SC: Arbitral Tribunal’s Duty to Provide Justification Behind Determination of Rate of Interest on Award


Khushi Bajpai

Published on: October 6, 2022 at 22:39 IST

An appeal against an Orissa High Court ruling that upheld an Arbitral Tribunal decision was considered by a Supreme Court bench consisting of Justices BR Gavai and BV Nagarathna.

The Supreme Court partially upheld the appeal, saying that “where a power is granted to an arbitration tribunal to award interest at a rate which it deems acceptable, then an obligation would be put upon the arbitral tribunal to explain how it deems the rate of interest to be appropriate.”

Sibo Sankar Mishra and Ashok Panigrahi, respectively, represented the Appellants and Respondents in court.

In this instance, the Respondent was given the go-ahead to build a 3 km. long missing connection on a national highway (NH) on December 16th, 1971. The project had to be finished within a year, or by December 15th, 1972.

The Respondent had already paid a significant portion of the contract sum by the time the work was finally finished on August 30th, 1977, despite the fact that it was not possible to complete the work by the deadline.

The Appellants were notified of the Respondent’s claim by the Respondent, but they did not respond favorably.

After that, the Respondent sued the Trial Court pursuant to Section 20 of the 1940 Arbitration Act, requesting that the case be referred to arbitration. The suit was decided in favor of the Respondent, and he was instructed to submit the original arbitration agreement to the court.

The Respondent, though, disobeyed.

In the meanwhile, the Arbitration and Conciliation Act of 1996 went into effect and the 1940 Act was repealed.

The Respondent then submitted an application in the Trial Court’s dismissed lawsuit, requesting the appointment of an Arbitrator in accordance with the 1996 Act.

The Trial Court disallowed the same due to a lack of jurisdiction.

The Respondent thereafter filed a motion with the High Court to appoint an Arbitrator in accordance with Section 11 of the 1996 Act. The High Court’s Single Judge approved the application and chose an arbitrator.

A claim amount and interest pendente lite at the rate of 18% annually from April 1, 1976, to the date of the award were given by the arbitrator.

Additionally, he ordered the future interest on the sum of the two amounts to be paid at a rate of 18 % annually until actual payment.

Unhappy, the Appellants petitioned the District Judge for the award to be set aside under Section 34 of the 1996 Act. The same was turned down.

As a result, the Appellants brought an appeal to the High Court pursuant to Section 37 of the 1996 Act, which was similarly denied.

The Supreme Court was then petitioned by the appellants.

According to Section 31(7)(a), interest must be paid at a rate that the arbitral tribunal deems appropriate, even though it has the authority to include interest in full or in part in the amount for which the award is made.

The Court made the following statement in that context:

“When the arbitral tribunal is empowered with such a discretion, the arbitral tribunal would be required to apply its mind to the facts of the case and decide as to whether the interest is payable on whole or any part of the money and also as to whether 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 arbitral tribunal rendered its decision.”

The District Judge’s and the High Court’s orders, the Court found, demonstrated that no such exercise had been conducted and that the Arbitrator had awarded the interest without providing any justification.

Furthermore, it was decided that dropping the interest rate from 18% per year to 10% would be appropriate, equitable, and in the interests of justice given the facts and circumstances of the case.

The Supreme Court used the authority granted to it by Article 142 of the Indian Constitution to act similarly.

In order to make the necessary revisions to the Arbitrator’s order, the Court partially upheld the appeal.

The Court further mandated that the Appellants pay the sum established by the Executing Court within a month of the directives being issued.

There were no cost-related orders passed.

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