Telangana High Court Clarifies Section 31(7)(a) And (b) Of The Arbitration And Conciliation Act, 1996 Regarding Timeframes, Restrictions, And Discretion

Case title:

THE HON’BLE JUSTICE MOUSHUMI BHATTACHARYA AND THE HON’BLE JUSTICE M.G.PRIYADARSINI

Date of Order:

July 23, 2024

Bench:

Hon’ble Justice Moushumi Bhattacharya

SUBJECT

Deeply embedded in the Arbitration and Conciliation Act, 1996, Section 31(7) deals with interest awardable by an arbitral tribunal and makes a distinction between a pre-award, pendente lite, and post-award interest. That section vests tribunals with discretion to award interest unless the contract expressly forbids an award of such interest. Clauses 16(3) and 64.5 of the General Conditions of Contract may bar or limit the award of such interest. 

IMPORTANT PROVISIONS

• Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996
• Clauses 16(3) and 64.5 of the General Conditions of Contract

OVERVIEW

• This appeal arises out of an order dated 22.04.2016 passed by the Trial Court whereby the application of the appellants under Section 34 of the Arbitration and Conciliation Act, 1996, to set aside an arbitral award dated 14.09.2007, was dismissed.
• The arbitration was in respect of claims made by the respondent contractor against the appellant-South Central Railways, for the construction of a bridge across the Godavari River.
• The principal issue in this appeal is the award of interest.

ISSUES RAISED

• Whether the award of 12% pendente lite interest by Arbitral Tribunal is in conformity with law.
• Whether the claimant/respondent is entitled for post-award interest or not.

ARGUMENTS OF THE APPELLANT

• The appellant contends that Clauses 16(3) and 64.5 of GCC clearly exclude payment of interest upon amounts payable to the contractor. Since arbitration agreement is a part of contract, it excludes award of interest for pre-reference and pendente lite periods.
• The statutory framework under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, grants primacy to party agreement insofar as interest is concerned. The wording "Unless otherwise agreed by the parties" in Section 31(7)(a) are clear and unequivocal, indicating that the arbitral tribunal has no alternative but to award interest against the agreement.
• The tribunal exceeded its jurisdiction by awarding 12% annual pendente lite interest, which violated the contract's provisions.
• The appellant also appeals against the tribunal's reasoning on the ground that its conclusion, that Clauses 16(3) and 64.5 of the GCC do not preclude the arbitrator from awarding interest, is wrongly decided, and it is plainly in contradiction to the contract terms.
• The interpretation would undo the express contractual prohibition of interest, which alone would make the award of pendente lite interest improper by the tribunal.

ARGUMENTS BY RESPONDENT

• It is contended by the respondent that the delay of 28 months in completing the work was on account of the appellants/Railways and has caused loss financially to the respondent, and thus, award of interest was fully justified. 
  o    The decision in K.N. Sthyapalan Vs. State of Kerala, 2007, comes to the rescue of the respondent, urging that the Arbitrator is empowered to compensate a party for any extra costs incurred by it due to failure of the other.
• The appellants' significant delay and cause of expense support interest. However, the respondent has criticized the interpretation of Clauses 16(3) and 64.5 of the GCC as absolute bars to interest awards, particularly in cases of delay caused by the other party.
• Moreover, in view of the fact that both the contract and the award are silent about post-award interest, the respondent places great reliance on Section 31(7)(b) of the Arbitration and Conciliation Act, 1996. This is on the basis of the statutory provision for payment of the post-award interest to the respondent, thus adding great strength to the case for compensatory justice.

COURT ANALYSIS

• In the judgment, the court discussed the ambit of Section 31(7) of the Arbitration and Conciliation Act, 1996 with respect to the award of interest under three heads, namely, pre reference, pendente  lite and post award.  It opined that interest pre-reference would be the one which would be available from the date of cause of action till the commencement of the arbitration proceedings, pendente lite is the one which would be available from the start of the arbitration proceedings, till the date of award, and post award would be interest available from the date of the award, till the payment.
• The court went back to the position that the power of the arbitral tribunal to award pre-reference and pendente lite interest is subject to the absence of express exclusion by the parties or a silent arbitration agreement.
• Section 31(7)(a) makes the tribunal's discretion subject to the parties' agreement, which may well be that interest is payable for different periods-both pre- and post-award-and at a particular rate. Section 31(7)(b) is, however, free-standing and is concerned only with the award. If there is complete silence in the award-about the rate, that is to say-the statutory rate is 2% above the base rate prevailing from the date of the award to payment.
• It observed that the pre-reference and pendente lite interest is controlled by the agreement of the parties, while the post-award interest follows the award. If the award prescribes no rate, then the statutory provision of 2% above the rate of the time applies. Apparently, it is entirely within the control of the Tribunal even to fix the rate of post-award interest. This view is consistent with the judgments of the Supreme Court in Hyder Consulting (UK) Vs. State of Orissa (2015), Union of India Vs. Manraj Enterprises (2022), Delhi Airport Metro Express Vs. Delhi Metro Rail Corporation (2022), and Morgan Securities vs. Videocon Industries Limited (2023).
• The court emphasized the importance of party agreement in determining pendente lite interest. Clauses 16(3) and 64.5 of the General Conditions of Contract (GCC) prohibit payment of interest for pre-reference and pendente lite periods. Therefore, a 12% pendente lite interest violates these clauses.
• The court, as for post-award interest, held the position that the GCC is silent, and nor does the award contains any clause relating thereto. Therefore under Section 31(7)(b) allows post-award interest at the rate of 2%, more than the running rate; as for explanation in the case of Morgan Securities vs. Videocon Industries Limited, 2023.
• On the question of price escalation, the arbitral tribunal was given wide discretion which was utilised correctly and the award of price escalation cases as well as overhead charges was upheld relying upon K.N. Sathyapalan vs. State of Kerala (2007) to point out the dictum that compensation has to be for the detriment caused due to the action of the other party.

CONCLUSION

• The award of pendente lite interest at 12% from 30.06.2005 till 14.09.2007 is hereby set aside as being contrary to the General Conditions of Contract, 1998 and terms of the agreement and/or as being in violation of Section 31(7)(a) of the Act
• The respondent is held to be entitled to post-award interest from 14.09.2007 till the date of payment at 2% above the prevalent rate on 14.09.2007, as under Section 31(7)(b)
• The court, thus confirmed the award in respect of escalation of price and overhead charges and indicated that the court does not see that there was any infirmity for it to interfere with the discretion exercised by the Arbitral Tribunal on both these aspects.
• Alter the impugned order of the Trial Court dated 22.04.2016 only to that extent of awarding interest, other aspects to remain the same.