Supreme court sets aside High court judgment which reduced the interest from 18% awarded by the arbitrator to 9% while exercising an application under Section 34 of the Arbitration Act, on the ground that the Arbitration award cannot be altered by a Court under S.34 and the Court can either set aside or uphold the award.

M/S LARSEN AIR CONDITIONING AND REFRIGRATION COMPANY [APPELLANT(S)] Vs.

UNION OF INDI that A & ORS. [RESPONDENT(S)]

CIVIL APPEAL NO(S). 3798 OF 2023

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(2JB, S. RAVINDRA BHAT and DIPANKAR DATTA JJ., delivered by S. RAVINDRA BHAT, J.)

Facts: The present appeal is preferred against the judgment of the Allahabad High Court whereby the court modified the arbitral award to the extent of reducing the interest, from compound interest of 18% to 9% simple interest per annum.

Issue: 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?

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Arguments on behalf of counsel for appellants: Mrs. Neeraj Singh

The 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’ and 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 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. wherein this court, in light of Section 31(7), upheld 18% per annum as rate of interest, as justifiable. Further, reliance was placed on this court’s judgment in Secretary, Irrigation Department, State of Orissa v. G.C. Roy 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.

Arguments on behalf of counsel for respondents: Mr. Vikramjit Banerjee, Addnl. Solicitor General

The counsel 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, and the Arbitration and Conciliation Act, 1996 before deciding to reduce the interest to a more reasonable rate. 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. The ASG relied on several judgments of this court: Municipal Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd. & Ors. 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 Keralawherein 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 Company 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.

Held: The court disposed off the present appeal and set aside the judgment of the high court to the extent of modification of rate of interest for past, pendente lite and future interest, while reinstating the 18% per annum rate of interest, as awarded by the arbitrator on 21.01.1999 (in Claim No. 9).

The court observed that, “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”. 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 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.”

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