Court Cannot Modify Arbitral Award By Awarding Interest Under Section 34 Of A&C Act: Delhi High Court
The Delhi High Court has ruled that though the claimant is entitled to pre-arbitration interest on the amount of counter-guarantee released in its favour, the Court, in view of the limited scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), cannot award interest to the claimant since it would amount to modification of the...
The Delhi High Court has ruled that though the claimant is entitled to pre-arbitration interest on the amount of counter-guarantee released in its favour, the Court, in view of the limited scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), cannot award interest to the claimant since it would amount to modification of the award.
The Division Bench of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad observed that though the Supreme Court, in certain cases, has awarded interest to the relevant parties by modifying the arbitral awards, however, the same was undertaken by the Apex Court in exercise of its discretionary powers under Article 142 of the Constitution of India.
Helm Dungemittel GMBH entered into a contract to supply certain goods to the respondent- State Trading Corporation of India (STC). The Contract required Helm to furnish an irrevocable performance bank guarantee in favour of STC. Accordingly, the appellant Canara Bank issued a performance bank guarantee in favour of STC, which was secured by a back-to-back counter-guarantee issued by the German Bank in favour of Canara Bank. After certain disputes arose between Helm and STC, STC invoked the bank guarantee issued by Canara Bank. Though Canara Bank released the bank guarantee in favour of the STC, the German Bank did not release the amount under the counter-guarantee in favour of Canara Bank. Helm filed a suit in the Delhi High Court, seeking a permanent injunction against Canara Bank, restraining it from invoking the counter-guarantee. The Court directed Helm to deposit the requisite amount of counter guarantee with the Court and thereafter, the said amount was further directed to be transferred to Canara Bank.
Subsequently, the Delhi High Court referred the parties to arbitration. Before the Arbitral Tribunal, Canara Bank raised a claim of interest that had accrued to it on the amount of counter guarantee released to it. However, in the arbitral award, the Arbitral Tribunal did not record any finding regarding the claim of pre-arbitration interest and hence, no pre-arbitration interest was awarded to Canara Bank.
Canara Bank filed an application under Section 34 of the A&C Act before the Delhi High Court to set aside the award. During the pendency of the application under Section 34, Canara Bank filed an application under Section 34(4) and 34(5) of the A&C Act, seeking adjournment of the proceedings before the Court so as to give an opportunity to the Arbitral Tribunal to resume the arbitral proceedings and eliminate the grounds for setting aside the arbitral award.
While ruling that the application filed under Section 34 (4) and 34 (5) of the A&C Act was not maintainable since it was filed at the instance of the party that was itself challenging the arbitral award, the Court rejected the application.
Adjudicating on the Section 34 application, the Court set aside the arbitral award to the extent it awarded nil pre-arbitration interest to Canara Bank. Against this, Canara Bank filed an appeal under Section 37(1)(c) of the A&C Act before the Division Bench of the Delhi High Court.
The appellant/ Canara Bank contended before the Division Bench that since the defect in the award was curable in nature, the arbitral proceedings should have been resumed by the Court to cure the defect and hence, the Single Judge had erred in setting aside the arbitral award.
The Court observed that the Single Judge, by placing reliance on the decision of the Delhi High Court in ONGC Petro Additions Limited versus Tecnimont S.P.A. and Anr. (2019), had held that since the appellant had itself filed the application under Section 34 to set aside the award, hence, it cannot contemporaneously file an application under Section 34(4) to adjourn the proceedings and remand the matter to the arbitrator.
Referring to the provisions of Section 37 of the A&C Act, the Court held that an appeal under Section 37 is not maintainable against an order dismissing an application under 34(4).
Further, the Bench observed that the Apex Court in I-Pay Clearing Services (P) Ltd. versus ICICI Bank Ltd. (2022) had ruled that the Court, in exercise of the discretion conferred to it under Section 34(4) of the A&C Act, can give an opportunity to the arbitrator to resume the arbitral proceedings to give reasons or to fill the gaps in the reasoning in support of a finding, which is already rendered in the award. However, when prima facie it appears that there is a patent illegality in the award itself in view of the fact that there is no finding recorded in the award, the Court cannot remand the matter to the Arbitral Tribunal to resume the arbitral proceedings.
Hence, noting that the arbitral award had not recorded any finding with regard to the issue of interest, the High Court ruled that it qualified as a patent illegality and thus, the Single Judge could not have remitted the proceedings back to the Arbitral Tribunal under Section 34(4) of the A&C Act since there was no finding on the issue of interest.
While holding that though Canara Bank was entitled to interest for the pre-arbitration period, and that the Arbitral Tribunal had committed a manifest error in not coming to any finding on the said issue, the Court held that it cannot, however, modify an award under Section 34 of the A&C Act.
"While the Arbitral Tribunal had also duly taken notice of the contentious issue, unfortunately, the award is entirely silent on this issue. In the considered opinion of this Court, the Ld. Arbitral Tribunal has committed a manifest error in not coming to any finding on this issue. In light of the facts, it is apposite to state that Canara Bank was entitled to interest for the pre-arbitration period as well, as also noted by the Ld. Single Judge. However, the power of the Ld. Single and this Court to interfere with the arbitral award halts at this juncture, considering the limited scope of Sections 34 and 37 of the Arbitration Act."
Hence, considering the limited scope of judicial review under Section 34 of the A&C Act, the Court upheld the order of the Single Judge that it could not have awarded interest to the appellant.
The Court added that though the Supreme Court, in certain cases, has awarded interest to the relevant parties by modifying the arbitral awards, however, the same was undertaken in exercise of its discretionary powers under Article 142 of the Constitution of India.
"Hence, it emerges that the Order dismissing the Application under Section 34(4) is not maintainable under the present Appeal filed under Section 37 of the Arbitration Act. Further, although the Ld. Single Judge has rightly concluded that the Appellant ought to have been granted pre-arbitration interest, neither the Ld. Single Judge nor this Court can modify the award in order to award the Appellant interest.", the Court said.
While granting the appellant the liberty to pursue the legal remedies in accordance with law, including initiating de novo arbitration, the Court dismissed the appeal.
Case Title: Canara Bank versus The State Trading Corporation of India Ltd. & Anr.
Citation: 2022 LiveLaw (Del) 913
Dated: 23.09.2022 (Delhi High Court)
Counsel for the Appellant: Mr. Pradeep Dewan, Sr. Advocate with Ms. Anupam Dhingra, Advocate
Counsel for the Respondent: Mr. Tarkeshwar Nath, Mr. Lalit Mohan, Mr. Shivam Roy and Mr. Harshit Singh, Advocates for respondent No.1/ STC.
Mr. Amit Dhingra and Mr. Rohit Mahajan, Advocates for respondent No.2.