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Award Of Costs By Arbitrator, Not Containing Quantification And Reasons, Is Arbitrary: Delhi High Court

Parina Katyal
18 Jan 2023 2:30 PM GMT
Award Of Costs By Arbitrator, Not Containing Quantification And Reasons, Is Arbitrary: Delhi High Court
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The Delhi High Court has ruled that the mandate contained in Section 31(3) of the Arbitration and Conciliation Act, 1996 (A&C Act), as per which an arbitral award shall state the reasons on which it is based, must pervade every aspect of the award, including the award of costs. “Awarding costs by a stroke of the pen, without stating reasons therefor, would fly in the face...

The Delhi High Court has ruled that the mandate contained in Section 31(3) of the Arbitration and Conciliation Act, 1996 (A&C Act), as per which an arbitral award shall state the reasons on which it is based, must pervade every aspect of the award, including the award of costs.

Awarding costs by a stroke of the pen, without stating reasons therefor, would fly in the face of section 31(3), apart from being opposed to well accepted canons of fairness and justice”, the bench of Justice Anup Jairam Bhambhani remarked. The Court thus set aside the award of costs made against the award debtor, holding that the same was arbitrary since it was unreasoned and did not contain any quantification.

The disputes between the petitioner, Union of India (Northern Railways), anjustd the respondent, Alcon Builders and Engineer Pvt Ltd, under a works-contract was referred to arbitration and the Sole Arbitrator passed an award in favour of the respondent. The petitioner challenged the award of pendente-lite interest and costs of proceedings imposed on the petitioner, by filing a petition under Section 34 of the A&C Act before the Delhi High Court.

The petitioner, Union of India, submitted before the High Court that the award was passed before the Arbitration and Conciliation (Amendment) Act, 2015 came into force. It argued that by awarding pendente-lite interest on the principal sum, the Arbitrator acted in breach of the pre-amended provisions of Section 28(3) of the A&C Act.

The Union of India argued that as per the pre-amendment provisions of Sections 28(3), the arbitral tribunal shall decide the dispute in accordance with the terms of the contract. The petitioner further averred that clause 16(2) of the General Conditions of Contract (GCCs), 1989, which governed the contractual relation between the parties, expressly provides that no interest will be payable on the amounts payable to the Contractor (respondent) under the contract.

It further submitted that the costs of proceedings awarded against the petitioner, is contrary to the provisions of Section 31(8) of the A&C Act, as it stood prior to its amendment by the 2015 Amendment Act.

Before the High Court, the parties raised a preliminary query as to whether, in exercise of its jurisdiction under Section 34, the Court can partly set-aside an arbitral award.

The High Court observed that, typically, an arbitral award includes decisions on multiple claims and counter-claims raised by the parties. Thus, the award commonly comprises a bouquet of decisions of the arbitrator on separate claims and counter-claims, the Court said.

The bench ruled that a court exercising power under Section 34 cannot “modify” an arbitral award, while holding that “modification” means to substitute the court’s own decision for the decision made by the arbitrator on any given claim or counter-claim. The arbitrator’s decision on each claim and counter-claim, taken individually, is final, the Court held.

However, the Court held that when the arbitrator’s decisions on multiple claims and counterclaims are severable and not inter-dependent, the court is empowered under Section 34 to set-aside or uphold the arbitrator’s decisions on individual and severable claims/counter-claims, without having to set-aside the entire arbitral award. The same would not amount to “modification” of the arbitral award, the Court said.

Referring to the facts of the case, the Court observed that clause 16(2) of the GCCs of 1989, which governed the contractual relationship between the parties, specifically provides that no interest is payable to the Contractor/ respondent, not only upon the earnest money or the security deposit but also on “amounts payable to the Contractor under the contract”.

“In fact, the learned Arbitrator has acknowledged the applicability of this clause in his own award, but has yet proceeded, to award interest pendente-lite for the period from July 2001 to July 2007, which was impermissible under clause 16(2)”, the bench said.

The Court added: “The learned Arbitrator himself observes that he had no jurisdiction to “...ignore any contractual provision and award amounts dehors the contract” and that the “... claim of interest is not admissible in view of said contractual provision”; but then goes-on to award interest for an even longer period though at a lesser rate, against the terms of the contract. This, the learned Arbitrator could not have done.”

The bench further observed that the Arbitrator awarded Rs. 4 lacs as costs of proceedings, despite the fact that the respondent, Alcon Builders and Engineer, had claimed only Rs.1 lac towards costs. Further, the Arbitrator offered no break-up, quantification, reason or rationale for award of costs against the petitioner, the Court took note.

The Court reckoned that even as per the pre-amendment provisions of Section 31(8), the cost of proceedings awarded by the Tribunal must be “reasonable costs”.

It concluded that, “Absent any heads under which costs have been quantified or awarded, and absent any reasoning therefor, the award of costs of Rs.4 lacs must be held to be arbitrary. It may be observed here that the mandate contained in section 31(3), that an arbitral award shall state the reasons on which it is based, must pervade all and every aspect of the award, including award of costs. Awarding costs by a stroke of the pen, without stating reasons therefor, would fly in the face of section 31(3), apart from being opposed to well accepted canons of fairness and justice.”

Holding that the award of costs was arbitrary and untenable in law, since it was unreasoned and did not contain any quantification, the Court allowed the petition and set-aside the award of pendente-lite interest and costs.

Case Title: Union of India & Anr. versus Alcon Builders and Engineer Pvt. Ltd

Citation: 2023 LiveLaw (Del) 60

Counsel for the Petitioner: Mr. Jitendra Kumar Singh, Advocate with Ms. Anjali Kumari & Mr. Rudresh Tripathi, Advocates

Counsel for the Respondent: Mr. G.S. Gangwar, Advocate

Click Here To Read/Download the Order

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