Arbitral Tribunal Cannot Award Interest On Interest: Delhi High Court

The Single Bench of Justice Bakhru has held that when the arbitrator has awarded interest on a substantive claim, allowing interest on the awarded interest is not permissible under the law.

The Court reiterated that construction of the terms of the contract falls purely within the domain of the arbitrator and the scope of S.34 is very narrow and the court does not sit in appeal over the award. The possibility of having another view is not a ground to set aside the award.

Facts

The parties entered into a contract for the execution of three project works. The agreement between the parties provided that the petitioner shall reimburse the service tax paid by the respondents to the concerned authorities, however, subject to the petitioner submitting proofs of payment. Moreover, the petitioner was to pay airlifting charges to the respondent for transportation of the equipment.

Certain dispute arose between the parties regarding the execution of the projects work and the payment of airlifting charges. Pursuant to the application of the respondent under S.11, the parties were referred to the arbitral tribunal.

The Award

The respondent claimed damages in respect of airlifting charges and service tax and interest on all the claims. The petitioner further claimed pendente lite interest.

The tribunal allowed the claims of the respondent in respect of the airlifting charges and service tax. The tribunal further allowed interest on all claims and also allowed interest on the amount awarded as interest on other claims.

Contention of the parties

The petitioner challenged the award on the following grounds:

• The arbitrator erred in allowing the claims of the respondent with respect to the airlifting charges as the same were conditional upon the respondent producing evidence for the same and in absence of its failure to adduce evidence regarding the cost it incurred for airlifting the equipment, the claims were liable to be rejected.
• The award results in the unjust enrichment of the respondent, therefore, contrary to the fundamental policy of the Indian law.
• The arbitrator has awarded interest on interest and the rate of interest is also excessive.

The respondent refuted the submissions on behalf of the petitioner on the following grounds:

• The cost of airlifting the equipment was included in the total cost of the equipment, therefore, there was no requirement to submit separate bills regarding the airlifting cost.
• However, the respondent conceded that the award of interest is unsustainable and may be readjusted.

Analysis by the Court

The Court held that since the LoAs also provided for airlifting charges, it was reasonable for the tribunal to assume that the respondent is entitled to the cost of airlifting once it has established that the equipment was airlifted and there is no requirement to submit separate billing for airlifting. Since the view taken by the tribunal is a possible one, no ground is made out to interfere with the award.

The Court held that the tribunal erred in allowing the claim of the respondent with respect to further interest on the amount of interest already allowed in relation to the other claims.

The Court further held that awarding of pendente lite interest on the amount of awarded interest, in effect, amounts to awarding interest on interest, which is impermissible. It held that the tribunal is not empowered to grant further interest on the value of already allowed claims.

However, the Court held that an arbitral tribunal would have the power to award future interests on the awarded amounts, which as expressly provided under Section 31(7)(a) of the A&C Act, may include interests on the amounts awarded.

Case Title: Delhi Development Authority v. Watcon Water Specialists Pvt. Ltd. and Anr. O.M.P. (COMM.) 300 of 2020

Citation: 2022 LiveLaw (Del) 347

Date: 19.04.2022

Counsel for the Petitioner: Ms. Kanika Singh

Counsel for the Respondent: Mr. Kiriti Uppal, Sr. Adv. With Mr. Prateek Solanki and Mr. Shaurya Rohit.

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