SUPREME COURT REITERATES THAT COURTS HAVE LIMITED SCOPE OF JUDICIAL INTERFERENCE IN ARBITRAL AWARDS

A Two Judge Bench of the Supreme Court comprising of Justice S. Ravindra Bhat and Dipankar Datta passed a Judgment dated 11-08-2023 in the matter of Civil Appeal No. 3798/2023, M/S Larsen Air Conditioning and Refrigeration Company Vs. Union Of India & Ors and reiterated the limited scope of judicial interference in arbitral awards.

FACTS:

(1) That the Appeal filed before the Supreme Court by one, M/S Larsen Air Conditioning and Refrigeration Company (Appellant) against the Union of India (O.I), Secretary Ministry Of Defence and Garrison Engineer (P) Factory (Respondents), challenged the decision of the Hon’ble High Court Judicature at Allahabad (High Court) that altered the Arbitral Award to the extent of reducing the compound interest @ 18% p.a. to simple interest @ 9% p.a. in FAFO-1227 of 2003, vide Order dated 17.07.2019.

(2) The Appellant and the Respondent No. 1 – U.O.I entered into a contract through a tender process. During the execution of the said Contract, certain disputes arose between the Appellant and the Respondent No. 1, thereby prompting the Respondent No.1 to initiate arbitration proceedings, which commenced on 22.04.1997.

(3) Subsequently, the Arbitration Tribunal passed Final Award dated 21.01.1999, directing Respondent No. 1 to pay @18% pendente lite interest p.a. and future compound interest on the Award Amount.

(4) Being aggrieved by the aforesaid Final Award dated 21.01.1999, the Respondent No. 1 challenged the Arbitration Award under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) (Application for Setting Aside Arbitral Award) before the Ld. District Judge, Kanpur Nagar, U.P. (District Court) in Case No. 64/70 of 1999.

(5) Further, the District Court heard the challenge, but refused to entertain the Section 34 Application owing to its inability to act as an appellate authority over the Award and also, because the Respondent No.1 failed to provide sufficient proof to establish its alleged grounds. Thus, the District Court dismissed the Section 34 Application filed by the Respondent No. 1, vide Order dated 06.03.2003.

(6) Aggrieved by the Order of the District Court dated 06.03.2003, the Respondent No. 1 filed an Appeal before the High Court of Uttar Pradesh at Allahabad in FAFO-1227 of 2003 on 07.05.2003. During the legal proceedings, the Respondent No. 1 deposited ₹10,00,000.00 in the District Court, Kanpur, against an outstanding amount of ₹1,82,878.11 on 06.06.2003.

(7) Thereafter, the High Court partially allowed the Appeal, vide Order 17.07.2019, thereby expressing disapproval of the Arbitral Award’s reasoning. Further, the High Court questioned the applicability of the Arbitration Act 1940, and proceeded to reduce the interest rate awarded by the Arbitral Tribunal from 18% to 9% per annum.

(8) Further, the High Court set a deadline for the remaining payment to be deposited by the Appellant, directing them to do so as expeditiously as possible, but not later than 12 weeks from the date of the judgment.

(9) The case serves as an important precedent for the interpretation of arbitration law in India and the scope of court intervention in arbitral awards.

HIGH COURT FINDINGS:

I) The High Court, vide Order 17.07.2019, considered the matter and held that the sum of ₹3 Lakhs that was awarded by the Arbitral Tribunal, as compensation for losses incurred due to non-issuance of tender documents and the subsequent disruption of business, could not have been granted.

II) The High Court further concluded that the proceedings in this case were not governed by the Arbitration Act, of 1940. Consequently, the High Court held that the 18% interest rate awarded by the Arbitral Tribunal was not applicable.

III) Further, The High Court, while deciding the matter of pendente lite interest, affirmed that the bar to award interest on amounts payable under a contract was not sufficient to deny the payment of interest pendente lite.

IV) As a result, the High Court decided to reduce the interest rate from the awarded 18% to 9% per annum. Additionally, the High Court directed the Appellants to deposit the remaining amount, along with accrued interest, within 12 weeks from the date of the judgment.

V) On other grounds, the High Court held that there was no scope for interference in the Arbitral Award.

SUPREME COURT:

Aggrieved by the Order dated 17.07.2019 of the High Court in FAFO No. 1227/2003, the Appellant filed Civil Appeal No. 3798 / 2023 before the Hon’ble Supreme Court. The Apex Court, vide Order dated 11.08.2023, made the following observations:

i) The Supreme Court reaffirmed its interpretation of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.

“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”.

The Apex Court emphasized that, under the Act, in the absence of specific directions by the arbitrator, the awarded amount “shall” carry interest at 18% per annum from the date of the award to the date of payment.

ii) Further, the Bench observed that this interpretation was consistent with the Court’s earlier decision in Shahi vs. State of U.P. & Ors [2019] 11 SCR 640, where the Court emphasized that the statutory rate of interest was applicable unless explicitly directed otherwise by the arbitrator. The Court further noted that the old Arbitration Act of 1940 and its state amendments did not apply to proceedings initiated under the 1996 Act, reinforcing the legislative intent to limit judicial interference in arbitral awards.

iii) The Supreme Court reiterated the limited scope of judicial interference in arbitral awards. It stressed that courts could only set aside or remand an award based on specific grounds, such as patent illegality or denial of natural justice.

iv) Further, the Apex Court highlighted that the 1996 Act consciously omitted the power to modify an arbitral award, which had existed in the previous Arbitration Act of 1940.

v) Hence, in the present case, the Bench held that on the basis of the statutory rate interest of 18% p.a. given under the 1996 Act and in the absence of specific directions by the Arbitral Tribunal, the Supreme Court reinstated the 18% per annum interest rate initially awarded by the Arbitral Tribunal.

vi) Therefore, the Apex Court directed the Respondent-U.O.I. to pay the outstanding amount within 8 weeks from the date of the judgment.

CONCLUSION:

Thus, based on aforesaid observations, the Supreme Court allowed the Appeal filed by the Award-Holder and held that the Impugned Judgment i.e. the High Court Order dated 17.07.2019 warranted interference and as a result, the same was set aside to the extent of modification of interest rate for past pendent lite and future interest. Further, the Apex Court reiterated the limited scope of judicial interference in arbitral awards, and reinstated the original 18% per annum interest rate.

 

Sakshi Raghuvanshi

Associate

The Indian Lawyer