IMPORTANT POINT
Setting aside arbitral award – Illegality must go to root of matter and cannot be of a trivial nature.

JUDGMENT :

S. RAVINDRA BHAT, J.

1. Aggrieved by the impugned judgment¹ [Judgment dated 17.07.2019 passed by Allahabad High Court in First Appeal from Order No. 1227/2003] of the Allahabad High Court, the appellant has approached this court with a simple question of law, as to whether the High Court erred in modifying the arbitral award to the extent of reducing the interest, from compound interest of 18% to 9% simple interest per annum.

Facts

2. The dispute between the appellant and Union of India (hereafter ‘respondent-state’) arose from a contract entered into pursuant to being awarded the tender. In the course of work, certain disputes arose. On 22.04.1997, the respondent-state referred the dispute to arbitration, and the proceedings closed on 24.10.1998. The tribunal published its award on 21.01.1999 and directing the first four respondents to pay 18% pendente lite and future compound interest on the award in respect of Claim Nos. 1-8.

3. The respondent-state challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter ‘the Act’). The district court² [Judgment dated 06.03.2003 passed by the District Judge, Kanpur Nagar in Misc. Case No. 64/70 of 1999], dismissed the challenge on the ground that it could not sit in appeal over the award and since the respondent-state had failed to file any proof of the grounds alleged. Aggrieved, the respondent-state, preferred an appeal before the High Court in 2003. In the interim, the respondent-state deposited Rs. 10,00,000 in the District Court, Kanpur on 06.06.2003 against Rs. 1,82,878.11 due at the time.

4. Partly allowing the appeal, the High Court disapproved the reasoning in the award on Claim No. 6; it held that the sum of Rs. 3 lakhs awarded towards compensation for loss caused due to non-issue of tender document and paralysing business could not have been granted. The High Court held that it could not be said that the proceedings (in the present case) were under the Arbitration Act, 1940 and therefore, the rate of interest granted should not be 18%. The High Court referred to this court’s judgments in K. Marappan vs. Superintending Engineer TBPHLC Circle Anantapur, (2019) 5 SCR 152, M/s Raveechee and Co. vs. Union of India, (2018) 5 SCR 138 and Ambica Construction vs. Union of India, (2017) 14 SCC 323 while deciding this question of pendente lite interest; it was held that the bar to award interest on the amounts payable under the contract would not be sufficient to deny the payment of interest pendente lite. The High Court proceeded to reduce the rate of interest from 18% (as ordered by the arbitrator), to 9% per annum. The remaining amount was directed to be deposited by the appellants as expeditiously as possible, with the interest accrued, not later than 12 weeks from the date of the judgment. On other grounds, it was held that there was no scope for interference in the arbitral award.

Contentions of parties

5. The ground pressed by the appellant in the present proceedings, relates to the modification of the rate of interest (relating to award in Claim No. 9) and the scope of this appeal is limited to this question.

6. Mrs. Neeraj Singh, counsel appearing on behalf of the appellant, submitted that their claim was in fact for 24% pendente lite interest, and the arbitrator had already reduced it to the 18% granted. Pointing to pre-amended Section 31(7)(b) of the 1996 Act, it was contended that the High Court erred in reducing the ‘statutory interest rate’; this provision prescribed that in the event the Arbitrator did not give any specific directions as regards rate of interest on amount awarded, such amount ‘shall’ carry interest of 18% per annum. The Arbitrator had properly considered the matter and accordingly granted 18% past pendente lite and future compound interest on 8 claims, which was affirmed by the district court. Counsel also pointed out Clause 70 of the General Conditions of Contract (GCC), which stipulates that the award of the arbitrat