Agreement Between The Parties “Birth-Giver”; Arbitrator Can’t Grant Pre-Award Interest When Agreement Provided For No Interest: Delhi High Court

The bench of Justice Chandra Dhari Singh held that since the Agreement between the parties specifically provided that no interest shall be granted on the accrued amount under the contract, the same took away the power of the Arbitrator to deviate and grant his own rate of interest.

Noting that the Arbitral Tribunal is a creature of a contract, the court remarked that since the Agreement between the parties was the “birth-giver”, it should be held at a higher stature when it concerns an issue that has been pre-decided and mutually agreed between the parties.

The bench further ruled that the arbitral award cannot be vitiated merely because the Arbitral Tribunal decided to give issue-wise findings in the award when no such issues were made out by the parties during the arbitral proceedings. The court held that the same was not a procedural illegality or irregularity, and that the Arbitrator has the power to draft the award in the manner that seems suitable to him.

The dispute between the petitioner, Tehri Hydro Development Corporation India Limited, and the respondent/ claimant, M/s C. E. C. Limited, under a Contract Agreement was referred to arbitration and the Arbitral Tribunal passed an award in favour of the claimant.

The petitioner, Tehri Hydro, challenged the award under Section 34 of the A&C Act before the Delhi High Court. The petitioner contended that the pre-award interest of 14% awarded by the Arbitrator to the respondent was barred by Section 31(7)(a), which provides that if there is an agreement between the parties excluding interest, the same shall not be payable.

The petitioner further argued that the arbitral award granted an amount of Rs. 1.3 crores on account of loss of profit to the respondent, however, no such claim was raised by the latter before the Arbitrator. It also pleaded that the Arbitrator gave out issue-wise findings without any issues being addressed by the parties during the course of arbitration proceedings.

Section 31 (7)(a) of the A&C Act provides that, unless otherwise agreed by the parties, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, between the date on which the cause of action arose and the date on which the award is made.

The High Court remarked that the arbitral award cannot be vitiated merely because the Arbitral Tribunal decided to give issue-wise findings in the award when no such issue was made out by the parties during the arbitral proceedings. The court held that the same was not a procedural illegality or irregularity.

The court added that the Arbitral Tribunal has the power to analyse the issue and give his findings accordingly, and that the manner in which such findings are recorded is under the prerogative of the Tribunal. It reiterated that the Arbitrator has the power to draft the award in the manner that seems suitable to him.

The court thus concluded: “Therefore, the learned Arbitrator has acted well within his power in granting an amount of INR 1.3 Crore on account of loss of profit to the respondent when such a claim was not made before the learned Arbitral Tribunal, and giving out issue-wise findings in the Award when such issues were not addressed by the parties during the course of the Arbitral Proceedings.”

The bench further held that not all procedural irregularities are sufficient to set aside an award, and what is relevant is their materiality to the outcome of the proceedings. It added that procedural irregularities that are not perverse on the face of the arbitral award, do not warrant the action of the court to set aside such an award.

While considering the pre-award interest granted by the Tribunal, the court reckoned that as per the relevant clause contained in the contract, the contractor shall not be entitled to interest on any arrears.

Observing that the Arbitral Tribunal is a creature of a contract, the court held: “The powers of an Arbitral Tribunal are those conferred upon it by the parties within the limits allowed by the applicable law, together with any additional powers that may be conferred automatically by the operation of law.”

It further observed that the Supreme Court has held that the Agreement between the parties has primacy over the powers of the Arbitral Tribunal regarding the rate of interest of an arbitral award. Further, as held by the Apex Court in Associate Engineering Company vs Govt. of Andhra Pradesh & Ors, (1991) 4 SCC 93, the Arbitrator cannot simply overlook the provisions in the Contract.

Referring to Section 31 (7)(a) of the A&C Act and the contract executed between the parties, the court concluded that the Arbitral Tribunal had clearly gone beyond the contract and awarded interest.

“A bare reading of Section 31 (7) (a) makes it evident that the Section applies only where there is no previous Agreement as to the rate of interest to be awarded. It is as plain as a pikestaff that the learned Arbitral Tribunal has gone beyond the contract and awarded an interest rate at 14% when it was previously decided vide Clause 1.2.15 of the Contract that the contractor shall not be entitled to interest on any arrears,” the court said.

Referring to a catena of judgments regarding grant of pre-award interest under Section 31(7)(a), the court said the Arbitral Tribunal may not grant a different interest rate when a specific rate of interest has been decided by the parties under an Agreement.

The bench took note that since in the present case, the relevant clauses of the Agreement specifically provided that no interest shall be granted, the same took away the power of the Arbitrator to deviate and grant his own rate of interest.

“Even if the learned Arbitrator is successful in justifying his reasons for deciding such a rate, the Agreement being the birth-giver, should be held at a higher stature when it concerns an issue that has been pre-decided and mutually agreed upon by the parties,” said the court.

Holding that the court has no power to modify the rate of interest under Section 34, the court set aside the award of interest on the ground that the same suffered from patent illegality, while upholding the other claims awarded by the Arbitral Tribunal.

Case Title: Tehri Hydro Development Corporation India Limited vs M/s C. E. C. Limited

Citation: 2023 LiveLaw (Del) 354

Counsel for the Petitioner: Mr. Puneet Taneja, Ms. Prity Sharma, Ms. Laxmi Kumari and Mr. Manmohan Singh Narula, Advocates with Mr. Tarul Sharma from THDCIL

Counsel for the Respondent: Mr. Ratan Kumar Singh, Sr. Advocate with Mr. Rajeev Gurung, Advocates

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