Supreme Court of India: Power of the Court to Reduce the Rate of Interest Awarded by the Arbitrator While Deciding an Application to Set Aside the Award

Supreme-Court-of-India-1_85138_730x419

In case of Shahi and Associates v State of U.P. and Ors. 2019 (10) SCALE 609, the Supreme Court of India was called upon to adjudicate two issues firstly whether, in the facts of the case, the parties were governed by the Arbitration Act, 1940 (the ‘Old Act’) if the agreement between the parties was entered into prior to the date when the Arbitration & Conciliation Act, 1996 (the ‘New Act’) came into force even though the parties have admittedly proceeded under the New Act. Secondly, whether the interest awarded by the arbitrator in accordance with the statutory interest rate provided under Section 31(7)(b) of the New Act i.e. 18% per annum (before it is amended by the Arbitration and Conciliation (Amendment) Act, 2015, w.e.f. 23.10.2015) can be reduced to a lower rate of interest as provided under the State amendment to the Old Act i.e. 6% per annum. Detailed case analysis given below:-

Factual Matrix

The Contractor was engaged by Employer in a construction project. Certain disputes arose between the parties and the Contractor invoked arbitration. Albeit the construction agreement between the parties was entered into in 1993, the arbitration proceedings were commenced under the Arbitration & Conciliation Act, 1996 (the ‘New Act’) which came into force on 22.08.1996. An award was rendered in favor of the Contractor along with interest in accordance with Section 31(7)(b) i.e. 18% per annum from the date of award till the date of actual payment. The award was assailed by the Employer before the District Judge under Section 34 of the Act who, while upholding the principle award, reduced the rate of interest on the sum awarded from 18% to 6% per annum in view of para 7-A of Section 24 of the State Amendment to the Arbitration Act, 1940 (the ‘Old Act’)(which was in effect prior to the New Act). The decision of the District Court was further upheld by the High Court. Therefore, the aggrieved Contractor assailed the decision of the High Court in the present proceedings.

Contractor’s Contentions

The Contractor contended as under:-

  • That the arbitration proceedings commenced on 27.10.1999 under the New Act and the provisions of the Old Act as amended by the State amendment will have no application to the proceedings between the parties which were introduced by para 7-A to the First Schedule of the Old Act;
  • That the Old Act stands repealed and therefore para 7-A has become obsolete.

Judgement

The Supreme Court observed as under

  • That the New Act came into force with effect from 22.08.1996. Section 85 of the New Act expressly repeals the provisions of the Old Act. Thus, the New Act will be applicable to the arbitration proceedings in the instance case which were commenced on or after the New Act came into force;
  • Para 7-A of Section 24 of the State Amendment Act was an amendment to the First Schedule of the Old Act. Thus, the provision of the Old Act including the State amendment will have no application to the proceedings commenced after the New Act came into force.
  • Section 31(7)(b) of the New Act mandates that in the event the Arbitrator does not give any specific directions as regards the rate of interest on the amount awarded, such amount ‘shall’ carry interest @18% per annum from the date of award till the date of payment.

The Court concluded that though in the instance case, the construction agreement was signed earlier to the date of coming into force of the New Act, the arbitration proceedings admittedly commenced in 1999 and were conducted in accordance with the New Act. Therefore, the High Court and the District Court were not justified in reducing the rate of interest following the State Amendment to the Old Act and thus, the interest awarded by the Arbitrator in accordance with Section 31(7)(b) of the New Act was restored by the Supreme Court.

Analysis

Reducing the rate of interest awarded by the arbitrator is in a way power of the Court to vary the award. The power to vary the award is explicitly provided under the English and Singaporean regime however the power to vary the award does not find mention in explicit terms under the New Act.

But the question arises that whether the Court is empowered to vary the award (i.e. rate of interest in the present case) while hearing an application to set aside an award under Section 34 of the New Act?

Position in Singapore

Section 48 of the Arbitration Act, 2001 (‘AA’) of Singapore which empowers the court to set aside an award is almost identically worded as Section 34 of the New Act. It is pertinent to note that Section 48 of AA speaks only about setting aside of an award. But Section 49 of AA which provides for a remedy of appeal, empowers the court, under sub-section (8) even to vary the award. Therefore, one may tend to think that in an original application to set aside an award under Section 48, the court cannot vary the award, though in an appeal under Section 49, it can vary the award. But this conclusion available on a plain reading of the provisions, is dispelled by Section 47 which provides that a Court shall not have jurisdiction to confirm, vary, set aside or remit an award on an arbitration agreement except where so provided in this Act. As if reiterate such a conclusion, Section 51, which is made applicable to both sections 48 and 49, speaks of varying an award, under sub-section (2) of Section 51. Therefore, Sections 47 and 51(2) of the Singapore Act, make it amply clear that the power to set aside includes a power to vary the award. [Ms.X vs Y Ltd. & Another, 2014 Madras High Court]

Position in England & Wales

The English Arbitration Act, 1996 categorises the powers of the Court in relation to an award, into three types. They are

  • challenge to an award on the question of substantive jurisdiction, under Section 67,
  • challenge to an award on the ground of serious irregularity affecting either the Tribunal or its proceedings or the award, under Section 68, and
  • appeal to the Court on a question of law arising out of an award, under Section 69.

Interestingly, the jurisdiction exercisable by the Court under these three categories of challenges, appear to vary at least to certain extent. Whenever a challenge to an award is made under Section 67 of the English Act, on the question of substantive jurisdiction, the Court can, under Sub-section (3), either confirm the award or vary the award or set aside the award in whole or in part. But, when a challenge is made under Section 68 on the ground of serious irregularity, the Court may either remit the award for re-consideration or set aside the award in whole or in part, or declare the award to be of no effect in whole or in part. In contrast, the Court may, in an appeal on a point of law arising under Section 69, either confirm the award or vary the award or remit the award back to the Tribunal for a fresh consideration or set aside the award in whole or in part.

In other words, the power of the Court to set aside the award in whole or in part, is available in all the three Sections, namely 67, 68 and 69. But, the power to vary the award is available only in Sections 67 and 69 when the challenge is on the question of substantive jurisdiction or when it is an appeal on a question of law. In a case falling under Section 68 of the English Arbitration Act, 1996, challenging the award on the ground of serious irregularity, there is no power to vary the award.

Conclusion

Under the Indian regime, the expression ‘recourse to a Court against an arbitral award’ appearing in Section 34(1) cannot be construed to mean only a right to seek the setting aside of an award. Recourse against an arbitral award could be either for setting aside or for modifying or for enhancing or for varying or for revising an award. The expression ‘application for setting aside such an award’ appearing in Section 34(2) and (3) merely prescribes the form, in which, a person can seek recourse against an arbitral award. The form, in which an application has to be made, cannot curtail the substantial right conferred by the statute. In other words, the right to have recourse to a Court, is a substantial right and that right is not liable to be curtailed, by the form in which the right has to be enforced or exercised. Hence, the power under Section 34(1) includes, within its ambit, the power to modify, vary or revise under which the Indian Courts have consistently reduced the rate of interest awarded by the Arbitrator.

The same conclusion can be arrived at, through a different route also. It is well settled that in a petition under Section 34, a Court does not exercise the powers of an Appellate Court. The jurisdiction vested under Section 34 is not an appellate jurisdiction. It is almost like a revisional jurisdiction or may be little less in its scope than a revisional jurisdiction under Section 115 of the Code of Civil Procedure. But, a revisional jurisdiction would normally include within its purview, a power to correct patent illegalities. The fact that the jurisdiction of the court under section 34 is revisional, is quite obvious. Section 34(2) comprises of two parts. The first is in clause (a), where the burden is on the party assailing the award to prove certain things. The second is in clause (b) of sub-section (1), where the court tests the award with reference to certain parameters. There is no necessity for splitting sub-section (2) of section 34 into 2 clauses, one imposing an obligation upon the party to establish certain facts and another imposing a duty upon the court to satisfy itself about a different set of factors, unless the jurisdiction sought to be conferred is revisional in nature. Therefore, the Court has power under Section 34 to modify or vary the award passed by the arbitral Tribunal. [Ms.X vs Y Ltd. & Another, 2014 Madras High Court]

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s