The Arbitral Tribunal is Cast With Duty to Give Reasons While Exercising Its Discretion Under Section 31(7) of the Arbitration and Conciliation Act
Hon’ble Supreme Court in a recent judgment[1] held that when a discretion is vested in the Arbitral Tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996 to determine the rate of interest, whether the interest is payable on whole or any part of the money and whether it is to be awarded to the whole or any part of the period stipulated, the Tribunal has the duty to apply its mind and give reasons as to how it deems a certain interest rate as reasonable and to decide why the interest is payable on whole or any part of the money and also as to why 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. While exercising its jurisdiction under Article 142 of the Constitution of India, The Hon’ble Court reduced the rate of interest from 18% to 9% and further reduced the period by 20 odd years on account of the lapse of the Claimant-Respondent in taking timely action.
The Respondent was awarded the contract for construction of missing link of 3 kms stretch on NH6 on 16th December, 1971 to be completed within one year. The contract amount was Rs.4,59,330/. However the work could be completed by 30th August 1977. The Respondent was already paid an amount of Rs.3,36,465/ by then. The Respondent issued a notice to the Appellant regarding his claim only on 25th July 1989 followed by the Respondent filing his claim of Rs.1,45,28,198/ and interest @ 19.5% from 1st April 1976 to 15th March 2002. The learned Arbitrator, vide award dated 24th August 2004, awarded a sum of Rs.9,20,650/ and an interest pendent lite with effect from 1st April 1976 to the date of the award at the rate of 18% per annum which came to Rs. 46,90,000/. The learned Arbitrator further directed the future interest to be paid at the rate of 18% per annum on the total of the aforesaid two amounts till actual payment.
The Award was challenged on various grounds including on the ground that the interest amount of Rs.46,90,000/ is almost five times that of the main award amount of Rs.9,20,650/. The Appellant relied on the judgments in Rajendra Construction Co. v. Maharashtra Housing & Area Development Authority and Others [(2005) 6 SCC 678], Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy and Another [(2007) 2 SCC 720] and Mcdermott International Inc. v. Burn Standard Co. Ltd. and Others [(2006) 11 SCC 181].
The Court examined the issue in the light of the discretion given to an Arbitral Tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) to determine the rate of interest, whether interest would be applicable on the whole or any part of the money awarded, and whether it shall be applicable 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. The Court arrived at the decision that such discretion when vested in the Arbitral Tribunal, it has a duty to exercise the discretion while applying its mind to the facts and circumstances of the case and give reasons for arriving at a certain interest rate, the sum of which it shall be applicable, and period for which it shall apply.
The Court observed that the Arbitral Tribunal in the matter did not do any such exercise of reasoning and further failed to exclude the period of more than 20 years during which it was the Respondent-Claimant who did not raise its claim and further did not take any action after decree was passed in 1990 and then after passing of 1996 Act until 2001 when the Respondent-Claimant finally filed an application under section 11 of the 1996 Act. The Court in this regard held that a party cannot be permitted to derive benefits from its own lapses. With regard to the determination of the rate of interest, the Court made reference to various judgments including the observation made by the Court in Mcdermott International Inc. wherein it was held that given the long lapse of time, it will be in furtherance of justice to reduce the rate of interest while exercising the jurisdiction under Article 142 of the Constitution of India. The Court, accordingly found that the present case was also a fit case wherein this Court needed to exercise its powers under Article 142 of the Constitution of India to reduce the rate of interest. While taking into consideration the conduct of the Respondent in delaying the proceedings at every stage which led to a long pendency of the dispute, the Court concluded that, though it will not be in the interest of justice to interfere with the principal award, it would be a fit case wherein the interest at all the three stages, that is prereference period, pendente lite and postaward period, requires to be reduced. The Court, therefore, was pleased to reduce the rate of interest to 9% from 18%
[1] Executive Engineer (R and B) and Ors. v. Gokul Chandra Kanungo (Dead) Thr. His Lrs. [CIVIL APPEAL NO. 8990 OF 2017 decide on 30.09.2022]
