Arbitrator can award pre-reference & pendente lite interesteven when agreement is silent on award of interest.

Legal Brief: Arbitrator can award pre-reference & pendente lite interest even when agreement is silent on award of interest.

Case: Pam Developments Private Limited v. State of West Bengal & Anr

Court: Hon’ble Supreme Court of India

Date of Judgment: 23.08.2024

By: Adv. Saksham Mathur

Facts

  • That the respondent issued a tender notice on 09.2010 for a project which was supposed to be complete within the 18 months from the date of signing contract. The respondent accepted the offer of appellant and both the parties entered in a contract of road widening and strengthening project. The project was ultimately completed on November 9, 2012, after a five-month delay.

 

  • The Appellant raised a bill for 77,85,290 and seven other claims for additional costs due to alleged delays by the Respondent:

 

Claim no. 1 related to loss of business, with respect to which Rs. 3,87,530 was awarded,

claim no. 2 related to uneconomic utilization of plant and machinery, with respect to which Rs. 61,22,000 was awarded and

claim no. 3 related to labour charges for uneconomical stoppage of work, with respect to which Rs. 5,80,500 was awarded,

claim no. 4 related to interest on delayed payment of running account bills and escalation bill for which the Arbitrator awarded Rs. 54,84,024,

claim no. 5 related to escalation with respect to which Rs. 11,51,198 was granted; and

claim 6 related to interest on the sum awarded, with respect to which interest @12% p.a. was awarded from 12.04.2016 to 30.01.2018 and @ 9.25% p.a.post award interest till date of actual payment. Finally

claim no. 7 pertained to costs and the Arbitrator awarded 4 lakhs to the appellant, being the successful party”

 

  • The arbitration proceeding initiated between the parties and the arbitrator ordered in favour of the Appellant on 01.2018, awarding

a total of Rs. 1,37,25,252 with interest. The award encompassed claims for loss of business, uneconomic utilization of plant and machinery, labour charges for uneconomic stoppage of work, interest on delayed payments, escalation, and pre- and post-award interest.

 

  • The respondent aggrieved by the order dated 01.2018 passed by the learned arbitrator and filed an application for setting aside the order under Section 34 of the Arbitration and Conciliation Act, 1996. The District Judge partially upheld the award, setting aside Claims 1 (loss of business) as it is beyond the arbitrator’s jurisdiction and Claim 2 (uneconomic utilization of plant and machinery) on jurisdictional and procedural grounds.

 

 

  • Aggrieved by the order of learned district Judge both the parties appealed the District Judge’s decision to the Calcutta High Court. The High Court upheld the District Judge’s decision on Claim 1(loss of business). It reversed the District Judge’s decision on Claim 2 (uneconomic utilization of plant and machinery), restoring the Arbitrator’s award. The High Court also set aside Claims 3 (labour charges) and 4 (interest on delayed payments) and modified Claim 6 (interest) by removing pre-reference interest.

 

  • The Appellant challenged the High Court’s order before the Hon’ble Supreme Court of India.

Issues

 

  1. Whether the Appellant was contractually entitled to claim losses for idle labour and machinery despite a clause prohibiting such claims?
  2. Whether the Appellant was entitled to interest on delayed payments of running account bills despite the Respondent’s argument that such interest constituted a claim on unpaid advances, which was not permissible under the contract?
  3. Whether the High Court erred in modifying the Arbitral Award regarding pre-reference interest despite the contract not prohibiting it?

Legal Analysis

 

  • The Supreme Court upheld the High Court’s decision to set aside Claim 3(labour charges). The Court found that the contract unambiguously prohibited claims for idle labour and The Court emphasized the primacy of contractual interpretation and held that neither the Arbitrator nor the District Court adequately considered the clear contractual provisions.
  • The Supreme Court sided with the Appellant, setting aside the High Court’s judgment, and restoring the Arbitral The Court found that the High Court overstepped its bounds by substituting its own reasoning for the Arbitrator’s without demonstrating perversity or violation of public policy in the Arbitrator’s decision. The Court emphasized the limited scope of interference under Section 37 of the Act.
  • The Supreme Court again ruled in favour of the Appellant, setting aside the High Court’s modification and upholding the Arbitrator’s award of pre-reference Citing established precedent and Section 31(7) of the Act, the Court underscored the Arbitrator’s power to grant pre- reference interest, especially when the contract does not explicitly prohibit it, as in this case.

Conclusion

 

The Supreme Court’s judgment clarifies the scope of judicial intervention in arbitral awards under the Act. While Courts may overturn awards based on contractual interpretation or breaches of public policy, they should refrain from substituting their judgments for those of the arbitrator without compelling grounds. The judgment also highlights the importance of explicit contractual language in circumscribing the arbitrator’s discretion, particularly concerning claims for additional costs and interest.

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