COURT OF JHARKHAND AT RANCHI Arbitration…
The clause of the award granting compound interest at 10% per year on the reconciled amount was set aside; the remaining award was maintained.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
IN THE HIGH COURT OF JHARKHAND AT RANCHI
Arbitration Appeal No. 14 of 2011
Central Mine Planning and Design Institute Limited, a subsidiary of Coal India Limited and a Government of India Public Sector Undertaking having its registered office at Gondwana Place, Kanke Road, P.O. – Ranchi University, P.S. Gonda, District- Ranchi, PIN834031 … … Applicant/Appellant
Versus
Director, Ranchi Security Private Limited, 301, Girdhar Plaza, opposite Gosala, Harmu Road, Ranchi, PIN- 834001
… … Respondent
CORAM: HON’BLE MRS. JUSTICE ANUBHA RAWAT CHOUDHARY
--For the Appellant : Mr. Anoop Kumar Mehta, Advocate Mr. Saurabh Sagar, Advocate For the Respondent : Mr. Pandey Neeraj Rai, Advocate Mr. Manish Kumar, Advocate ---
13 /17.02.2023 Heard Mr. Anoop Kumar Mehta, learned counsel appearing on behalf of the appellant along with Mr. Saurabh Sagar, Advocate.
2. Heard Mr. Pandey Neeraj Rai, learned counsel appearing on behalf of the respondent along with Mr. Manish Kumar, Advocate. 3. This appeal is directed against the order dated 12.07.2011 passed by learned Sub-Judge-I, Ranchi in Miscellaneous case No. 13 of 2010 whereby the application filed by the appellant under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act of 1996”) has been rejected.
Arguments on behalf of the Appellant
4. The learned counsel for the appellant, while giving the factual background, has submitted that the appellant entered into different agreements with the respondent – company for getting security to cover its establishments. A copy of the agreement is annexed as Anneuxure-1. Admittedly, there was arbitration clause for resolution of dispute. A dispute was raised regarding wages paid/payable by the appellant to the respondent for disbursement to the ex-servicemen security personnel employed by the respondent and the respondent invoked arbitration clause. Consequently, ex-chairman-cum-Managing Director of Central Coalfields Limited was appointed as the sole arbitrator. He further submits that the statement of defence/rejoinder was filed before the learned Arbitrator.
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5. However, in the midst of the arbitration proceedings, it was agreed by both the parties to go for reconciliation of the amount to be paid/payable to the respondent company and the respondent company did not claim any interest while submitting the reconciliation statement of the amount and ultimately, the reconciliation statement was signed by both the parties according to which arrear dues was only Rs. 13,78,027/-. The sole arbitrator disposed of the arbitral proceeding on the basis of reconciliation statement by his award dated 22.02.2010 read with order dated 10.03.2010 rectifying the figure. He further submits that there was yet another order dated 14.04.2010 whereby the submissions made by both the parties to review the interest was rejected with an observation that interest rate @ 10% per year on the amount held up has already been ordered and the same is to be paid.
6. The learned counsel for the appellant has submitted that as per the agreement, the respondent who was the security agency, was entitled for reimbursement of the amount paid to the ex-servicemen security personnel and consequently, the award also reflected certain mode of payment so far it related to dues on account of wages of security personnels based on the reconciliation statement.
7. He also submits that the payment for the services of the respondent and to be retained by the respondent was only to the extent of 18% of the wages paid to security personnels. The learned counsel submits that the award is a short award as the same is purely based on the reconciliation statement submitted by the parties and it has been recorded in the award that in order to expedite the case it was agreed by both the parties to go for reconciliation of amount to be paid to the respondent and consequently, reconciled figure was accepted by both the parties.
8. Learned counsel for the appellant has submitted that following were the five elements of the award dated 22.02.2010 read with order dated 10.03.2010 rectifying the figure:
“(1) CMPDI should pay remuneration to Security Agency as agreed upon (Rs. 13,78,027/-) in reconciliation.
(2) Compound Interest @ 10% per year on the amount held up and now being paid, should be paid for the period it is due to the date of payment. The interest is to be disbursed to Ex-Servicemen.
(3) Payment to the Security Agency should be made in installments to be distributed to the Ex-Servicemen who were employed.
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(4) Payment for Service Charges should be paid to RSPL as admissible. This in respect of CMPDI (Hd. Quarters) work is 18% of wages paid to Ex-Servicemen.
(5) CMPDI should depute one of its executives to supervise the payments to the ex-servicemen correctly.”
9. The learned counsel submits that the application under Section 34 of the Act of 1996 was filed on the following grounds:
“(i) For that the Arbitral Tribunal has illegally and beyond the terms of the contract, has awarded compound interest @10% per year on the awarded amount.
(ii) For that the Arbitral Tribunal has awarded the amount of Rs. 13,78,027/- on the reconciled figures accepted by RSPL (O.P.) and CMPDI (Petitioner). The parties did not choose for any interest on the said amounts to be awarded by the Arbitral Tribunal.
(iii) For that the learned Arbitral Tribunal has traveled beyond the terms of the agreement and thus has acted beyond his jurisdiction. (iv) For that the Arbitral Tribunal while awarding the reconciled figure has failed to take into consideration clause 33 of the agreement under which clause the security agency first disbursed the revise amount to ex-servicemen in presence of the management representative and thereafter claim for reimbursement by submitting the bill and then only the company C.M.P.D.I. Ltd. will re-imbursed the amount so disbursed. Since the respondent did not disburse the revised amount to ex-servicemen, as such petitioner is not liable for payment of interest.
(v) For that the learned Arbitrator has failed to take into consideration that awarding of interest is always subject to contract to parties. In the present case there is no terms and conditions for awarding interest for pre-awarded period and post awarded period. (vi) For that the award given by the Arbitral Tribunal is bad in law as well as in facts and circumstances of the present case.”
10. The learned counsel for the appellant submits that the learned court below has not properly considered the grounds raised under section 34 of the Arbitration and Conciliation Act, 1996.
He also submits that direction for payment of compound interest @ 10% per year on the amount of reconciled figure being the amount held up and now being paid, was not at all sustainable in law. He submits that the parties did not choose for any interest on the reconciled amounts to be awarded by the Arbitral Tribunal. He also submits that the learned Arbitral Tribunal has traveled beyond the terms of the agreement and thus has acted beyond his jurisdiction.
11. The learned counsel submits that the arbitral tribunal has illegally and beyond the terms of contract and beyond the terms of settlement through reconciled figure arrived by both the parties, awarded compound interest @ 10% per year on the awarded amount of reconciled figure. He submits that since the reconciled figure was
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accepted by both the parties, therefore, there was no occasion to award any interest on the amount of reconciled figure.
12. It is also submitted that the learned Arbitrator traveled beyond the terms of agreement/settlement and failed to take into consideration that awarding of interest is always subject to contract between the parties and that there was no such terms and conditions for awarding any interest when the reconciliation statement was prepared by the parties and submitted to the learned Arbitrator.
13. The learned counsel has also submitted that the learned tribunal has also failed to take into consideration Clause 33 of the agreement, according to which the respondent was to first disburse the amount to ex-servicemen – security personnel in presence of management representative and thereafter, claim for reimbursement by submitting the bill and since the respondent did not disburse the revised amount to ex-servicemen – security personnel, as such, the appellant was not liable to pay any amount.
14. The learned counsel has also submitted that by virtue of the impugned award, the interest has to be passed on to the exservicemen- Security personnel, who are not party to the agreement. The impugned Award is completely silent on the point of reasons to award interest, that too, at the rate of 10% compounding with respect to the reconciled amount agreed to be found payable by the appellant to the respondent. The learned counsel also submits that the ‘due date’ from which the interest is payable is also not mentioned in the award. 15. The learned counsel for the appellant has further submitted that in the recent judgement passed by the Hon’ble Supreme Court in Civil Appeal No. 1539 of 2019 [Jaiprakash Associates Ltd. (JAL) Vs. Tehri Hydro Development Corporation India Ltd. (THDC)] and also in the judgement passed in Civil Appeal No. 8990 of 2017 [(Executive Engineer, (R and B) and Others Vs. Gokul Chandra Kanungo (Dead) Thr. His Lrs.)], Section 31 of the 1996 Act has been interpreted wherein it has been held that a discretion has been vested in the arbitral tribunal to include payment of interest as it deems reasonable and when such a discretion is vested, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable.
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16. The learned counsel submits that the specific case of the appellant is that no interest at all was payable and otherwise also the compound interest as awarded by the learned Arbitrator is not sustainable in the eyes of law. The learned counsel submits that the aforesaid aspects of the matter have not been properly considered by the learned court below and therefore, the present appeal has been filed.
Arguments on behalf of the Respondent
17. The learned counsel appearing on behalf of the respondent, on the other hand, has opposed the prayer of the appellant and has submitted that considering the limited scope of interference in the matter of Award passed by an Arbitral Tribunal which is limited to the grounds mentioned in Section 34 of the aforesaid Act of 1996, no interference is called for in the impugned Award and the impugned order. The learned counsel submits that the learned Arbitrator was within his right to award interest irrespective of any contract to that effect. He submits that there is no negative covenant regarding payment of interest.
18. The learned counsel has submitted that earlier in the judgement passed by the Hon’ble Supreme Court in the case of “State of Haryana Vs. S.L. Arora” Reported in (2010) 3 SCC 690 , it was held that compound interest can be awarded only if there is a specific contract or authority under statute for compounding of interest and that there is no general discretion vested in courts or tribunals to award compound interest. It was further held in that judgement that in absence of any provision for interest upon interest in the contract, the Arbitral tribunal does not have power to award interest upon interest or compound interest either for pre award period or for the post award period. The learned counsel submits that the aforesaid aspect decided in the case of S.L. Arora has been set at rest by three judges Bench in the case reported in (2014) 2 SCC 189 (M/s Hyder Consulting (UK) Ltd. Vs. Governor, State of Orissa) wherein the verdict of S.L. Arora has been overruled and the majority view is that post award interest can be granted by an Arbitrator on the interest amount awarded. He submits that it has been held in the aforesaid case of Hyder Consulting that in the case of S.L. Arora , it has been wrongly decided
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that a sum directed to be paid by an Arbitral Tribunal and the reference to the Award on the substantive claim does not refer to interest pendente lite awarded on the “sum directed to be paid upon award” and that, in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to Award interest upon interest or compound interest either for the pre-award period or for the post-award period. The learned counsel submits that while deciding the case in the matter of Hyder Consulting , it was also observed that the Arbitral tribunal may award interest on the sum directed to be paid by the Award i.e., a sum inclusive of principal sum adjudged and the interest.
19. The learned counsel submits that in view of the aforesaid facts and circumstances, the learned Arbitral Tribunal has not committed any error of law in awarding compound interest much less any error calling for interference under Section 34 of the Arbitration and Conciliation Act, 1996.
20. The learned counsel has also relied upon a judgement passed by the Hon’ble Supreme Court reported in (2001) 2 SCC 41 (Tata Iron & Steel Co. Ltd. Vs. Union of India and Others) to submit that in the said case, the term ‘reimbursement’ has been considered and it has been held in paragraph 16 thereof, that in common acceptation the word “reimburse” means and implies “to pay back or refund”. It has further been held in the said paragraph that as a matter of fact, it denotes restoration of something paid in excess and that Reimbursement has to mean and imply restoration of an equivalent for something paid or expended. Reimbursement pre-supposes previous payment.
21. The learned counsel also submits that the modality of payment as carved out in the Award sufficiently takes care of the clause 33 of the agreement although no specific reference to Clause 33 of the agreement has been made.
Findings of this Court
22. After hearing the learned counsel for the parties and considering the facts and circumstances of this case, the foundational background of the case as narrated by the appellant, is not in dispute. Admittedly, in the midst of the arbitral proceedings, the parties agreed
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to reconcile the amount to be paid by the appellant to the respondent being wages for ex-servicemen security personnel and submitted a reconciliation statement on the basis of which the amount remaining to be paid was Rs. 13,78,027/- only. The reconciled figures were accepted by both the parties and therefore, there is no discussion in the Award on the merits of the claim except that the parties have reconciled on the amount to be paid by the appellant to the respondent. Initially, the reconciled figure was recorded as Rs. 14,64,903/- but later rectified as Rs. 13,78,027/-.
23. The said discussion regarding reconciliation statement is followed by the operative portion of the award as quoted above. Thus, the award is non speaking and is based on reconciled statement amounting to Rs. 13,78,027/-.
24. Section 31 of the Arbitration and Conciliation Act, 1996 provides that the Arbitral Award shall state the reasons upon which it is based unless -
(b) the award is an arbitral award on agreed terms under Section 30. Section 30 provides for settlement even during the arbitration proceedings.
25. In the present case, both the parties had entered into an exercise for reconciliation of their claim and jointly arrived at a figure of Rs. 13,78,027/- and consequently, there has been no adjudication so far as the quantum of claim is concerned.
26. However, the learned Arbitrator, while passing the Award in connection with the aforesaid reconciled amount payable to exservicemen – security personnel added the following: -
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Compound Interest @10% per year on the amount held up and now being paid, should be paid for the period it is due to the date of payment. The interest is to be disbursed to ExServicemen. Thus, apart from the reconciled figure, the exservicemen were also entitled to Compound Interest @10% per year for the period it is due to the date of payment.
iii. Operative portion of the award –para 4
Payment for Service Charges to the respondent, as admissible. This in respect of appellant (Hd. Quarters) work is 18% of wages paid to Ex-Servicemen.
27. The award for payment of reconciled figure has been ensured to be ultimately paid only and only to the ex-servicemen security personnel under supervision of an executive officer of the appellant and the security agency has been directed to be disbursed the amount in installment. Apparently, such a modality has been made to ensure that the amount is ultimately paid to the ex-servicemen security personnel who were to be paid by the respondent but the liability was to be ultimately borne by the appellant. Further, the learned arbitrator, in terms of the agreement itself, provided for 18% of the reconciled amount by way of remuneration to the respondent. This Court is of the considered view that the learned Arbitrator was within his jurisdiction to pass an award of the reconciled figure payable to ex-servicemen security personnel with a mechanism to ensure that the payment is actually disbursed to them only AND also for payment of remuneration to the respondent as service charges to the extent of 18% of the reconciled amount. Accordingly, there was no occasion for the learned court below to interfere with para 1, 3, 4 and 5 of the operative portion of the award.
Para 2 of the Operative portion of the award.
28. However, para 2 of the Operative portion of the award requires further consideration. Vide para 2, the amount (wages) is to be paid directly to the ex-servicemen with compound interest @10% per year on the amount withheld and now being paid for the period it was due upto the date of payment with a further direction that the interest is also to be passed on/disbursed directly to the ex-servicemen.
29. Admittedly, the Award does not give any reason for awarding interest @ 10% compounding to be passed on to ex-servicemen –
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security personnel and admittedly, there is no contract for award of compound interest @ 10% per year on the amount withheld/payable to the ex-servicemen. Admittedly, at the time of arriving at the reconciliation figure, there was no mentioning of any payable interest much less compound interest @ 10% compounded yearly. Moreover, the compound interest has been awarded for the period it remained due till the date of payment, however, the date on which the amount became due is also not mentioned in the award. Admittedly, no interest has been awarded on the remuneration awarded to the respondent i.e., 18% of the reconciled amount.
30. It is apparent that the parties had agreed to the reconciliation amount to Rs. 13,78,027/- and consequently, the learned Arbitral Tribunal passed a non-speaking award in connection with the quantification of the said amount found payable to the ex-servicemen security guards employed by the claimant/respondent- the service provider and also the consequent 18% service charges payable to the claimant/respondent as per the contract. The learned Arbitrator also fixed the modalities of payment to ex-servicemen security guards by directing that the payment under this head was to made in installments and to be disbursed directly to ex-servicemen security guards under supervision of the appellant - the service recipient.
31. The crux of the dispute between the parties as argued before this Court is in connection with additional amount by way of compound interest @ 10% per year payable to the ex-servicemen security guards from the date it became due till payment to be paid at the time of disbursement of the amount payable to ex-servicemen security guards only. Admittedly, this interest amount is not to be paid to or retained by the respondent.
32. Section 31 (3) of the Arbitration and Conciliation Act, 1996 clearly provides that the arbitral award shall state the reasons upon which it is based, unless — (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30.
33. The specific ground for challenge by the appellant before the learned court below was that the arbitral tribunal had awarded an amount of Rs. 13,78,027/- on the reconciled figure, but the parties did
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not choose for interest on the said amount to be awarded by the arbitral tribunal and it is submitted that the arbitral tribunal had acted beyond his jurisdiction. The appellant had also specifically raised the issue that the arbitral tribunal had illegally and beyond the terms of the contract awarded compound interest @ 10% per year on the awarded amount.
34. So far as the awarded amount to the extent of 18% of the various wages of the ex-servicemen relating to payment of service charges vide paragraph-4 of the award is concerned, there is no dispute and no ground in that connection was raised. Paragraph-4 of the impugned order passed by the learned court below reads as under:
“Section 31 7(a) of the Arbitration and Conciliation Act, 1996 says that unless otherwise agreed by the parties, where and insofar 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 arise and the date on which the award is made. 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.
Perused the award made by sole arbitrator it is clear that award is made according to agreement with reference and this arbitral award is made with confirmative of section 31 (7a) and 7b of Arbitral and conciliation Act, 1996 interest as award is genuine, legal with provision of this Act. This award is not arbitratory, misconducted and against the public policy of India, therefore award passed by sole arbitrator is valid and legal. This misc. petition filed on behalf of petitioner is dismissed. Further respondent is work, as agency, as legal personality as legal persons, he also be made as party.”
35. The learned court below has not taken into consideration the specific plea raised by the appellant objecting to compound interest @ 10% per year and plea that there was no agreement to that effect. This Court finds that on the one hand, the award was totally non-speaking, so far as the award of compound interest @ 10% is concerned and the learned court below has also not considered the legality and validity of award of compound interest @ 10% which certainly covers the period prior to passing of the award also. Admittedly, there is no stipulation for payment of compound interest in the contract between the parties and it is no body’s case that at the time of preparation and submission
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of reconciliation statement for disposal of the case by the learned arbitrator, the parties had agreed on payment of any interest much less payment of compound interest.
36. In the judgment passed by the Hon’ble Supreme Court in the case of State of Haryana vs. S. L. Arora reported in (2010) 3 SCC 690 , the Hon’ble Supreme Court has considered the permissible interest under Section 31 (7) of the Act of 1996 and has held that authority of the arbitral tribunal to award interest under section 31(7)(a) is subject to the contract between the parties and the contract will prevail over the provisions of section 31(7)(a) of the Act. It has been further held that if the contract provides for compounding of interest, or provides for payment of interest upon interest, or provides for interest payable on the principal upto any specified stage/s being treated as part of principal for the purpose of charging of interest during any subsequent period, the arbitral tribunal will have to give effect to it, interest has to be awarded as specified in the contract for pre-award period, and in the absence of any contract, as per discretion of the Arbitral Tribunal. It has been held that Section 31 (7) merely authorizes the arbitral tribunal to award interest in accordance with the contract and in the absence of any prohibition in the contract and in the absence of specific provision relating to interest in the contract, to award simple interest at such rates as it deems fit from the date on which the cause of action arose till the date of payment. Paragraph 34 of the aforesaid judgment is quoted as under: -
37. The Judgment passed by the Hon’ble Supreme Court in the case of S. L. Arora (supra) held that for the post-award period, the interest
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of 18% would be payable only on the principal amount and the total amount of the award would be the amount awarded on the substantive claim excluding the claim relating to interest. Thus, the judgment passed by the Hon’ble Supreme Court in the case of S. L. Arora (supra) dealt with power of the Arbitrator in awarding interest till the date of award and also with the power to give interest post award.
38. So far as pre-award period is concerned, it was clearly held that in absence of any contract to the contrary, the arbitrator had the power to award simple interest at the rates as it deems fit from the date on which the cause of action arose t ill the date of payment. It was held that Section 31 (7) makes no reference to payment of compound interest or payment of interest upon interest. Nor does it require the interest which accrues till the date of the award, to be treated as part of the principal for calculating the post-award interest from the date of award till payment.
39. The aforesaid judgment was considered by the Hon’ble Supreme Court in the case reported in (2013) 2 SCC 719 (Hyder Consulting (UK) Limited vs. Governor, State of Orissa and a point was raised that the judgment passed in the case of S. L. Arora (supra) was per incuriam to the judgment passed in the case of McDermott International INC v. Burn Standard Co. Ltd. and Others and U.P. Coop. Federation Ltd. Vs. Three Circles holding that interest awarded on the principal amount upto the date of award becomes the principal amount and, therefore, award of future interest thereon would not amount to award of interest on interest. Consequently, the matter was to be considered by a Larger Bench.
40. Thus, the issue which was referred to the Larger Bench was primarily with regard to payment of post-award interest and as to whether the post-award interest will include interest only on the principal amount or it will include interest on the principal amount plus interest as awarded by the learned Arbitrator.
41. The said issue has been ultimately decided by the Hon’ble Supreme Court in the case reported in (2015) 2 SCC 189 (Hyder Consulting (UK) Limited vs. Governor, State of Orissa) , wherein, as per the majority view in which both the consenting judges have given their different judgment. The opinion of one of the consenting judge
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has been recorded in paragraph-2, wherein it has been held that it was not possible to agree with the conclusion in S.L. Arora's case that Section 31(7) of the Act does not require that interest, which accrues till the date of the Award, be included in the "sum" from the date of Award for calculating the post-award interest and it was held that such finding of the case of S. L. Arora was not in consonance with the clear language of Section 31(7) of the Act. It was also held in paragraph-13 that the Arbitral Tribunal may direct interest to be paid on such "sum" for the post-award period vide clause (b) of subsection (7) of Section 31 of the Act, at which stage the amount would be the sum arrived at after the merging of interest with the principal; the two components having lost their separate identities .
42. Similar view was expressed by the other concurring judge to hold that amount under Section 31(7)(a) of the Act, whether with interest or without interest, constitutes a "sum" for which the award is made and therefore, for the purposes of an award, there can be no distinction between a "sum" with interest, and a "sum" without interest. Once the interest is "included in the sum" for which the award is made, the original sum and the interest component cannot be segregated and be seen independent of each other. The interest component then loses its character of an "interest" and takes the colour of "sum" for which the award is made.
43. The aforesaid issue regarding post-award interest was again subject-matter of consideration by the Hon’ble Supreme Court in the case reported in (2022) 4 SCC 116 (UHL Power Company Limited vs. State of Himachal Pradesh) and in paragraph 5 of the said judgment the ratio laid down by the Hon’ble Three Judges Bench in the case of M/s Hyder Consulting (UK) Limited (supra) has been crystalized by stating that the aspect h as been set at rest by a threejudge Bench of this Court in Hyder Consulting (UK) Ltd. V. State of Orissa, that has overruled the verdict in S.L. Arora case. The majority view is that post-award interest can be granted by an arbitrator on the interest amount awarded.
44. This Court finds that the judgment passed by the Hon’ble Supreme Court in the case of S. L. Arora (supra) was overruled with respect to the post-award interest by clearly holding that the post-
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award interest will be granted on the entire sum of award and such sum would include the interest, meaning thereby, for calculating postaward interest in terms of Section 31(7) (b), the interest would be calculated on the ‘ principal amount plus interest’ as awarded by the arbitrator.
45. So far as the finding recorded by the Hon’ble Supreme Court in the case of S. L. Arora (supra) dealing with pre-award interest is concerned, the same has not been over-ruled by the subsequent judgments and consequently, this Court is of the considered view that the judgment passed by the Hon’ble Supreme Court in the case of S. L. Arora (supra) holding that the Arbitral Tribunal is entitle to award interest in accordance with the contract and in absence of prohibition in the contract and in absence of specific provision relating to interest in the contract, the arbitral tribunal may award simple interest at such rates as it deems fit from the date on which the cause of action arose till the date of payment.
46. In the present case, the award on the point of interest is totally non-speaking. It does not refer to any contract between the parties enabling the learned arbitrator to award compound interest. It is not the case of either parties that there was any enabling provision to award compound interest in the contract or any such agreement for compound interest was ever arrived during the preparation /submission of reconciliation statement. None of the parties have made any submission before this Court that there was any stipulation between the parties to award compound interest rather it is the specific case of the appellant before this court and was also the specific case of the appellant before the learned court below that there was no contract for payment of interest at all.
47. Thus, this Court finds that the award of compound interest on the reconciled figures is neither backed by any contract nor by any agreement between the parties after entering into contract / during the pendency of the arbitration proceedings nor any reasons have been assigned by the learned Arbitrator before or at the time of giving the award of compound interest while passing a non-speaking award based on reconciled figures.
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48. Further the Hon’ble Supreme Court in the judgment passed in Civil Appeal No. 8990/2017 (Executive Engineer (R and B) and Others vs. Gokul Chandra Kanungo (Dead) through his legal representatives) as referred to the judgment passed in the case of M/s Hyder Consulting (UK) Ltd (supra) and Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation , reported in 2022 SCC Online SC 549 it has been held that the award of interest by the arbitrator also requires application of mind and should be attended by reasons.
49. In view of the judgment passed in Civil Appeal No. 8990/2017 (Executive Engineer (R and B) and Others vs. Gokul Chandra Kanungo (Dead) through his legal representatives) reported in 2022 SCC Online SC 1336 para-10, the award of compound interest @ 10% by the learned Arbitrator cannot be sustained in the eyes of law. Para 10 of the judgment passed in Civil Appeal No. 8990/2017 is quoted as under: -
“10. The provisions of Section 31(7)(a) of the 1996 Act fell for consideration before this Court in many cases including in the cases of Hyder Consulting (UK) Limited (supra) and Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation . A perusal of clause (a) of sub section (7) of Section 31 of the 1996 Act would reveal that, no doubt, a discretion is vested in the arbitral tribunal to include in the sum for which the award is made interest, 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. However, it would reveal that the section itself requires interest to be at such rate as the arbitral tribunal deems reasonable. When a discretion is vested to an arbitral tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable. It could further be seen that the arbitral tribunal has also a discretion to award interest on the whole or any part of the money or for the whole or any part of the period between the date of cause of action and the date on which the award is made. 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
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the period between the date on which the cause of action arose and the date on which the award is made.”
50. In the aforesaid judgment, it has been clearly held that the Arbitral Tribunal has the power to Award interest at such rate as deemed reasonable, but at the same time, a duty is cast upon the Arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable. It has also been held that when the Arbitral Tribunal is empowered with such a discretion, it would be required to apply its mind to the facts of the case and decide as to whether the interest is payable on the 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 Award is made.
51. The perusal of the Award clearly indicates that aforesaid exercise has been done by the learned Arbitral Tribunal while awarding compound interest @ 10% vide clause 2 of the award. Further, the award does not disclose what would be the due date of payment for calculation of interest.
52. Admittedly, the Arbitral Tribunal has passed the Award on the basis of reconciliation statement jointly filed by the parties before the learned Arbitrator. The interest rate @ 10% compounding on the amount held up is ex-facie without any basis and without any reason as to how the tribunal has found that the same would be the reasonable interest. Admittedly, the contract does not contain any stipulation for payment of interest much less compound interest @ 10 % on the amount due and payable to the ex-servicemen. The agreed reconciliation statement which formed the basis of the award also does not contain any stipulation for payment of interest much less compound interest @ 10 % on the amount due and payable to the exservicemen.
53. The learned court below, while rejecting the petition under Section 34 of the aforesaid Act of 1996 has simply referred to Section 31 and power of the learned Arbitrator to award interest. This Court is of the considered view that power of the learned Arbitrator to award interest is certainly available, but at the same time, the learned Arbitrator has to give reasons as to how a particular rate of interest has
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been found to be reasonable for being awarded to the claimant particularly when compound interest was neither a part of the settlement between the parties nor a part of contractual rate of interest. 54. The learned court below has not at all considered the aforesaid aspects of the matter and has simply referred to Section 31 (7) (a) of the Act of 1996 which gives a discretion upon the arbitrator to award interest whenever any sum of money is found payable. The required scrutiny in the light of the provisions of section 34 of the Act of 1996 when seen in the light of the aforesaid judicial pronouncements has not been done and accordingly the impugned order refusing to setaside the award to the extent it relates to award of compound interest @ 10% on the reconciled/settled figure is hereby set-aside.
55. Accordingly, the part of the award directing for payment of compound interest @10% per year suffers from patent illegality and cannot be sustained in the eyes of law. The compound interest awarded is a separate item altogether which can certainly be segregated from rest of the amount and therefore, the Clause 2 of the Award is set-aside.
56. So far as the rest portion of the award is concerned, the same does not call for any interference. It is sufficient to observe that the modality of payment of Rs. 13,78,027/- to the Ex-servicemen Security Personnel has been provided and the award clearly indicates that the same has to be necessarily given only to the ex-servicemen and no part affect can go to the claimant and has also been directed that the same is required to be paid in installment. It is for the Executing Court to ensure that the payment is made in accordance with the award. Since the amount of Rs. 13,78,027/- has been deposited before this Court, the same is directed to be remitted to the executing court.
57. This appeal is disposed of by deleting the paragraph 2 of the award granting compound interest @ 10% per year on the reconciled amount of Rs. 13,78,027/-. However, the remaining amount payable as per the award would carry statutory interest in terms of Section 31(7) (b) of the Act.
58. Interim order, if any, stands vacated.
59. Pending interlocutory application, if any, is closed.
60. Let the lower court records be sent back to the court concerned.
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61. Let a copy of this order be communicated to the learned court below through ‘FAX’.
(Anubha Rawat Choudhary, J.)
Mukul
3 issues framed by the court
Whether an arbitral tribunal can award compound interest without a contractual provision or specific agreement between the parties?
Whether an arbitral award directing payment of compound interest is sustainable when it fails to record reasons for the rate and nature of interest?
Whether the High Court can set aside a portion of an arbitral award granting compound interest based on patent illegality under Section 34 of the Arbitration and Conciliation Act, 1996?
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3 provisions across 1 enactments
Central Mine Planning and Design Institute Limited
Director, Ranchi Security Private Limited
ANUBHA RAWAT CHOUDHARY
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
