall”
carry interest @ 18% p.a. from the date of award till the date of
payment. Since the Arbitration Act, 1940 has been repealed by way
of Section 85 of the 1996 Act, the Schedule to the Arbitration Act,
including the State amendment, also stands repealed. The only
exception is provided in sub-section (2)(a) of Section 85 where a
proceeding which had commenced when the Arbitration Act of 1940
was in force and continued even after coming into force of the 1996
Act, and all parties thereto agreed for application of the old Act of
1940. Therefore, the provisions of Arbitration Act, 1940 including
the State amendment, namely, para 7-A inserted by Section 24 of
92 [2023] 11 S.C.R.
SUPREME COURT REPORT: DIGITAL
the U.P. Amendment Act will have no application to the proceedings
commenced after coming into force of the 1996 Act.
12. In the instant case, though the agreement was earlier to the date
of coming into force of the 1996 Act, the proceedings admittedly
commenced on 27-10-1999 and were conducted in accordance with
the 1996 Act. If that be so, para 7-A inserted by Section 24 of the
U.P. Amendment Act has no application to the case at hand. Since
the rate of interest granted by the arbitrator is in accordance with
Section 31(7)(b) of the 1996 Act, the High Court and the District
Judge were not justified in reducing the rate of interest by following
the U.P. Amendment Act.”
13. In the present case, given that the arbitration commenced in 1997,
i.e., after the Act of 1996 came into force on 22.08.1996, the arbitrator,
and the award passed by them, would be subject to this statute.
Under the enactment, i.e. Section 31(7), the statutory rate of interest
itself is contemplated at 18% per annum. Of course, this is in the
event the award does not contain any direction towards the rate of
interest. Therefore, there is little to no reason, for the High Court to
have interfered with the arbitrator’s finding on interest accrued and
payable. Unlike in the case of the old Act, the court is powerless to
modify the award and can only set aside partially, or wholly, an award
on a finding that the conditions spelt out under Section 34 of the
1996 Act have been established. The scope of interference by the
court, is well defined and delineated [refer to Associate Builders v.
Delhi Development Authority11, Ssangyong Engineering Construction
Co. Ltd v. National Highways Authority of India (NHAI)12 and Delhi
Airport Metro Express Pvt. Ltd. v Delhi Metro Rail Corporation Ltd13].
14. The reliance on Kalsi Construction Company (supra) by the
respondent-state, is inapt, given that this court had exercised
its Article 142 jurisdiction in light of three pertinent factors – the
award had been passed 20 years prior, related to construction of
a Paediatrics Centre in a medical institute, and that the parties in
that case had left the matter to the discretion of the court. Similarly,
in Oriental Structural Engineers (supra) this court held that since
11 [2014] 13 SCR 895
12 [2019] 7 SCR 522
13 [2021] 5 SCR 984
[2023] 11 S.C.R. 93
M/S LARSEN AIR CONDITIONING AND REFRIGRATION
COMPANY v. UNION OF INDIA AND ORS.
the contract stipulated interest entitlement on delayed payments,
but contained no mention of the rate of interest applicable – the
Tribunal ought to have applied the principles laid down in G.C. Roy
(supra), and therefore, in exercise of Article 142, this court reduced
the rate of interest awarded by the tribunal on the sum left unpaid.
The judgment in Municipal Corporation of Greater Mumbai (supra) no
doubt discusses the inherent powers of the High Court as a superior
court of record, but relates specifically to the jurisdiction to recall its
own orders, and offers little assistance in the present dispute.
15. The limited and extremely circumscribed jurisdiction of the court under
Section 34 of the Act, permits the court to interfere with an award,
sans the grounds of patent illegality, i.e., that “illegality must go to
the root of the matter and cannot be of a trivial nature”; and that the
tribunal “must decide in accordance with the terms of the contract,
but if an arbitrator construes a term of the contract in a reasonable
manner, it will not mean that the award can be set aside on this
ground” [ref: Associate Builders (supra)]. The other ground would
be denial of natural justice. In appeal, Section 37 of the Act grants
narrower scope to the appellate court to review the findings in an
award, if it has been upheld, or substantially upheld under Section
34. It is important to notice that the old Act contained a provision14
which enabled the court to modify an award. However, that power
has been consciously omitted by Parliament, while enacting the Act
of 1996. This means that the Parliamentary intent was to exclude
power to modify an award, in any manner, to the court. This position
has been iterated decisively by this court in Project Director, National
Highways No. 45E and 220 National Highways Authority of India v
M. Hakeem15:
“42. It can therefore be said that this question has now been settled
finally by at least 3 decisions [McDermott International Inc. v. Burn
Standard Co. Ltd., (2006) 11 SCC 181] , [Kinnari Mullick v. Ghanshyam
Das Damani, (2018) 11 SCC 328 : (2018) 5 SCC (Civ) 106] , [Dakshin
14 “15. Power of court to modify award
— The court may by order modify or correct an award
— (a) where it appears that a part of the award is upon a matter not referred to arbitration and such part can be sepa-
rated from the other part and does not affect the decision on the matter referred; or
(b) where the award is imperfect in form, or contains any obvious error which can be amended without affecting such
decision; or
(c) where the award contains a clerical mistake or an error arising from an accidental slip or omission.”
15 [2021] 5 SCR 368
94 [2023] 11 S.C.R.
SUPREME COURT REPORT: DIGITAL
Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies (P) Ltd.,
(2021) 7 SCC 657] of this Court. Even otherwise, to state that the
judicial trend appears to favour an interpretation that would read into
Section 34 a power to modify, revise or vary the award would be to
ignore the previous law contained in the 1940 Act; as also to ignore
the fact that the 1996 Act was enacted based on the Uncitral Model
Law on International Commercial Arbitration, 1985 which, as has
been pointed out in Redfern and Hunter on International Arbitration,
makes it clear that, given the limited judicial interference on extremely
limited grounds not dealing with the merits of an award, the “limited
remedy” under Section 34 is coterminous with the “limited right”,
namely, either to set aside an award or remand the matter under the
circumstances mentioned in Section 34 of the Arbitration Act, 1996.”
16. In view of the foregoing discussion, the impugned judgment warrants
interference and is hereby set aside to the extent of modification
of rate of interest for past, pendente lite and future interest. The
18% per annum rate of interest, as awarded by the arbitrator on
21.01.1999 (in Claim No. 9) is reinstated. The respondent-state is
hereby directed to accordingly pay the dues within 8 weeks from
the date of this judgment.
17. The present appeal, and pending application(s) if any, stand disposed
of in the above terms, with no order as to costs.
Headnotes prepared by: Ankit Gyan Result of the case : Appeal disposed of.
