1. Construction contract dispute — Claim for payment and interest — Arbitration under the Arbitration and Conciliation Act, 1996 — Challenge to interest awarded in arbitral award. (Para 1 , 2 , 3 , 4 , 5 )
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2022 Supreme(SC) 1006
SUPREME COURT OF INDIA
B.R. GAVAI, B.V. NAGARATHNA, JJ.
Executive Engineer (R And B) And Others - Appellants
Versus
Gokul Chandra Kanungo (Dead) Thr. His Lrs. – Respondents
Civil Appeal No. 8990 of 2017
Decided on : 30-09-2022
Important Points
IMPORTANT POINT
Award of interest by Arbitrator – When discretion is vested to Arbitral Tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon Arbitral Tribunal to give reasons as to how it deems the rate of interest to be reasonable.
Award of interest by Arbitrator – When discretion is vested to Arbitral Tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon Arbitral Tribunal to give reasons as to how it deems the rate of interest to be reasonable.
Subject
Arbitration Law - Interest on Awards
Act Referred
Headnote
Arbitration and Conciliation Act, 1996 – Section 31(7)(a) – Award of interest by Arbitrator – When discretion is vested to Arbitral Tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon Arbitral Tribunal to give reasons as to how it deems the rate of interest to be reasonable – Arbitral Tribunal has also discretion to award interest on whole or any part of money – Arbitrator, without assigning any reasons, has awarded interest at the rate of 18% per annum for period during which proceedings were pending and also at same rate after award was made till actual payment – Court needs to exercise its powers under Article 142 of Constitution of India to reduce rate of interest – Rate of interest reduced to 9%. (Paras 10, 11, 20 and 21)
Facts of the case:
Appellants have challenged the judgment dated 18th April 2012 passed by Single Judge of High Court of Orissa in Arbitration Appeal No. 25 of 2007, thereby dismissing appeal filed by appellants.
Findings of Court:
Executing Court would quantify the amount in accordance with the directions within a period of one month thereafter. The appellants shall make the payment of the amount as determined by the Executing Court within a period of one month thereafter.
Result : Appeal Partly allowed.
Legal Category Hierarchy
Advocates appeared:
For the Appellant(s) : Mr. Sibo Sankar Mishra, AOR
For the Respondent(s): Mr. Ashok Panigrahi, AOR Mr. Nabab Singh, Adv. Ms. Nikita Jaydevan, Adv. Ms. Geetanjali Das Krishnan, Adv.
For the Appellant(s) : Mr. Sibo Sankar Mishra, AOR
For the Respondent(s): Mr. Ashok Panigrahi, AOR Mr. Nabab Singh, Adv. Ms. Nikita Jaydevan, Adv. Ms. Geetanjali Das Krishnan, Adv.
Table of Contents
2. Appellants challenge the exorbitant interest rate and its award during periods of claimant's inaction — Respondent contends the arbitrator's discretion under Section 31(7) is non-interferable. (Para 7 , 8 )
3. Arbitrator failed to assign reasons for the interest rate and period — Claimant's prolonged silence and lapses disentitle them to interest for those specific intervals. (Para 10 , 11 , 12 , 13 , 14 )
4. Discretion to award reasonable interest under Section 31(7)(a) of the 1996 Act requires the arbitral tribunal to provide reasons for the rate and period selected. (Para 10 )
5. Appeal partly allowed — Interest denied for periods of claimant's inaction — Interest rate for remaining periods reduced to 9% per annum. (Para 20 , 21 )
6. Does an arbitral tribunal have a duty to provide reasons when awarding interest under Section 31(7)(a) of the 1996 Act?
Yes. While the tribunal has discretion to award interest at a rate it deems reasonable, this discretion imposes a duty to provide reasons explaining how the rate and the period for which interest is awarded were determined to be reasonable. (Para 10 )
7. Can a claimant be awarded interest for periods during which they failed to take steps to raise their claim?
No. A party cannot derive benefits from its own lapses. Prolonged silence or failure to take necessary steps to commence proceedings disentitles the claimant to interest for those specific periods of inaction. (Para 12 , 13 , 14 )
8. Under what circumstances can the Supreme Court reduce the rate of interest awarded by an arbitrator?
The Court may exercise its powers under Article 142 of the Constitution to reduce interest rates to do complete justice, especially when the awarded rate is exorbitant or the claimant's conduct contributed to the delay. (Para 15 , 16 , 17 , 18 , 19 , 20 )
JUDGMENT :
B.R. GAVAI, J.
1. The appellants have challenged the judgment dated 18th April 2012 passed by the learned Single Judge of the High Court of Orissa in Arbitration Appeal No. 25 of 2007, thereby dismissing the appeal filed by the appellants.
2. The facts in brief giving rise to the present appeal are as under:
The respondent was awarded the contract for construction of 3 kilometers missing link on NH-6 from Kanjipani to Kuntala on 16th December 1971. The work was to be completed within one year that is before 15th December 1972. The contract amount was Rs.4,59,330/. However, the work could not be completed by the stipulated date and it was completed only on 30th August 1977, by which date, the respondent was already paid an amount of Rs.3,36,465/.
3. The respondent, on 25th July 1989, issued a notice to the appellant regarding his claim. The said notice was replied to by the appellant on 10th August 1989 stating therein that, as against the claim of Rs.3,34,744/, the respondent had been paid an amount of Rs.3,36,465/. The respondent thereafter filed a suit being O.S. No. 206 of 1989 before the Court of Civil Judge (Senior Division), Bhubaneswar (hereinafter referred to as the “trial court”) under Section 20 of the Arbitration Act, 1940 (for short, “the 1940 Act”) seeking reference of the dispute to arbitration. By order of the trial court dated 14th February 1990, the suit was decreed in favour of the respondent and he was directed to file the original F-2 agreement in the court for referring the dispute to arbitration. However, the respondent did not file the original F-2 agreement as directed. In the meantime, the 1940 Act was repealed and the Arbitration and Conciliation Act, 1996 (for short, “the 1996 Act”) came into force.
4. The respondent thereafter filed an application in the disposed of suit before the trial court, praying for appointment of an arbitrator under the provisions of the 1996 Act. The same was rejected by the trial court vide order dated 4th February 2000 for lack of jurisdiction. The respondent thereafter moved an application being MJC No. 36 of 2000 under Section 11 of the 1996 Act before the High Court for appointment of an arbitrator. The learned Single Judge of the High Court, vide order dated 15th October 2001, allowed the said application and appointed Shri S.K. Mohanty, former Judge of the same High Court as the Arbitrator.
5. On 15th March 2002, the respondent filed his claim of Rs.1,45,28,198/- under 15 heads of claim and demanded 19.5% interest 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/in respect of head Nos. 1 to 14. The learned Arbitrator also awarded interest pendente 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. Being aggrieved thereby, the appellants filed a petition being Arbitration Petition No. 153 of 2004 before the Court of District Judge, Cuttack under Section 34 of the 1996 Act for setting aside the award. The same was rejected by an order dated 25th July 2007. Being aggrieved thereby, the appellants filed an appeal under Section 37 of the 1996 Act before the High Court. The same was also dismissed vide the impugned judgment. Being aggrieved thereby, the present appeal.
6. We have heard Shri Sibo Sankar Mishra, learned counsel appearing on behalf of the appellants and Shri Ashok Panigrahi, learned counsel appearing on behalf of the respondents.
7. Shri Mishra submitted that the learned Arbitrator has grossly erred in awarding interest for the period from 1977 to 1989 inasmuch as the respondent was in deep slumber for a period of twelve years and did not take any step for raising his claim. It is further submitted that the learned Arbitrator has also erred in awardin
