Bombay High Court
THE KOLHAPUR MUNICIPAL CORPORATIONversusFAIRDEAL CONSTRUCTION
- Decided
- Disposal
- DISPOSED OFF
Holding
The court upheld the principal award and costs, set aside the pendente‑lite interest as barred by contract, and modified the post‑award interest to the rate prescribed by the amended statute.
Summary
The Kolhapur Municipal Corporation (Petitioner) challenged an arbitral award of Rs 24,06,50,119.03 awarded to Fairdeal Construction (Respondent) under Section 34 of the Arbitration and Conciliation Act, 1996. The award also granted pendente‑lite interest at 18% from 1997, post‑award interest at 18% and costs of Rs 1,50,00,000. The court examined whether the award was perverse, whether interest could be awarded despite an express contractual bar (Clause 24), and whether the post‑award interest rate complied with the amended statute. It held that the monetary award and costs were valid, set aside the pendente‑lite interest because the contract barred any interest, and modified the post‑award interest to the rate prescribed by the amended Section 31(7)(b) (approximately 9%). The petition was therefore disposed with partial set‑aside and modification of the award.
Issues considered
- The arbitral award for the principal sum can be set aside on the ground of patent illegality or perversity.
- Whether pendente‑lite interest can be awarded despite Clause 24 of the contract prohibiting any interest.
- Whether the post‑award interest rate of 18% complies with Section 31(7)(b) of the Arbitration Act as amended.
- Whether the award of costs of Rs 1,50,00,000 is excessive under Section 31A.
- Whether the award can be partially set aside or modified under Section 34(2A) and the doctrine of severability.
Legislation cited
- Arbitration and Conciliation Act, 1996 — s. 28(3), 31(7)(a), 31(7)(b), 31A, 33, 34(2A)
- Indian Contract Act, 1872 — s. 28
- Interest Act, 1978 — s. 3(3)
Subjects
- Arbitration
- Section 34
- Pendente lite interest
- Post‑award interest
- Contract interpretation
- Patent illegality
- Severability
- Costs award
- Indian Contract Act
- Interest Act
Judgment
01-CARBP-1018-2019 (1).DOC
JYOTI
RAJESH
MANE IN THE HIGH COURT OF JUDICATURE AT BOMBAY
Digitally signed by
JYOTI RAJESH
MANE
ORDINARY ORIGINAL CIVIL JURISDICTION
Date: 2026.10.08
19:52:31 +0530
COMMERCIAL ARBITRATION PETITION NO. 1018 OF 2019
The Kolhapur Municipal Corporation
Off: Bhavsingiji Road, Post Box No.33,
Kolhapur 416 002.
Through The Commissioner. ...Petitioner
Versus
Fairdeal Construction
Through Proprietor,
K.N.Jyothindran,
R/o. Green Heritage, B 1302,
Plot No.79/80, Sector 20, Kharghar,
Navi Mumbai 410 210. ...Respondent
_______
Mr. S.C.Naidu a/w. Mr. Abhishek T. Ingale i/b. Mr. Abhijit Adagule,
for the Petitioner.
Mr. Akhilesh Dubey a/w. Mr. Vagish Mishra a/w. Mr. Amit Dubey, a/w. Mr. Uttam
Dubey a/w. Mr. Rajuram Kuleriya a/w. Ms. Ritika Gupta a/w Mr. Varad Dubey,
a/w. Mr. Alex D’souza, a/w. Mr. Shubham Sharma a/w. Mr. Aadesh Sawant a/w.
Mr.Subham Mishra a/w. Mr.Sahil Upadhyay a/w. Mr. Shivam Mishra and Mr.Aryan
Yadav i/b. Law Counsellor for Respondent.
_______
CORAM: AARTI SATHE, J.
RESERVED ON: 09 SEPTEMBER 2026
PRONOUNCED ON: 08 OCTOBER 2026
JUDGMENT:
1. This petition under Section 34 of the Arbitration and Conciliation Act,
1996, (hereinafter referred to as the Act), challenges the arbitral award dated 1 st
April 2019, (hereinafter referred to as the “impugned arbitral award”) passed by the
learned Sole Arbitrator in the arbitration proceeding filed by the Respondent,
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seeking the claims as made in the statement of claim filed before the learned Sole
Arbitrator.
2. By way of the impugned arbitral award, the learned Sole Arbitrator awarded
a sum of Rs. 24,06,50,119.03/- in favour of the Respondent together with interest
thereon at the rate of 18% per annum from 1 st January 1997 until the date of the
award, and thereafter at the same rate on the sums so awarded until payment or
realization thereof.
3. By way of the impugned arbitral award, the learned Sole Arbitrator also
awarded costs quantified at Rs. 1,50,00,00,000/- in favour of the Respondent,
which costs were directed to be borne and paid by the Petitioner.
4. Briefly, the facts are as follows:-
i. The Petitioner is a civic authority of the city of Kolhapur. At the relevant
time, octroi duty was levied on the import of goods within the limits of the
Petitioner, and the Petitioner was entitled to levy and collect the said octroi duty.
The Respondent was the successful bidder pursuant to a tender floated by the
Petitioner for collection of octroi for the period from November 1995 to October
1996.
ii. On 7th September 1995, the Petitioner issued a tender notice inviting offers
for appointment as an agent for collection of octroi within the jurisdiction of the
Petitioner. The said tender notice inter alia contained the tender conditions as well
as the terms and conditions of the agreement to be executed with the successful
bidder. Pursuant to the said tender notice, the Respondent submitted their bid for
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an amount of Rs. 25,09,00,317/-. On 10th October 1995, the Petitioner accepted
the said bid and issued a letter of acceptance of even date in favour of the
Respondent.
iii. Under the terms and conditions of the tender notice, the Respondent was
required to furnish bank guarantees aggregating to Rs. 5,00,00,000/-. The
agreement was to commence from 1st November 1995. It is the Petitioner's
contention that the Respondent failed to furnish the requisite bank guarantees
within the stipulated period.
iv. On 14th November 1995, an agreement was executed between the Petitioner
and the Respondent (hereinafter referred to as the “Agreement”), whereby the
Respondent was appointed as the octroi agent for collection of octroi on behalf of
the Petitioner, in accordance with Rule 35 of Chapter VIII of the Schedule to the
Bombay Provincial Municipal Corporations Act, 1949 (hereinafter referred to as
the BPMC Act) for a period of one year.
v. It is the Petitioner's contention that, under Clause 1 of the Agreement
executed between the Petitioner and the Respondent, the Respondent was required
to pay a total sum of Rs.25,09,00,317/- for the period of one year towards the
collection of octroi. The said amount was to be paid by the Respondent in 50
weekly instalments, each instalment falling due every week on or before Friday.
vi. It is further the contention of the Petitioner that the Respondent was not
entitled to seek any deferment or postponement of any instalment falling due, nor
was the Respondent entitled to claim any concession in payment on account of any
shortfall in collection or for any other reason. According to the Petitioner,
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compliance with the aforesaid condition constituted a condition precedent under
the Agreement.
vii. On 15th November 1995, the Respondent commenced collection of octroi
in accordance with the terms and conditions of the Agreement. However, it is the
Petitioner's contention that soon thereafter, the Respondent committed several
breaches of the terms and conditions of the Agreement. Despite repeated
intimations, notices, and warnings calling upon the Respondent to comply with the
terms of the Agreement, the Respondent failed and neglected to do so.
viii. Consequently, on 23rd April 1996, the Petitioner was constrained to
terminate the Agreement by issuing a termination notice of even date. On 13 th May
1996, the Respondent, through their Advocate, replied to the aforesaid termination
notice.
ix. The Respondent further challenged the aforesaid termination notice by
filing Writ Petition No. 3335 of 1996 before this Court. The said Writ Petition
came to be dismissed by an order dated 1st July 1996. Being aggrieved by the
aforesaid order dated 1st July 1996, the Respondent approached the Supreme Court
by filing Special Leave Petition (SLP) No. 10717 of 1996. The said SLP came to be
dismissed on 6th September 1996, with liberty given to the Respondent to agitate
their rights in accordance with law.
x. Thereafter, on 6th December 1996, the Respondent addressed a letter of
even date to the Petitioner, demanding appointment of an Arbitrator.
Subsequently, the Respondent filed an application under Section 11 of the Act
before this Court, seeking appointment of an Arbitrator.
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xi. By an order dated 4th September 1998, this Court directed the
Commissioner of the Petitioner to adjudicate upon the disputes between the
parties. The said order further provided that in the event the decision was rendered
against the Respondent, the Petitioner would communicate a list of three officers to
the Respondent, from whom the Respondent would select one officer to be
appointed as the Sole Arbitrator for adjudication of the disputes between the
parties.
xii. On 17th September 1998, the Respondent requested that their letter dated
13th May 1996 be treated as the reference to arbitration, and thereunder raised
claims amounting to Rs.46,66,49,091/-. The Respondent thereafter filed their
submissions on 19th September 1998 and additional submissions on 28 th
September 1998.
xiii. On 5th November 1998, the Commissioner of the Petitioner, by an order of
even date, upheld the termination of the Agreement and further recorded the
statement of the Respondent that they had not collected any amounts from current
account holders during the contractual period.
xiv. On 1st January 1999, pursuant to the directions issued by this Court, the
Respondent confirmed Dr. Nitin Kare, Collector, Sangli, as the Sole Arbitrator in
the present matter (hereinafter referred to as the “erstwhile Sole Arbitrator”).
xv. On 9th March 1999, the Respondent submitted their Statement of Claim
before the erstwhile Sole Arbitrator. The Petitioner, in response thereto, filed their
Written Statement and Counter-Claim dated 29th April 1999.
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xvi. On 29th November 1999, the Petitioner filed an Additional Written
Statement before the erstwhile Sole Arbitrator. On 2 nd February 2005, the
erstwhile Sole Arbitrator directed the Chief Auditor of the Petitioner to settle and
reconcile the accounts between the parties. Pursuant thereto, the Chief Auditor
submitted his report on 7th June 2005.
xvii. Thereafter, on 23rd November 2005, the erstwhile Sole Arbitrator passed an
interim award, holding that a sum of Rs. 2,00,00,000/- was payable by the
Petitioner to the Respondent.
xviii. In the interregnum, the erstwhile Sole Arbitrator resigned from the
arbitration proceedings. Consequently, a fresh application under Section 11 of the
Act was made before this Court, seeking the appointment of a new Arbitrator.
Pursuant thereto, Justice S.N. Variava (Retired) came to be appointed as the
learned Sole Arbitrator to adjudicate upon the disputes between the parties.
xix. On 1st December 2006, the Respondent filed their Statement of Claim
before the learned Sole Arbitrator, seeking an award of Rs. 58,25,86,551/- towards
principal, and a sum of Rs. 1,70,50,47,280/- towards interest.
xx. On 9th January 2007, the Respondent filed an Execution Petition, pursuant
to which the learned District Judge issued a warrant of attachment dated 9 th
January 2007.
xxi. The aforesaid warrant of attachment was challenged by the Petitioner by
filing Civil Revision Application No. 24 of 2007 before this Court. By an order
dated 2nd November 2007, this Court was pleased to set aside the said warrant of
attachment. The Respondent thereafter challenged the order dated 2 nd November
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2007 before the Supreme Court. The said challenge came to be dismissed by the
Supreme Court on 13th May 2008.
xxii. On 16th October 2009, the Respondent filed an application before the
learned Sole Arbitrator seeking amendment of their Statement of Claim, whereby
they sought to enhance/add their claim to Rs. 60,31,28,596/- towards principal
and Rs.6,45,38,699/- towards interest. The said application for amendment came
to be allowed by the learned Sole Arbitrator on the same date.
xxiii. In response to the aforesaid amendment, the Petitioner filed their
Additional Written Statement on 10th October 2010. By the said Additional
Written Statement, the Petitioner adopted the Written Statement previously filed
before the erstwhile Sole Arbitrator, and inter alia contended that no fresh claims
could be introduced, as such claims were barred by limitation. It was further
contended that the arbitral proceedings were required to be confined to the claims
raised by the Respondent in their letter dated 13 th May 1996. Thereafter, on 4th
March 2013, the Respondent filed a Revised Statement of Claim, claiming an
amount of Rs. 4,35,86,95,077/-.
xxiv. The Petitioner filed their Additional Written Statement in response thereto
on 26th June 2013. On 11th July 2013, the learned Sole Arbitrator framed the issues
arising for determination. The said issues were subsequently amended on 11 th July
2014. Thereafter, the parties led evidence before the learned Sole Arbitrator.
xxv. On 13th September 2013, the Respondent was permitted to further amend
their Statement of Claim. Pursuant thereto, the Respondent filed the amended
Statement of Claim on 21st January 2014, thereby raising their claim to
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Rs.4,69,83,96,010/-. Thereafter, in the meeting held on 7 th January 2014, the
learned Sole Arbitrator clarified that in view of the amended Statement of Claim,
the Respondent would not be entitled to rely upon the Statement of Claim filed on
4th March 2013.
xxvi. During the course of the arbitral proceedings, upon considering the rival
claims and with the consent of both parties, the learned Sole Arbitrator, by an order
dated 12th May 2016, appointed V.S. Dastur & Company, Chartered Accountants,
as an expert to examine and verify the various documents produced and relied
upon by the parties. The said expert submitted its report before the learned Sole
Arbitrator on 19th September 2017.
xxvii. On 25th January 2019, both parties advanced their oral submissions before
the learned Sole Arbitrator. The hearing of the matter was thereafter concluded,
and both parties also filed their respective written submissions.
xxviii. Upon consideration of the aforesaid claims and the material placed on
record, the learned Sole Arbitrator passed the impugned arbitral award dated 1 st
April 2019. The said impugned arbitral award is the subject-matter of challenge in
the present petition.
5. Learned counsel Mr. S.C. Naidu, along with Mr. Abhishek T. Ingale,
instructed by Mr. Abhijit Adagule appeared on behalf of the Petitioner, and Mr.
Akhilesh Dubey, along with Mr. Vagish Mishra, Mr. Amit Dubey, Mr. Uttam
Dubey, Mr. Rajuram Kuleriya, Ms. Ritika Gupta, Mr. Varad Dubey, Mr. Alex
D’souza, Mr. Shubham Sharma, Mr. Aadesh Sawant, Mr. Subham Mishra, Mr. Sahil
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Upadhyay, Mr. Shivam Mishra, and Mr. Aryan Yadav, instructed by Law
Counsellor appeared on behalf of the Respondent.
6. Learned counsel on behalf of the Petitioner has submitted that the
jurisdiction of this Court under Section 34 of the Act is limited and circumscribed
by the boundaries which are set up in the Act and the provision itself, and
reappreciation of evidence or substitution of a possible view is impermissible.
However, he has submitted that in the facts of the present case, judicial
intervention is mandated, inasmuch as the impugned arbitral award suffers from
perversity, patent illegality, and fundamental internal inconsistency, which go to
the root of the matter. He has buttressed the above submission by submitting that
in the facts of the present case, the impugned arbitral award suffers exactly from the
above anomalies and is hence liable to be set aside. His primary contention was in
respect of the contradictions in the impugned arbitral award itself, on the ground
that although the learned Sole Arbitrator had held that the Respondent was in
breach of the Agreement and that the termination of the Agreement was valid, yet
the learned Sole Arbitrator had awarded an amount of Rs. 24,06,50,119.03/- to the
Respondent, and such a huge award was something which was inconsistent with
the fact that once the termination of the Agreement was held to be valid, then it
was not possible that such a huge principal amount could have been awarded to the
Respondent. He further submitted that when there was a breach by the
Respondent themselves, how the learned Sole Arbitrator proceeded to award such a
huge amount is a question which calls for interference of this Court under the
provisions of Section 34 of the Act. He further submitted that the impugned
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arbitral award also has granted pendente lite interest at 18% per annum from 1 st
January 1997, which is in contradiction to the explicit terms of the Agreement.
7. He further submitted that a number of monetary claims have been granted
by the learned Sole Arbitrator on pure conjecture rather than evidence, and further
also that the impugned arbitral award disregards the statutory framework under
Section 31A of the Act. The impugned arbitral award directing the Petitioner to
pay the colossal sum as awarded was, according to him, patently illegal and suffered
from irreconcilable internal contradictions. He submitted that the operative relief
which the learned Sole Arbitrator had granted was contrary to and irreconcilable
with his own specified findings under individual heads of claim, and in view
thereof, the same suffers from perversity, jurisdictional errors and patent illegality
going to the very root of the matter.
8. He further submitted that the impugned arbitral award had four distinct
limbs. The first limb was a monetary award in the sum of Rs. 24,06,50,119.03/-.
The second limb was the award of the pendente lite interest on the aforesaid
monetary sum from 1st January 1997 till the date of the impugned arbitral award.
The third limb was the post-award interest at the rate of 18% per annum on the
sum awarded, and the last limb was the award of costs to the sum of Rs.
1,50,00,000/-. His primary thrust was in respect of the interest which had been
granted pendente lite to the Respondent. He submitted that the award of interest
constitutes an independent and compelling ground for setting aside the component
of the impugned arbitral award with respect to pendente lite interest. He submitted
that the granting of the interest itself goes to the root of the matter, as the same was
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prohibited by the very terms of the Agreement which had been entered into
between the parties. He further submitted that the second limb, which is with
respect to interest, is the foundational error in the reasoning of the learned Sole
Arbitrator in the impugned arbitral award. His submission was that it is not that
the Petitioner is seeking that this Court substitute its own view with the view given
by the learned Sole Arbitrator, however, the challenge to the impugned arbitral
award is primarily in respect of the decision-making process itself, and according to
him the conclusion which was reached at by the learned Sole Arbitrator was a
conclusion which no reasonable person could have given, and is without
application of mind.
9. He further submitted that interest is a matter of entitlement and not
discretion. Interest must have its source either in the statute or in the contract. If
parties have contractually excluded interest, an arbitrator, deriving his jurisdiction
from the contract itself cannot award what the parties have expressly agreed shall
not be awarded. He further submitted that the parties to the Agreement in question
had by an express contractual stipulation excluded/prohibited the payment of
interest. In view thereof, he submitted that the learned Sole Arbitrator could not
disregard the bargain between the parties and award interest by invoking general or
equitable discretion. An arbitrator derives his jurisdiction from the agreement, and
in arbitration proceedings, party autonomy is supreme in so far as deciding the
disputes between the parties, including the interest portion. He therefore submitted
that when the contract itself is clear and unambiguous, then a claimant shall not be
entitled to claim interest, and if the contract contains words of sufficient amplitude
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to exclude interest, then notwithstanding any other provision of the contract or
applicable law, this contractual prohibition operates against the grant of interest,
and the arbitrator cannot circumvent such prohibition by describing the award of
interest as discretionary, compensatory, or equitable. He submitted that Clause 24
of the Agreement constituted a complete contractual exclusion of a claim for
interest, and that the said clause was clear and unambiguous and provided that the
Respondent shall not be entitled to claim interest, and it therefore operated as a bar
for grant of interest by the learned Sole Arbitrator. He further submitted that the
entitlement to interest cannot be divorced from the contractual bargain between
the parties, and once that being the case, the learned Sole Arbitrator could not
disregard the stipulation and award interest as though the contractual prohibition
did not exist. He further submitted that Section 31(7)(a) of the Act did not confer
an unfettered or overriding power on the arbitrator to award interest and disregard
the parties’ agreement. The statutory power under Section 31(7)(a) operates
subject to the contract between the parties, and consequently, any contract which
expressly excluded a claimant’s entitlement to interest also implied that the
arbitrator’s discretion was correspondingly excluded. He also submitted that the
language employed by the parties in Clause 24 was comprehensive, and the
exclusion extended to “any kind of interest” in respect of “any of the claims”. He
also submitted that the expression “any other provisions” is of particular
significance, and it cannot be rendered otiose, as it necessarily comprehends every
other statute or legal source by which a claim for interest might otherwise be
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asserted, including the statutory discretion of an arbitrator under Section 31(7)(a)
of the Act.
10. He further submitted that on a reading of Section 31(7)(a) of the Act, it is
clear that the Act expressly uses the term “unless otherwise agreed by the parties”.
This term, according to him, is not merely ornamental, and it constitutes a
statutory recognition of party autonomy and conditioned the very exercise of the
arbitrator’s power to award pre-reference and pendente lite interest. He submitted
that where the parties have consciously and unequivocally agreed that no interest
shall be payable or claimable, the statutory discretion under Section 31(7)(a) is
displaced. The expression “may include” cannot be read in isolation so as to confer
upon the arbitrator an overriding power to award interest contrary to the parties’
agreement. The Act gives the parties the first and decisive option. Once the parties
have exercised the option, the arbitrator cannot make an award that is contrary to
their bargain. He further submitted that one cannot rewrite the provisions of a
contract, and that Section 31(7)(a) of the Act does not authorize the arbitrator to
rewrite the contract.
11. He further submitted that even in respect of the third limb of the impugned
arbitral award, which he sought to challenge, the learned Sole Arbitrator has
erroneously applied the rate of 18% per annum as the post-award interest. He
submitted that though Section 31(7)(b) prescribes a statutory default rate, and
unless the arbitral award directs otherwise, the sum directed to be paid carries
interest from the date of the arbitral award until payment at a rate that is 2% higher
than the current rate of interest prevalent on the date of the arbitral award. He
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submitted that this provision therefore supplies a default rule, while also
recognizing the arbitrator’s authority to direct a different rate in the arbitral award.
He therefore submitted that the payment of the post-award interest at the rate of
18% per annum is accordingly severable and liable to be set aside or modified to
that extent, inasmuch as the learned Sole Arbitrator has not given any justifiable or
sufficient reasons to adopt an interest rate that is different from that prescribed
under 31(7)(b) of the Act, and the same is therefore liable to be interfered with.
12. In so far as the first limb of the impugned arbitral award is concerned,
learned Counsel on behalf of the Petitioner submitted that the learned Sole
Arbitrator had committed a grave misdirection in law by adopting an approach that
was not only erroneous, but one which completely disregarded the material records
and contractual terms between the parties. He submitted that in fact there was total
inconsistency between the findings of the learned Sole Arbitrator and the operative
portion of the impugned arbitral award, rendering the impugned arbitral award
unintelligible, and such an approach pervades the entirety of the factual findings,
demonstrating a classic instance of perversity, where no reasonable person
instructed in law and acting on material before him could have arrived at such a
conclusion. Under the provisions of Section 34(2A) of the Act, in an arbitral award
that relies on findings grounded in no evidence, ignores vital evidence, or proceeds
on a visual perversity of facts, the defect goes to the very root of the matter and
hence is liable to be set aside on the ground of patent illegality. He further
submitted that there was a mathematical impossibility in so far as the quantum of
compensation which was awarded by the learned Sole Arbitrator. He submitted
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that it was an admitted position by the Respondent that the claim pertained strictly
to a limited contractual duration of five and a half months, spanning from 15 th
November 1995 to 23rd April 1996. However, the Respondent accepted that the
bid amount for total octroi collection for a full 12-month period running from 1 st
November 1995 to 31st October 1996 was Rs. 25,09,00,317/-. He therefore
submitted that despite the Respondent claiming a total collection of just over Rs.
25,00,00,000/-, it was impossible to see as to how the learned Sole Arbitrator had
awarded a sum of Rs. 24,06,50,119.03/- for less than half of that timeline. He
submitted that this amounted to a windfall, and hence it was a mathematical
impossibility to award nearly 96% of the entire year’s projected revenue by the
Respondent for a period comprising less than 46% of this duration, which was
commercially absurd.
13. He further submitted that the tender document issued by the Petitioner in
October 1995 for the appointment of an agent to collect octroi for the period from
1st November 1995 to 31st October 1996 set out tender specifications, wherein the
minimum offer value was “not less than Rs. 25,09,00,000/-”. Accordingly, earnest
money deposit had been fixed at Rs. 25,00,000/-, and security deposit at Rs.
5,00,00,000/-. He submitted that the learned Sole Arbitrator ignored the
commercial consideration in adjudicating the commercial disputes between the
parties by totally disregarding the fixed Minimum Reserve Price (MRP) of Rs.
25,09,00,000/- for the full 12-month period from 1 st November 1995 to 31st
October 1996 and awarded an amount of Rs. 24,06,50,119.03/-, which was a
mathematical error. He also submitted that even assuming an extraordinary surge
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or peak in collection rate during this time frame, the contractual baseline
established by the Petitioner and accepted by the Respondent itself demonstrated
that the total octroi collections for the period of five and a half months could not
reasonably or realistically reach Rs. 24,06,50,119.03/-, thereby rendering the
valuation assumed by the learned Sole Arbitrator wholly excessive and without
basis in terms of the tender specifications. He also submitted that the learned Sole
Arbitrator had completely disregarded the MRP stipulated in the tender, and that
the MRP constituted the objective and prescribed benchmark for valuation. He
submitted that the MRP was not an incidental or irrelevant figure, and that it was a
material term of the tender framework, which the learned Sole Arbitrator was
bound to take into account. He submitted that this itself showed that the learned
Sole Arbitrator had not applied his mind before granting the amount as awarded in
the impugned arbitral award.
14. He further submitted that the vice in the impugned arbitral award lay in the
very decision-making process itself. He submitted that the learned Sole Arbitrator
had failed to demonstrate any rational nexus between the stipulated MRP, the
evidence on record, and the amount ultimately awarded. He submitted that an
award which ignores a material contractual/tender stipulation and arrives at a figure
which is substantially higher than the prescribed benchmark without explaining the
basis or methodology for such departure is not a mere alternative view of the
evidence, but is a finding unsupported by the contractual framework and the
material on record. He submitted that where the conclusion is such that no fair-
minded or reasonable person could have arrived at the same on the evidence before
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him, the finding becomes perverse and irrational and consequently suffers from
patent illegality. He submitted that the learned Sole Arbitrator was entitled to
depart from the MRP only upon reasoned and evidence-based determination, and
he was not entitled to disregard it altogether and substitute an arbitrary figure
unsupported by the tender, the contract, or the evidence. He submitted that the
impugned arbitral award was not only merely excessive, but it was also
demonstrably unsustainable on the face of the record and suffered from patent
illegality. He submitted that the Petitioner under the Right to Information Act
(RTI), 2005 had disclosed the gross collections for the periods from 1 st November
1992 to 31st October 1993, 1st November 1993 to 31st October 1994, and 1st
November 1994 to 31st October 1995, which indicated figures of Rs.
17,78,00,000/-, Rs. 19,45,00,000/-, and Rs. 22,24,00,000/- respectively.
Considering the above-mentioned disclosures, he submitted that the impugned
arbitral award in the present case is only for a period of five and a half months and
has no correlation with the amount of octroi collection for a period of three years,
i.e., 12 months prior to the period under consideration. He submitted that the
learned Sole Arbitrator has effectively rewritten the terms of the Agreement and
has also ignored that the Agreement contemplated that the Respondent was
required to pay the agreed tender amount through weekly instalments and comply
with the stipulated security and accounting obligations. The Respondent’s
entitlement after termination could not be enlarged into an amount which was
never collected by the Petitioner, and this aspect assumes considerable significance
because an arbitrator is the creature of a contract, and their jurisdiction is derived
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from the arbitration agreement, and the substantive rights of the parties are derived
from the underlying contract. He submitted that the learned Sole Arbitrator could
not confer upon one party a benefit which the Agreement itself did not confer,
particularly after holding that the termination was contractually valid. He
submitted that in the present case, the learned Sole Arbitrator had gone
substantially beyond the proved amount of octroi collection and had adopted
assumptions regarding the amount of octroi, which could have never been
collected. He submitted that though the impugned arbitral award itself records that
the claims of the Respondent were on the basis of documents obtained through
RTI, as well as on a presumption of what should have been collected, the aforesaid
approach was legally impermissible when the result of the impugned arbitral award
was Rs. 24,06,50,119.03/-, which from evidence on record could have never been
the octroi collections for a period of five and a half months.
15. Learned counsel on behalf of the Petitioner further submitted that the
original contract period was from 1st November 1995 to 31st October 1996. The
learned Sole Arbitrator himself had recorded a finding that since the Respondent
had not been able to furnish a bank guarantee, the period of contract between the
parties would only be from the period of 15 th November 1995 till 23rd April 1996,
when it was legally terminated. The learned Sole Arbitrator himself had said that
the Respondent would be entitled to all amounts during the said period. He
therefore submitted that considering that this period was undisputed, the learned
Sole Arbitrator awarding a sum of Rs. 24,06,50,119.03/- for such a truncated
period was itself not justified, and hence this finding was contrary to the evidence
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on record. He further submitted that the learned Sole Arbitrator had relied upon
Exhibit C-38 in the arbitral proceedings, i.e., the Daily Cash Book which contains
daily summaries of octroi collected at all Nakas, to come to the conclusion that a
sum of Rs. 20,39,31,816.05/- was found to be collected during the contract period.
He submitted that Exhibit C-38 in the arbitral proceedings is the computation of
collection of octroi for the period 1 st November 1995 to 31st October 1996. He also
submitted that Exhibit C-38 was a summary for the full contract period, and after
examination of the same, it was shown that the net collection had been quantified
at Rs. 33,62,17,215.84/-. He submitted that the learned Sole Arbitrator, without
applying his mind, had committed a fundamental error going to the root of the
impugned arbitral award by relying upon the figures contained in Exhibit- C-38
for a period wholly outside the scope of the Agreement and the dispute referred to
arbitration. He sought to bring attention of this Court to Page Nos. 181 to 190 of
the Petition, where Exhibit- C-38 of the arbitral proceedings determined the octroi
collections for the period from 1 st November 1995 to 31st October 1996. He
submitted that the computation expressly included the pre-contract period from 1 st
November 1995 to 14th November 1995, as well as the post-contract period from
24th April 1996 to 31st October 1996. He submitted that after deducting the
instalments paid by the Respondent and EMD/bank amounts of Rs.
13,22,85,399.79/- from the total collection of Rs. 33,62,17,215.84/- the expert
who had been appointed by the learned Sole Arbitrator arrived at a balance figure
of Rs. 20,39,31,816.05. He submitted that it is on this basis that the learned Sole
Arbitrator had adopted this very figure in the impugned arbitral award, and after
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deducting the amounts paid by the Respondent, a sum of Rs. 20,39,31,816.05/-
was found to have been collected. He submitted that the reliance on the aforesaid
figure was ex facie unsustainable, considering that the amount required to be
determined in the present arbitral proceedings was for the octroi collection
pertaining only to the contractual period, i.e., from 15 th November 1995 to 23rd
April 1996. He submitted that the figure of Rs. 20,39,31,816.05/- admittedly
represented collections for a substantially larger period, extending from 1 st
November 1995 to 31st October 1996, and therefore included collections made
before the commencement of the Agreement and after its expiry. He submitted that
by adopting a figure which indisputably encompasses periods falling outside the
Agreement, the learned Sole Arbitrator had failed to confine the adjudication to
the subject-matter of reference and had proceeded on a fundamentally erroneous
factual premise. He therefore submitted that the impugned arbitral award had not
taken into account material that was relevant, the contractual collections, and
ignored the essential distinction between the contract period and the non-contract
period. He therefore submitted that this was not a mere error of appreciation of
evidence or a possible alternative view but was something which struck at the very
root of the matter, considering that once Exhibit C-38 of the arbitral proceedings
demonstrated that the figure of Rs. 20,39,31,816.05 was for the entire period from
1st November 1995 to 31st October 1996, the adoption of that figure for the
truncated period of 14th November 1995 to 23rd April 1996 was manifestly
irrational and contrary to the record. The amount awarded on the basis of Exhibit
C-38 of the arbitral proceedings is 85% of the monetary sum awarded, and hence
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this could not be the conclusion that the learned Sole Arbitrator could have
reached at.
16. Learned counsel on behalf of the Petitioner further submitted that the
impugned arbitral award is perverse, inasmuch as the finding concerning the
alleged collections from current-account holders is based on conjectures and
surmises. He has submitted that the learned Sole Arbitrator inferred that 90 out of
111 current-account holders must have imported goods and paid octroi of at least
Rs. 10,000/- per month, despite there being no evidence showing quantum or
nature of the goods allegedly imported by these persons. He submitted that the
learned Sole Arbitrator, on the basis of these presumptions, has inferred that the 90
current-account holders, even on a conservative basis during the contract period,
would have paid a sum of Rs. 45,05,000/-. He submitted that such a formula is not
evidence, and there is no demonstrated transactional data, no evidence of actual
import, no evidence of quantum of goods, no evidence of octroi payable on those
goods, and no evidence establishing the period for which such collections allegedly
occurred. He submitted that a monetary award cannot be founded upon a
speculative mathematical exercise unsupported by primary evidence. He therefore
submitted that in the facts of the present case, the finding that 90 out of 111
current-account holders must have imported goods and paid octroi of at least Rs.
10,000/- per month, and hence a collection of 45,05,000/- would have happened
is purely on guesswork and without actual proof of imports. He submitted that the
learned Sole Arbitrator has erroneously extrapolated collection of Hindustan
Petroleum Corporation Limited and general octroi.
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17. Learned counsel on behalf of the Petitioner, further by way of a tabular chart
which is reproduced below, submitted that the learned Sole Arbitrator has even
mathematically awarded a wrong figure, inasmuch as on a cumulative consideration
of claim Nos. 1,5,7, and 9 in the arbitral proceedings, the learned Sole Arbitrator
expressly determined that the Respondent was entitled to an aggregate sum of only
Rs 14,13,42,649.50/-. However, while passing the impugned arbitral award, an
amount of Rs. 24,6,50,119.03/- was awarded, and it is the submission of learned
counsel on behalf of the Petitioner that the excess of almost Rs. 10,00,00,000/- has
not been substantiated by the learned Sole Arbitrator, and he has not explained
how such a huge figure has been arrived at. He further submitted that in paragraph
No. 67 of the impugned arbitral award itself the learned Sole Arbitrator had
already awarded a figure of Rs. 12,34,16,894.25/-, and over and above that the
learned Sole Arbitrator while awarding the final figure of Rs. 24,06,50,119.03/- has
failed to subtract the earlier figure as mandated in paragraph No. 67 and has
awarded a double-dipping windfall to the Respondent. He submitted that this very
inconsistency goes to the very root of the matter, and hence the impugned arbitral
award needs to be set aside.
Claim No. Relevant Findings in Award Amount Awarded
Claim No. 1 Rs. 12,34,16,894.25
Claim Nos. Para 67, Pages 113-114 Rs. 1,67,26,496.25
5&9
Claim No.2 Para-68, Pg-114 Included in Claim
No.5
Claim No.4 Paras-70-71, Pgs-114-115 Rejected
Claim No.6 Paras-72-73, Pgs-115-116 Rejected
Claim No. 7 Para 74 @ Page 117 Rs. 11,99,259.00
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Claim No.8 Paras-75 & 76, Pgs-117- Rejected
118
Claim Para-79, Pg-118 Rejected
No.10
Claim Para-80, Pg-119 Rejected
No.11
Claim No. 12 Para-81, Pg-119 Included in Claim No.5
AMOUNT Rs. 14,13,42,649.50
AWARDED
18. He also submitted that it was the Respondent’s own admission, which was
recorded in the order of this Court order dated 15 th October 2019, that the
Respondent was entitled to Rs. 4,51,49,151.90/-, whereas the Petitioner had
contended that the Respondent was entitled to only Rs. 2,05,92,175/-. He
therefore submitted that this entitlement was stated with mathematical precision,
and the said figure could not be ignored while testing as to how the learned Sole
Arbitrator had come to the conclusion that the Respondent was entitled to Rs.
14,13,42,649.50/- and the ultimate award which was of the figure of Rs.
24,06,50,119.03/-. He therefore submitted that such an extraordinary divergence
in the figures requires an explanation which had to be given by the learned Sole
Arbitrator, and the same has not been done in the facts of the present case.
19. He also submitted that the costs of Rs. 1,50,00,000/- were ex facie arbitrary,
disproportionate, and contrary to the principles governing the grant of cost. He
also submitted that the costs have been awarded without demonstrating how such
an amount bears any nexus to the conduct of the parties or the nature of the
arbitral proceedings, and neither have the costs been granted according to the
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guidelines prescribed under Section 31A of the Act. He has sought to place reliance
on the decision of Sanjeev Kumar Jain v Raghubir Saran Charitable Trust & Ors.1
to contend that costs are not intended to operate as punishment against the
unsuccessful party, but are compensatory in nature, and are awarded to indemnify a
successful litigant for expenses reasonably and necessarily incurred in prosecuting
or defending the necessary proceedings. He submitted that even where realistic
costs are awarded, such costs must be reasonable, proportionate, and founded upon
rational assessment, and costs which are mechanical and excessive or unsupported
by law or are unsustainable. He also sought to place reliance on the following
decisions, which will be discussed later, to support all the arguments which have
been recorded aforesaid to support his claim that the impugned arbitral award is
manifestly illegal and requires interference under Section 34 of the Act:-
i. Sree Kamatchi Amman Constructions v. Divisional Railway Manager
(Works), Palghat2
ii. Union of India v. Bright Power Projects (India) Pvt. Ltd.3
iii. Garg Builders v. Bharat Heavy Electricals Limited4
iv. State of Haryana v. Jai Durgaa Finvest Pvt. Ltd.5
20. Learned counsel on behalf of the Petitioner therefore summarized that the
impugned arbitral award suffered from the following fundamental defects:-
1 (2012) 1 SCC 455
2 (2010) 8 SCC 767
3 (2015) 9 SCC 695
4 (2022) 11 SCC697
5 2026 SCC OnLine SC 1323
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i. The learned Sole Arbitrator found the termination to be lawful but
nevertheless awarded damages flowing from the alleged continuation of the
contract.
ii. The Respondent's own breaches were established by the learned Sole
Arbitrator.
iii. The quantum was arrived at substantially on assumptions regarding what
allegedly could have been collected.
iv. The learned Sole Arbitrator relied upon documents covering periods
beyond the date of termination.
v. Vital financial and audit material showing substantially lower annual
collections was not properly reconciled.
vi. An amount was attributed to current-account holders without evidence of
actual imports or octroi liability.
vii. The expert's figures were adopted despite the Petitioner's specific challenge
to their correctness.
viii. The learned Sole Arbitrator failed to properly account for the Respondent's
own collections and the Petitioner's losses.
ix. Claims introduced after a substantial lapse of time were entertained despite
the limitation objection.
x. Interest was awarded despite an express contractual prohibition.
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21. Per contra, learned counsel on behalf of the Respondent submitted that the
impugned arbitral award has been passed after due consideration of the evidence
and the facts on record, and hence does not need to be interfered with. He
submitted that the mandate of Section 34 of the Act was very limited, and no
arithmetical/mathematical errors can be reviewed and a plausible view that an
arbitrator has arrived at to award the figure cannot be substituted by the Court
under Section 34 of the Act. He sought to bring the attention of this Court to
various clauses in the Agreement to contend that the amounts which the
Respondent sought to claim were primarily moneys which the Petitioner owed to
the Respondent, and Clause 24 of the Agreement was only a general clause which
only barred the Respondent from claiming interest (as per the Interest Act, 1978 or
any other provisions), and that interest claim included interest on statutory rights
and not on money which was payable by the Petitioner to the Respondent. He
further submitted that the impugned arbitral award does not award damages to the
Respondent, however, it has awarded the rightful refunds of the Respondent. He
submitted that the impugned arbitral award, which was for a figure of Rs.
24,06,50,119.03/- was granted by the learned Sole Arbitrator after appointing the
expert under Section 26 of the Act to check accounts, and the said expert was cross-
examined by the Petitioner, and hence no fault could be found with the grant of
sum of Rs. 24,06,50,119.03/- along with interest at the rate of 18% per annum
from 1st January 1997 till date of the impugned arbitral award by the learned Sole
Arbitrator. He further submitted that in fact, there were no documents which were
submitted by the Petitioner at the time of arbitral proceedings, and the only
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documents produced by the Petitioner were Exhibits R-69, C-38, C-107A, C-
107B, and C-107C, where only a part of the collection of octroi during the contract
period was reflected. He further submitted that the Petitioner and the Respondent
were directed to submit their statements to come to the exact figure regarding the
octroi collection during the contract period, and thereafter the expert on the basis
of appreciation of these documents came to the figure of octroi collections. He also
submitted that the Petitioner had not produced all the documents before the
learned Sole Arbitrator, and hence the learned Sole Arbitrator had rightly come to
the conclusion regarding the amount which was payable by the Petitioner to the
Respondent.
22. He further submitted that the interpretation as sought to be placed by the
Petitioner on Clause 24 of the Agreement that the same bars the grant of interest
was incorrect and would not apply to the refund of the amount which the
Petitioner was bound to pay to the Respondent. He further submitted that even on
a reading of the impugned arbitral award it was clear that the learned Sole
Arbitrator had arrived at the figure of Rs. 24,06,50,119.03/- on an appreciation of
the limited evidence which was available before the learned Sole Arbitrator. He
further submitted that the entire calculation was arrived at after considering the
documentary evidence and in respect of the contract period being 1 st November
1995 to 31st October 1996, and the learned Sole Arbitrator himself had come to a
finding that till the date of termination of the Agreement, i.e., on 23 rd April 1996,
the Respondent had collected the amount of Rs. 22,39,23,622.74/- for a period of
five and a half months. He further submitted that the learned Sole Arbitrator has
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correctly come to the figure of Rs. 24,06,50,119.03/- in paragraph No. 67 of the
impugned arbitral award, and on account of the fact that the Petitioner did not
submit all the books and documents before the learned Sole Arbitrator, and which
were subsequently procured by the Respondent under RTI, the figures as reached
at by the learned Sole Arbitrator were correct figures on the basis of appreciation of
evidence. He theretofore submitted that there was no windfall, as the Petitioner was
seeking to suggest, and it is an incorrect submission, inasmuch as the learned Sole
Arbitrator has, on a perusal of the limited books and documents which were
submitted to him, come to the aforesaid figure.
23. Even in respect of the current-account holders it is submitted by learned
counsel on behalf of the Respondent that the learned Sole Arbitrator has given a
reasoned finding to arrive at a figure of Rs. 45,05,000/- on the basis that each
current-account holder was, on a very conservative basis, importing goods and
paying octroi of at least Rs. 10,000/- per month.
24. He further submitted that the Petitioner’s submission that the bid amount
for a full 12-month period running from 1 st November 1995 to 31st October 1996
itself was Rs. 25,09,00,319/-, and an amount of Rs. 24,06,50,119.03/- could not be
awarded by the learned Sole Arbitrator, and that the bid amount was a benchmark
that the learned Sole Arbitrator was bound to apply was an erroneous submission,
inasmuch as the bid amount was not an estimate of collection, however, it was the
price that the Respondent was bound to pay to the Petitioner in respect of the
octroi which it collected. He further submitted that the said amount could not be
taken into consideration for the Petitioner to contend that the learned Sole
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Arbitrator awarded a higher amount to the Respondent. He further submitted that
the learned Sole Arbitrator had come to a correct finding on the basis of the
evidence which was produced before him.
25. He also submitted that the order dated 15th October 2019 passed by this
Court, wherein the Respondent had admitted their entitlement of Rs.
4,51,49,151.90/-, was only in respect of an order under section 36(3) of the Act
subject to a deposit of Rs. 3,00,00,000/- by the Petitioner. He submitted that
nothing turns on the aforesaid order to quantify the ultimate figure in the
impugned arbitral award, inasmuch as the same was only in respect of stay
proceedings. It did not amount to a final adjudication of the Respondent’s
monetary entitlement, and neither has the Respondent resiled from the award.
26. He also submitted that no interference can be called for under the
provisions of Section 34 of the Act, inasmuch as the entire evidence could not be
reopened in Section 34 proceedings, and more so when the learned Sole Arbitrator
went through all exhibits and an expert was appointed by consent of the parties,
whose report the Petitioner tested in cross-examination. He therefore submitted
that the impugned arbitral award could not be set aside on a reappreciation of the
evidence. He also submitted that Clause 24 of the Agreement, if read in its correct
context, did not bar any interest which was payable, and hence the learned Sole
Arbitrator was well within his power to grant pendente lite interest, as done in the
facts of the present case. He submitted that there was no bar under Section 34 of
the Act to award the said interest. He further submitted that Section 31(7)(a), as it
stood, gave the learned Sole Arbitrator the power to award interest from the cause
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of action till the date of the arbitral award, unless otherwise agreed by the parties,
and that Section 31(7)(b) provided 18% interest from the date of the arbitral award
to payment, unless the award otherwise directs. He submitted that Clause 24 of the
Agreement did not bar interest on refund, as the refund was not a claim, and
interest was payable on delayed payments, which was not specifically barred under
Clause 24 of the Agreement. In view thereof, he submitted that there was no bar
which was contemplated under Clause 24 of the Agreement. He submitted that
under Section 31(7)(a) of the Act, the power conferred therein is lost only where
the parties have "otherwise agreed", i.e., agreed that interest is not payable on the
money in question. Clause 24 of the Agreement is not such an agreement for
money received, inasmuch as it names no fund, no period, and no circumstance,
however, it speaks of statutory interest on the agent's claims, and the specific
clauses of the Agreement like Clauses 12(iv), 14, 25, 26, and 27(b) show that
where the parties meant to exclude interest on a fund, they have said so. He further
submitted that under Section 28(3) of the Act, the arbitrator decides "in
accordance with the terms of the contract", and the same has been done in the facts
of the present case, as the learned Sole Arbitrator held Clause 24 of the Agreement
inapplicable to money of this character. He contended that this construction stands,
unless it is "not even a possible view".
27. Learned counsel on behalf of the Respondent also submitted that the costs
have been rightly granted by the learned Sole Arbitrator of Rs. 1,50,00,000/,
inasmuch as the Respondent had quantified legal expenses as Rs. 28,50,000/- and
also the costs of arbitration, and on the basis thereof the learned Sole Arbitrator
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fixed Rs. 1,50,00,000/- towards costs, a sum which either party has spent in an
arbitral proceeding which ran from 1998 to 2019 before a retired judge of a
Supreme Court with an expert Chartered Accountant appointed by consent. He
submitted that the costs of arbitration under the Explanation to Section 31(8)
include the fees and expenses of the arbitrator and of the expert which are not
“legal expenses” and were not within Claim No. 13 in the arbitral proceedings. He
submitted that on the basis of the amount spent by the Petitioner themselves of
approximately Rs. 1,62,00,000/- it could not be contended that costs awarded to
the Respondent was an unreal figure.
28. Learned counsel on behalf of the Respondent also sought to place reliance
on the following decisions to further advance his contentions, and which shall be
dealt with later in the judgement:-
i. ONGC Ltd. v. G & T Beckfield Drilling Services (P) Ltd.6
ii. Reliance Cellulose Products Ltd. v. ONGC Ltd.7
iii. Ferro Concrete Construction (India) (P) Ltd. v. State of Rajasthan 8
iv. OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions (India)
(P) Ltd.9
ANALYSIS AND FINDINGS
29. I have considered the rival submissions and perused the papers and
proceedings and the impugned arbitral award with the assistance of the learned
6 2025 SCC OnLine SC 1888
7 (2018) 9 SCC 266
8 2025 SCC OnLine SC 708
9 (2025) 2 SCC 417
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counsel on behalf of the parties, and I proceed to decide the present petition. At the
very outset, as has been reiterated by the Supreme Court and this Court in various
decisions that the mandate of Section 34 of the Act is circumscribed by the
limitation as set out in the Act itself. It allows interference in arbitral awards in only
exceptional circumstances, and keeping in mind these exceptional circumstances,
this Court is of the view that the impugned arbitral award needs to be tested on the
aforesaid contours.
30. At the outset, learned counsel on behalf of the Petitioner, has sought to
challenge this award under Section 34(2A) of the Act on the ground of patent
illegality, inasmuch as it is the contention of the Petitioner that the impugned
arbitral award has been rendered in such a manner that no reasonable person could
have come to such a conclusion, and the conclusions reached at are such that they
are ex facie perverse and would shock the conscience of the Court, insofar as the
grant of pendente lite interest at the rate of 18% per annum from 1 st January 1997
till the date of the impugned arbitral award. I am therefore of the view that before
setting out on the path of deciding the correctness of the impugned arbitral award,
it would be important to bifurcate the claims of the impugned arbitral award into
four limbs, as sought to be challenged even by the Petitioner. The following are the
limbs:-
i. The first limb is the monetary award in the sum of Rs. 24,06,50,119.03/-.
ii. The second limb is the award of the pendente lite interest on the aforesaid
monetary sum from 1st January 1997 till the date of the impugned arbitral award.
iii. The third limb is the post-award interest at the rate of 18% per annum on
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the sum awarded through the impugned arbitral award.
iv. The fourth limb is the award of costs to the sum of Rs. 1,50,00,000/- to the
Respondent.
31. I proceed to decide the present petition on the basis of the aforesaid four
limbs. Insofar as the first limb of the impugned arbitral award of the monetary
award of Rs. 24,06,50,119.03/- is concerned, I am of the view that no case for
interference can be made in the present proceedings under Section 34 of the Act. I
come to this conclusion on the ground that the said amount has been awarded by
the learned Sole Arbitrator after a thorough investigation into the facts and figures
as presented before it by the rival parties. The exercise of coming to a figure to
award a particular amount is within the scope of the learned Sole Arbitrator, and
this Court is of the view that by substituting its own opinion or by reappreciating
the evidence which has been marshalled at the time of arbitral proceedings, it
would amount to reappreciating evidence, which is against the mandate of
proceedings under Section 34 of the Act. I am further of the view that the
impugned arbitral award, in fact, by awarding the monetary sum of Rs.
24,06,50,119.03/-, has had the benefit of an expert, i.e., V.S. Dastur & Company,
Chartered Accountants, who were appointed by consent for the specific purpose of
examining the accounts of the parties.
32. The dispute in the present facts is primarily with respect to the Agreement
for collection of octroi by the Respondent on behalf of the Petitioner, on which
collection the Respondent was to earn a commission, and as per the terms of the
Agreement was to pay the collected octroi amount to the Petitioner. It is this very
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collection of octroi which was the issue which was needed to be decided by the
learned Sole Arbitrator, and the same has been done by the learned Sole Arbitrator
by relying on expert evidence and also on the basis of the records produced by both
the parties. Once this exercise had been conducted by the learned Sole Arbitrator,
then the Petitioner’s contention of hair-splitting the amount awarded to the
Respondent and seeking interference of this Court under Section 34 of the Act
would amount to substituting this Court’s view instead of what has been held by
the learned Sole Arbitrator. It is a settled principle of law that an arbitrator is the
master of facts and evidence, and once that being the case this Court is of the view
that nothing more can be read into the impugned arbitral award to dislodge it of
the monetary claim which the learned Sole Arbitrator had awarded in the facts of
the present case. I am therefore of the view that the submission as made by learned
counsel on behalf of the Petitioner that the award suffers from mathematical errors
and hence is patently perverse is a submission which ought to be rejected.
33. I am further of the view that even though the learned Sole Arbitrator held
that the termination of the Agreement by the Petitioner was valid, yet it was well
within the powers of the learned Sole Arbitrator to award the monetary claim as
per the amount of octroi which was collected for the period from 15 th November
1995 to 23rd April 1996 on the basis of documents which were placed on record
before the him. The contention of the Petitioner that the amount of Rs.
24,06,50,119.03/- is a windfall and commercially absurd figure which has been
awarded by the learned Sole Arbitrator, inasmuch as the same takes into
consideration the full 12 month period running from 1 st November 1995 to 31st
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October 1996 cannot be an argument which can be sustained in view of the clear
findings of the learned Sole Arbitrator. The Petitioner has sought to contend that
the bid amount for the total octroi collection was only Rs. 25,09,00,319/-, and
hence to have an award of Rs. 24,06,50,119.03/- was something which the learned
Sole Arbitrator could not have done. The bid amount could not be made a
benchmark to arrive at the monetary claim as awarded by the Learned Sole
Arbitrator, inasmuch as that was the minimum amount which the Respondent was
liable to pay the Petitioner. This is an argument which deserves to be rejected,
because the bid amount cannot be equated to the actual collection of the octroi,
even for the truncated period of the Agreement. The learned Sole Arbitrator has
come to the figure of Rs. 24,06,50,119.03/- on the basis of the evidence before it,
and particularly Exhibit C-38, which was produced by the Petitioner themselves,
and which was verified by the expert, which to my mind cannot be found fault
with. In fact, the learned Sole Arbitrator on several occasions had asked for
documents from the Petitioner, however, the same were not submitted by the
Petitioner, and therefore, the learned Sole Arbitrator, on the basis of the limited
documents before him, came to the conclusion that the aforesaid amount of Rs.
24,06,50,119.03/- was payable by the Petitioner to the Respondent. A perusal of
the impugned arbitral award would reflect that the learned Sole Arbitrator has
worked out this aforesaid amount by examining the statements produced by the
rival parties and has also categorically recorded that the Respondent was entitled to
the moneys under the Agreement, inasmuch as the Petitioner had encashed the
Bank Guarantee and the Security deposit provided by the Respondent and had
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recovered all that the Petitioner had to recover from the Respondent. In fact, the
Petitioner had recovered the same with interest at the rate of 24% per annum. The
learned Sole Arbitrator while awarding the aforesaid amount has placed particular
reliance on the following documents:-
i. Exhibit R-18 of the arbitral proceedings, which was the report of the Chief
Auditor of the Petitioner given to the erstwhile Sole Arbitrator
ii. Exhibit R-19 of the arbitral proceedings, which pertained to collection of
octroi on jaggery imported into Kohlapur from 1 st November 1995 to 23rd April
1996
iii. Exhibit R-21 of the arbitral proceedings, pertaining to motor memos which
were included in Exhibit C-38
iv. Exhibit R-24 of the arbitral proceedings, which was a letter dated 12th June
2010 from State Trading Corporation to the Chief Octroi Officer of the Petitioner
stating that an amount of Rs. 25,30,185,.87/- had been paid as octroi during the
period from April 1995 to April 1996
v. Exhibit R-69 of the arbitral proceedings, which is a book containing details
of few import bills/collections from current-account holders between the period
from 23rd April 1996 to 31st October 1996
vi. Exhibit C-57 of the arbitral proceedings, which showed collections from
current-account holders from 23rd April 1996 to 31st October 1996
vii. Exhibit C-107A, B, and C of the arbitral proceedings, which pertain to
current accounts of petroleum companies, i.e., HPCL, Bharat Petroleum
Corporation Limited (BPCL), and Indian Oil Corporation Limited (IOCL)
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viii. Exhibit C-38 of the arbitral proceedings, which is the daily cash book
containing daily summary of octroi collected at all Nakas.
34. All the aforesaid exhibits have been examined by the expert V.S. Dastur &
Company, Chartered Accountants, and the figure of Rs. 24,06,50,119.03/- has
been awarded by the learned Sole Arbitrator to the Respondent. This to my mind is
a copious exercise which the learned Sole Arbitrator has done in the facts of the
present case, and hence the arguments on behalf of Petitioner that this was a
mathematical impossibility ought to be rejected, inasmuch as all these amounts
have not been awarded by the learned Sole Arbitrator on the basis of his opinion
but on the basis of evidence provided by the expert, i.e., V.S. Dastur & Company,
Chartered Accountants, who was appointed by consent and who had examined the
figures which now cannot be sought to be reopened in the present case. I am of the
view that by doing so this Court would undertake a fact-finding exercise, which is
not something which can be countenanced in the facts of the present case. I am
further of the view that if the Petitioner indeed had found
arithmetical/mathematical errors on the face of the impugned arbitral award, then
resort could have been taken to the provisions of Section 33 of the Act, and the
same cannot be challenged by way of a petition under Section 34 of the Act, which
has limited parameters within which the Court can interfere. The relevant findings
of the learned Sole Arbitrator on the aforesaid issue are reproduce hereinbelow-
35. Thus from the above Exhibits, it can be seen that Respondent has, during
the Contract Period, collected the following Octroi. Exhibit R-18 shows that Rs.
1,64,40,090/- is collected and payable to Claimant; Rs. 11,99,259/-is payable to
Claimant for Jaggery imported into Kohlapur; Rs. 20,59,593 has been paid to
Respondent by State Trading Corporation during the Contract period; Rs. 586 is
found to have been collected under Exhibit R-69; Rs. 20,39,31,816.05/- is shown as
having been collected in Exhibit C-38. As explained above this sum of Rs.
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20,39,31,816.05/- is after deducting the refunds and payments made by Claimant
(either instalments paid or EMD and/or Bank Guarantees encashed). Under Exhibit
C-107A a sum of Rs. 28,37,77.00/- is found to have been collected for only half the
month of November 1995. Thus a total sum of Rs. 22,39,23,622.74 has been
collected by Respondent during the Contract Period. This is what emerges on the
basis of records, of the Respondent, available before this Tribunal. This is the
amount which should have been accounted for by Respondent and paid to Claimant
on termination in 1996 or soon after the termination in April 1996.
36. The Supreme Court has in the case of Gopal Krishnaji Ketkar vs Mahomed
Haji Latif reported in AIR (1968) S. C. 1413 held as follows:
"Mr. Gokhale, however, argued, that it was no part of the appellants' duty to
produce the accounts unless he was called upon to do so and the onus was
upon the respondents to prove the case and to show that the Dargah was the
owner of plot No. 134. We are unable to accept this argument as correct. Even
if the burden of proof does not lie on a party the Court may draw an adverse
inference if he withholds important documents in his possession which can
throw light on the facts at issue. It is not, in our opinion, a sound practice for
those desiring to rely upon a certain state of facts to withhold from the Court
the best evidence which is in their possession which could throw light upon
the issues in controversy and to rely upon the abstract doctrine of onus of
proof. In Murugesam Pillai v Manichavasaka Pandara (1) Lord Shaw observed
as follows:
"A practice has grown up in Indian procedure of those in possession of
important documents or information lying by, trusting to the abstract
doctrine of the onus of proof, and failing, accordingly, to furnish to,
the, Courts the best material for its decision. With regard to (1) 44
I.A.98, at P. 103 third parties, this may be right enough-they have no
responsibility for the conduct of the suit but with regard to the parties
to the suit it is, in their Lordships' opinion an inversion of sound
practice for those desiring to rely upon a certain state of facts to
withhold from the Court the written evidence in their possession which
would throw light upon the proposition."
This passage was sighted with approval by this Court in a recent decision -
Biltu Ram & Ors Vs Jainandan Prasad & Ors. (1). In that case, reliance was
placed on behalf of the defendants upon the following passage from the
decision of the Judicial Committee in Bilas Kunwar v. Desarai Ranjit Singh &
Ors. (2)
"But it is open to a litigant to refrain from producing any documents
that he considers irrelevant; if the other litigant is dissatisfied it is for
him to apply for an affidavit of documents and he can obtain inspection
and production of all that appears to him in such affidavit to be
relevant and proper. If he fails to do so, neither he nor the Court at his
suggestion is entitled to draw any inference as to the contents of any
such documents."
But Shah, J., speaking for the Court, stated: "The observations of the Judicial
Committee do not support the proposition that unless a party is called upon
expressly to make an affidavit of documents and inspection and production of
documents is demanded, the Court cannot raise an adverse inference against a
party withholding evidence in his possession. Such a rule is inconsistent with
illustration."
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The Respondent had all relevant records. Claimant had fairly disclosed, at the
Meeting held on 18* January 2016, how much Octroi he had collected. Of course
this was on a Query by the Tribunal. The Respondent would know and their records
would show how much the Respondent had collected during the Contract Period. It
was the duty of the Respondent to produce all the records, first before the previous
Arbitrator and in any case before this Tribunal. The Respondent has not done so. It
cannot be said that, when this Arbitration started, leave aside during the time when
the Arbitration was before the previous Arbitrator, the records were not available.
The only conclusion that can be drawn from Respondent not producing relevant
records is that, were the same to be produced they would falsify Respondents'
statement/stand that, during the Contract Period they had not collected any Octroi
from Current Account Holders. Most of the records now available before the
Tribunal have been obtained by Claimant through RTI inquiries. These records
falsify Respondents' statement/stand. Thus the inference, why records were not
produced, is reinforced. Under the Contract after payment of weekly deposits, all
other collections were to be Claimants profit. Respondent have collected/recovered
amounts which were to be paid by Claimant with interest at 24% p.a. Thus now any
amount shown to have been collected by Respondent, during the Contract Period,
would have to be handed over to Claimant. By the ruse of not producing relevant
records the Respondent cannot be allowed to deprive Claimant of the amounts due
to him. An Adverse inference will thus have to be drawn against the Respondent.
The Adverse inference has to be that, if the records had been produced they would
have shown that the Respondent has collected, during the Contract Period, not just
what is disclosed by the few Exhibits but more. Before the Tribunal sets out what it
infers are the collections, it must be mentioned that it was submitted that Exhibit C-
38 contains all collections and therefore there would be no more collections. Exhibit
C-38 should have contained all collections but it is seen that many of the entries in
the other Exhibits, before this Tribunal, are not contained in Exhibit C-38. The
Expert has removed all duplicate entries whilst submitting his Report. Expert has
found that sums have been collected, under various Exhibits, even after he has
removed the duplicate entries. No explanation could be given, even tough asked,
why and how so many entries are missing from Exhibit C-38. It is thus clear that
apart from the entries in Exhibit C-38 and the other Exhibits there are other
collections. As the records have been kept back an Adverse Inference is drawn that
the following Octroi, which should have been, in the normal course collected, has in
fact been collected:
37. Initially Claimant was given a list of 69 Current Account Holders (Exhibit
C-11). Thereafter pursuant to a RTI inquiry Claimant was informed that there were
111 Current Account Holders (Exhibit C-11A). Claimant has also extracted names
of Current Account Holders from the Chief Auditors Report (Exhibit R-18).
Claimant has thus presented to the Tribunal names of 140 parties. This includes the
Petroleum Companies, State Trading Corporation and Transport Corporation of
India. However as Exhibit C-11A, i.e. the list disclosed by Respondent pursuant to
RTI inquiry, shows that there are 111 Current Account Holders, for the present
exercise the Tribunal is considering that there were only 111 Current Account
Holders. Of course apart from these there are the State Trading Corporation and
Petroleum Companies like HPL, BPCL, IOCL etc who are dealt with separately. In
regard to the 111 Current Account Holders it must be recorded that in view of this
Tribunal a person would be a Current Account Holder only if he/she/it is regularly
importing goods and does not want the hassle of having to complete the formalities,
including payment of Octroi, every time There is no evidence/proof that
many/some Current Account Holders were not importing goods regularly. Thus it
will have to be presumed that each Current Account Holder was, on a very very
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conservative basis, importing goods and paying Octroi of, at least, Rs. 10000/- per
month. From the names appearing in the list Exhibit C-11A it is found that
approximately 90 names are not to be found in any of the Exhibits on record.
Claimant has very obligingly worked out and shown how many names are missing
from the Exhibits. Thus the collection from these 90 parties has not been disclosed
by Respondent. Other names appear in one or the other of the Exhibits. It must be
mentioned that amounts shown in the Exhibits against these names are not for the
entire Contract Period. By this is meant that it is not known how much is collected
in the missing part of the Contract Period. But for purposes of this exercise the
Tribunal is ignoring this (except for the Petroleum Companies and Government
Corporations) and only taking the missing 90 names into account. On this basis for
the Contract period of 5 and ½ months Respondent would/should have collected, as
stated on a very very conservative basis, from 90 Current Account Holders, the
minimum sum of Rs. 45,05,000/-. Thus it is inferred that a sum of Rs. 45,05,000/-
has been collected from these 90 Current Account Holders. This should have been
paid to Claimant by the Respondent on termination in 1996 or soon thereafter in
1996. At this stage it must be mentioned that Claimant has made serious allegations
of corruption in the Respondent and of collusion between officers of Respondent
and Current Account Holders. The Tribunal has not gone into these allegations as it
does not need to. But if Respondent claims that the amount of Rs. 45,05,000/- or
any part thereof has not been collected, even though admittedly there are 110
Current Account Holders, then one of the possible explanations is that this amount,
which should have come to Respondent, has been allowed to be not paid/siphoned
away. For this Claimant cannot be blamed and cannot be made to suffer. Claimant
must get what is due to him. If necessary Respondent can/must such take action, as
it deems necessary. Action must be taken against the Current Account Holders and
the concerned Officers also.
38. Apart from the above the records show:
a) Exhibit C-107A shows that from HPCL the half monthly collection was Rs.
6,11,815-. Thus for the remaining five months the collection should/would be Rs.
30,59,075/-;
b) Exhibit C-107B shows that from May to October (6 months) the collection from
IOCL was Rs. 71,39,403/. The monthly collection was thus Rs. 11,89,900.50/-. For
the Contract Period of 5½ month it would be Rs. 65,44,452.75/-;
c) Exhibit C-107C shows that from 24* April 1996 till October 1996 the collection
has been Rs. 28,55,965.67/-. For a few days in December 1995 a collection of Rs.
8501.02 has been shown. Thus very conveniently the Contract Period is left out. If
the six months collection is Rs. 28,55,965.67 the monthly collection would be Rs.
4,75,994.28/- and for the Contract Period of 5½ months the collection would be
Rs. 26,17,968.54/-.
39. The result of the above discussion is that it is held that the Respondent
have collected, during the Contract Period, the sums of:
(a) Rs. 22,39,23,622.74 (as disclosed from various Exhibits before this Tribunal);
(b) Rs. 45,05,000/- inferred to be collected from 90 Current Account Holders
whose names are not shown in any of the Exhibits before this Tribunal;
(c) Rs. 30,59,075/- presumed to be coffected, during the Contract Period, on the
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basis of Exhibit C-107A;
(d) Rs. 65,44,452.75 presumed to be collected, during the Contract Period, on the
basis of Exhibit C-107B;
(e) Rs. 26,17,968.54 presumed to be collected, during the Contract Period, on the
basis of Exhibit C-107C
Thus on a very very conservative basis the Respondent has collected, during
Contract period, a minimum sum of Rs. 24,06,50,119.03/-.
In the above calculation the Tribunal is not taking into account collections, during
the Contract Period, from parties who are not Current Account Holders because the
Tribunal has no basis for calculating this or knowing who those parties are.
I am therefore of the view that in respect of the first limb, the impugned arbitral
award does not suffer from any patent illegality, and is not perverse or arbitrary,
and does not require any interference by this Court.
35. My view is fortified by the decision of the Supreme Court in Associate
Builders v. DDA10, which was also considered by the Supreme Court in Ssangyong
Engg. & Construction Co. Ltd. v. NHAI 11 when dealing with patent illegality
under Section 34(2A) of the Act. The Court in Ssangyong (supra) had held that in
order to constitute a ground for setting aside an arbitral award, the illegality must
prima facie go to the root of the matter without requiring reappreciation of
evidence by the Court and not amount to a mere erroneous application of the law.
The Court had relied on Associate Builders (supra) to hold that an arbitral award
can be set aside if the Arbitral Tribunal contravenes Section 31(3) of the Act and
provides no reasons for an award, and if the Arbitral Tribunal wanders outside the
scope of the contract, committing an error of jurisdiction. The Court further held
that an arbitral award can be set aside on the ground of patent illegality if the
10 (2015) 3 SCC 49
11 (2019) 15 SCC 131
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findings of the Arbitral Tribunal are based on no evidence, or ignore vital evidence,
or is based on documents taken behind the back of the parties. The relevant
paragraphs of the decisions in Ssangyong (supra) and Associate Builders (supra) are
reproduced below:-
Ssangyong Engg. & Construction Co. Ltd. v. NHAI
37. Insofar as domestic awards made in India are concerned, an additional
ground is now available under sub-section (2-A), added by the Amendment
Act, 2015, to Section 34. Here, there must be patent illegality appearing on the
face of the award, which refers to such illegality as goes to the root of the matter
but which does not amount to mere erroneous application of the law. In short,
what is not subsumed within "the fundamental policy of Indian law", namely,
the contravention of a statute not linked to public policy or public interest,
cannot be brought in by the backdoor when it comes to setting aside an award
on the ground of patent illegality.
38. Secondly, it is also made clear that reappreciation of evidence, which is what
an appellate court is permitted to do, cannot be permitted under the ground of
patent illegality appearing on the face of the award.
39. To elucidate, para 42.1 of Associate Builders, namely, a mere contravention
of the substantive law of India, by itself, is no longer a ground available to-set
aside an arbitral award. Para 42.2 of Associate Builders however, would remain,
for if an arbitrator gives no reasons for an award and contravenes Section 31(3)
of the 1996 Act, that would certainly amount to a patent illegality on the face
of the award.
40. The change made in Section 28(3) by the Amendment Act really follows
what is stated in paras 42.3 to 45 in Associate Builders, namely, that the
construction of the terms of a contract is primarily for an arbitrator to decide,
unless the arbitrator construes the contract in a manner that no fair-minded or
reasonable person would; in short, that the arbitrator's view is not even a
possible view to take. Also, if the arbitrator wanders outside the contract and
deals with matters not allotted to him, he commits an error of jurisdiction. This
ground of challenge will now fall within the new ground added under Section
34(2-A).
41. What is important to note is that a decision which is perverse, as
understood in paras 31 and 32 of Associate Builders, while no longer being a
ground for challenge under "public policy of India", would certainly amount to
a patent illegality appearing on the face of the award. Thus, a finding based on
no evidence at all or an award which ignores vital evidence in arriving at its
decision would be perverse and liable to be set aside on the ground of patent
illegality. Additionally, a finding based on documents taken behind the back of
the parties by the arbitrator would also qualify as a decision based on no
evidence inasmuch as such decision is not based on evidence led by the parties,
and therefore, would also have to be characterised as perverse.
(Emphasis supplied)
Associate Builders v. DDA
31. The third juristic principle is that a decision which is perverse or so
irrational that no reasonable person would have arrived at the same is
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important and requires some degree of explanation.It is settled law that where:
(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account something irrelevant to the
decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision,
such decision would necessarily be perverse.
32. A good working test of perversity is contained in two judgments. In Excise
and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, it was
held : (SCC p. 317, para 7)
"7.... It is, no doubt, true that if a finding of fact is arrived at by ignoring
or excluding relevant material or by taking into consideration irrelevant
material or if the finding so outrageously defies logic as to suffer from
the vice of irrationality incurring the blame of being perverse, then, the
finding is rendered infirm in law."
In Kuldeep Singh v. Commr. of Police, it was held : (SCC p. 14, para 10)
"10. A broad distinction has, therefore, to be maintained between the
decisions which are perverse and those which are not. If a decision is
arrived at on no evidence or evidence which is thoroughly unreliable and
no reasonable person would act upon it, the order would be perverse.
But if there is some evidence on record which is acceptable and which
could be relied upon, howsoever compendious it may be, the
conclusions would not be treated as perverse and the findings would not
be interfered with."
…
42.2. (b) A contravention of the Arbitration Act itself would be regarded as a
patent illegality — for example it an arbitrator gives no reasons for an award in
contravention of Section 31(3) of the Act, such award will be liable to be set
aside.
42.3. (c) Equally, the third subhead of patent illegality is really a contravention
of Section 28(3) of the Arbitration Act, which reads as under:
"28. Rules applicable to substance of dispute.—(1)-(2)
(3) In all cases, the Arbitral Tribunal shall decide in accordance with the
terms of the contract and shall take into account the usages of the trade
applicable to the transaction."
This last contravention must be understood with a caveat. An Arbitral Tribunal
must decide in accordance with the terms of the contract, but if an arbitrator
construes a term of the contract in a reasonable manner, it will not mean that
the award can be set aside on this ground. Construction of the terms of a
contract is primarily for an arbitrator to decide unless the arbitrator construes
the contract in such a way that it could be said to be something that no fair-
minded or reasonable person could do.
43. In McDermott International Inc. v. Burn Standard Co. Ltd., this Court held
as under : (SCC pp. 225-26, paras 112-13)
"112. It is trite that the terms of the contract can be express or implied.
The conduct of the parties would also be a relevant factor in the matter
of construction of a contract. The construction of the contract agreement
is within the jurisdiction of the arbitrators having regard to the wide
nature, scope and ambit of the arbitration agreement and they cannot be
said to have misdirected themselves in passing the award by taking into
consideration the conduct of the parties. It is also trite that
correspondences exchanged by the parties are required to be taken into
consideration for the purpose of construction of a contract.
Interpretation of a contract is a matter for the arbitrator to determine,
even if it gives rise to determination of a question of law. [See Pure
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Helium India (P) Ltd. v. Oil and Natural Gas Commission and D.D.
Sharma v. Union of India.]
113. Once, thus, it is held that the arbitrator had the jurisdiction, no
further question shall be raised and the court will not exercise its
jurisdiction unless it is found that there exists any bar on the face of the
award."
(emphasis supplied)
36. Coming to the second limb of the impugned arbitral award in respect of
pendente lite interest on the aforesaid monetary claim from 1 st January 1997 till
the date of impugned arbitral award, it would be relevant to reproduce Clause 24 of
the Agreement, as much hinges upon the interpretation of the aforesaid clause
before granting interest. Clause 24 of the Agreement reads as follows: -
24) The Agent/s shall not be entitled to claim any kind of interest on any of his
claims as per the interest act or any other provisions.
37. A plain reading of the aforesaid clause makes it clear that the parties to the
Agreement had agreed that the Respondent would not be entitled to claim any
interest on any of their claims as per the Interest Act, 1978 or any other provisions.
The parties were therefore bound by the terms of this contract and hence could not
take a position which ran to the contrary. It would be also relevant to reproduce the
provisions of Section 31(7) of the Act as it stood at the relevant point of time to
determine the issue:-
31. Form and contents of arbitral award-
(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral
award is for the payment of money, the arbitral tribunal may include in the sum for
which the award is made interest, at such rate as it deems reasonable, on the whole or
any part of the money, for the whole or any part of the period between the date on
which the cause of action arose and the date on which the award is made.
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[(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise
directs, carry interest at the rate of two per cent. higher than the current rate of
interest prevalent on the date of award, from the date of award to the date of
payment.
On a reading of Section 31(7) of the Act, it is clear that clause (7)(a) of Section 31
clearly stipulates that insofar as an arbitral award, the arbitrator may include in the
sum of the arbitral award interest at a reasonable rate, unless otherwise agreed by
the parties. The provision therefore bars the arbitrator from awarding interest
where parties contract not to pay the interest amount. Once the contract itself bars
the parties from charging interest, then as per provisions of section 31(7)(a) of the
Act, awarding pendente lite interest in the facts of the present case would not be
warranted. It would be very relevant therefore to examine the language of the
clause wherein the parties have chosen not to grant interest. In the facts of the
present case, Clause 24 of the Agreement, which is reproduced above, specifically
provides that the parties would not be entitled for any interest in respect of their
claims under the Interest Act, 1978 or under any other provisions. This to my
mind is a bar on the learned Sole Arbitrator to award pendente lite interest. The
learned Sole Arbitrator has made scathing remarks against the conduct of the
Petitioner before granting interest and has upheld the decisions rendered in Union
of India v. N.K. Garg & Co. (supra). The learned Sole Arbitrator has also placed
reliance on the case of Raveechee & Co. v. Union of India 12, wherein the Supreme
Court has held that a clause prohibiting interest does prevent an arbitrator from
granting pendente lite interest and post-award interest where facts justify the same.
The relevant paragraph of the impugned arbitral award is reproduced below:-
12 (2018) 7 SCC 664
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84. I have heard the parties. It is correct that the Supreme Court has held that
if there is a prohibition in Contract, against grant of interest, the Arbitrator must not
grant interest. This would be the position in a normal case where a claim of a party is
not settled for some time due to a genuine belief that the claim is not genuine or
payable. But a provision that no interest is payable would be most unfair in a case
like this where a party has intentionally withheld information, withheld documents
and failed in its duty to take accounts and thus wilfully deprived the other side of
monies lawfully due to it for so many years. As we have seen the Respondent have
withheld monies due to the Claimant. The Respondent should have given the
monies to Claimant in 1996. The Respondent knowingly makes a false statement
before their own Commissioner to the effect that they have not collected any
amounts from Current Account Holders. Acting on this false statement the
Commissioner decides against the Claimant. The Arbitration then takes place before
the previous Arbitrator. Even at this stage the Respondent falsely claim that during
the Contract Period they have not collected any monies from Current Account
Holders. The previous Arbitrator has accounts taken. On the basis of accounts the
previous Arbitrator awards an interim sum in favour of the Claimant. Facts now
before this Tribunal show that Respondent have no defence in respect of this sum
Awarded by the previous Arbitrator. The Respondent instead of honouring the
decision of the previous Arbitrator challenged his decision and made allegations
against him. The previous Arbitrator therefore recused himself. The Claimant then
has to get this Tribunal appointed. Proceedings before this Tribunal have dragged
on from 1998 till date. Before this Tribunal the Respondent have not produced all
the relevant documents and have persisted in their false stand that during the
Contract Period they have not collected any amounts from Current Account
Holders. Claimant has had to get records of Respondent produced and information
obtained through RTI inquiry. The records show, as indicated above, that during the
Contract Period the Respondent has collected large amounts. Even though the
termination may have been valid, it was the duty of Respondent to immediately take
accounts and hand over to the Claimant all amounts collected (over and above what
was payable by Claimant). This was not done. Instead efforts have been made to
deny Claimant his dues by all means possible. Under these circumstances it would
be most unfair if Claimant were to be deprived of interest on the amounts due to
him. This Tribunal is, under these circumstances, inclined to accept the Judgment of
the Delhi High Court and hold that Clause 24 is violative of the provisions of
Section 23 of the Indian Contract Act. On the facts of this case Clause 24 would be
fraudulent and would imply and involve an injury to the Claimant in as much as it
would result in Claimant being deprived, not just of the monies but also the fruits of
monies which rightfully belong to him. It would result in a dishonest party like the
Respondent getting benefit of its dishonesty. It would therefore be against Public
Policy. In any case in the case of M/s. Raveechee and Co. vs. Union of India the
Supreme Court has held that such a Clause does not prevent an Arbitrator from
granting pendente lite and post Award interest where the facts so justify. The
amounts found to have been collected by Respondent should have been paid over to
Claimant in 1996 i.e. soon after termination. They have not been paid till date. On
small delay by Claimant, in paying the weekly instalments Respondent charged 24%
p.a. interest. The facts in this case fully justify an award of interest. Claimant has
prayed for interest at 24%p.a. The Arbitration and Conciliation Act, 1996 provides
for interest at 18%p.a. In my view this is the rate which must be applied.
Accordingly 1 hold that the sum of Rs. 24,06,50,119.03/, which has been-Awarded
in favour of the Claimant, will bear interest at the rate of 18% p.a. from 1st January
1997 till date of Award and the sum Awarded will bear further interest at 18% pa.
from the date of the Award till payment and realisation thereof. There will be an
Award accordingly.
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38. I am not in agreement with the approach of the learned Sole Arbitrator in
respect of the aforesaid findings, particularly on reading the language of Clause 24
of the Agreement. This particularly in view of the fact that the provisions of the Act
are a departure from the provisions of the Arbitration Act, 1940, which did allow
the arbitrator to provide pendente lite interest unless expressly provided in the
agreement/contract. However, the said principle has been statutorily recognized in
view of the words “Unless otherwise agreed by the parties” incorporated in Section
31(7)(a) of the Act. Therefore, once the contract entered between the parties bars
charging of interest, taking any other view would be doing violence to the
provisions of section 31(7)(a) of the Act. My view is supported by the recent
decision of the Supreme Court in North Eastern Electric Power Corpn. Limited
(NEEPCO) v. Astra Construction (P) Ltd. 13 and the decisions rendered in Sree
Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat
(supra), Union of India v. Bright Power Projects (India) Pvt. Ltd. (supra), Garg
Builders v. Bharat Heavy Electricals Limited (supra), and State of Haryana v. Jai
Durgaa Finvest Pvt. Ltd (supra) relied upon by the Petitioner.
39. The decision of the Supreme Court in Sree Kamatchi Amman
Constructions v. Railways (supra), upon which reliance has been placed by the
Petitioner to contend that the learned Sole Arbitrator could not have granted
pendente lite interest to the Respondent is apposite to the facts of the present
case, inasmuch as in the aforesaid case the Arbitral Tribunal had rejected the
13 2026 SCC OnLine SC 1948
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claims of the Appellant-Contractor regarding pre-reference and pendente lite
interest, having regard to the bar contained in the relevant clause of the
agreement entered into between the Appellant-Contractor and the
Respondent, which specifically stated that “No interest will be payable upon
the earnest money or the security deposit or amounts payable to the
contractor under the contract”. The same was upheld by the learned Single
Judge of the Madras High Court and the Division Bench upon a further
appeal by the Appellant-Contractor. The Appellant-Contractor had thereafter
preferred the dispute before the Supreme Court, wherein it was held that since
the amount awarded to the Appellant-Contractor through the arbitral award
was an amount payable to them under the contract entered into between the
two parties, no pre-reference or pendente lite interest could be awarded to the
Appellant-Contractor. The Court had further held that the Arbitral Tribunal
was justified in not awarding pendente lite interest to the Appellant-
Contractor, as Section 37(1) of the Act, by using the words "unless otherwise
agreed by the parties" categorically clarifies that the arbitrator is bound by the
terms of the contract insofar as the award of interest from the date of cause of
action to the date of award. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award interest between
the date when the cause of action arose to the date of award. The Court had
further, placing reliance on the decision rendered in Sayeed Ahmed & Co. v.
State of U.P.14 clarified that the decisions rendered under the Arbitration Act,
14 (2009) 12 SCC 26
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1940 may not be of assistance to decide the validity of grant of interest under
the Act, as it did not contain a provision similar to Section 31(7) of the Act.
Relevant paragraphs of the decision of the Supreme Court in Sree Kamatchi
Amman Constructions v. Railways (supra) are reproduced hereinbelow:-
10. The two claims on which amounts are awarded are with reference to Claim
4 relating to erroneous billing and Claim 6 relating to security deposit. Clause
16(2) in terms specifically bars payment of interest on security deposit. Insofar
as Claim 4 is concerned, the question is whether the amount awarded is an
"amount payable to the contractor under the contract".
11. The learned counsel for the appellant made a faint attempt to contend that
the award relating to Claim 4 was not in regard to an amount payable to the
contractor under the contract. This contention has absolutely no merit as the
award itself categorically recorded a finding that under Item 19 "the actual
quantity executed by the claimant at the orders of the respondent very much
becomes a part and parcel of the original agreement quantity". What was
awarded for the "rate per metre of rails to be led to SLY yard and stacked vide
agreement schedule Item 19" was the rate of Rs. 225 per metre. Thus Claim 4
related to a work executed by the contractor as a part and parcel of the work
contemplated under the agreement. Payment directed by the Arbitral Tribunal
for such work was also in accordance with the agreement schedule Item 19.
Therefore, it is evident that the amount awarded in regard to Claim 4 was an
amount payable to the contractor under the contract. Consequently, no interest
could be paid thereon having regard to the bar under Clause 16(2) of the
general conditions of contract.
…
18. At the outset it should be noticed that Engineers-De-Space-Age- and
Madnani- arose under the old Arbitration Act, 1940 which did not contain a
provision similar to Section 31(7) of the new Act. This Court, in Sayeed
Ahmed held that the decisions rendered under the old Act may not be of
assistance to decide the validity of grant of interest under the new Act. The
logic in Engineers-De-Space-Age was that while the contract governed the
interest from the date of cause of action to date of reference, the arbitrator had
the discretion to decide the rate of interest from the date of reference to date of
award and he was not bound by any prohibition regarding interest contained in
the contract, insofar as pendente lite period is concerned. This Court in Sayeed
Ahmed- held that the decision in Engineers-De-Space-Age would not apply to
cases arising under the new Act. We extract below, the relevant portion from
Sayeed Ahmed: (SCC p. 36, paras 23-24)
"23. The observation in Engineers-De-Space-Age- that the term of the
contract merely prohibits the department/employer from paying interest
to the contractor for delayed payment but once the matter goes to the
arbitrator, the discretion of the arbitrator is not in any manner stifled by
the terms of the contract and the arbitrator will be entitled to consider
and grant the interest pendente lite, cannot be used to support an
outlandish argument that bar on the Government or department paying
interest is not a bar on the arbitrator awarding interest. Whether the
provision in the contract bars the employer from entertaining any claim
for interest or bars the contractor from making any claim for interest, it
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amounts to a clear prohibition regarding interest. The provision need not
contain another bar prohibiting the arbitrator from awarding interest.
The observations made in the context of interest pendente lite cannot be
used out of contract
24. The learned counsel for the appellant next contended on the basis of
the above observations in Engineers-De-Space-Age, that even if Clause
G 1.09 is held to bar interest in the pre-reference period, it should be
held not to apply to the pendente lite period, that is, from 14-3-1997 to
31-7-2001. He contended that the award of interest during the pendency
of the reference was within the discretion of the arbitrator and therefore,
the award of interest for that period could not have been interfered with
by the High Court. In view of the Constitution Bench decisions in G.C.
Roy and N.C. Budharaj rendered before and after the decision in
Engineers-De-Space-Age?, it is doubtful whether the observation in
Engineers-De-Space-Age- in a case arising under the Arbitration Act,
1940 that the arbitrator could award interest pendente lite, ignoring the
express bar in the contract, is good law. But that need not be considered
further as this is a case under the new Act where there is a specific
provision regarding award of interest by the arbitrator."
The same reasoning applies to the decision in Madnani also as that also relates
to a case under the old Act and did not independently consider the issue but
merely relied upon the decision in Engineers-De-Space-Age.
19. Section 37(1)[Sic Section 31(7)] of the new Act by using the words "unless
otherwise agreed by the parties" categorically clarifies that the arbitrator is
bound by the terms of the contract insofar as the award of interest from the
date of cause of action to the date of award. Therefore, where the parties had
agreed that no interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the date of award
20. We are of the view that the decisions in Engineers-De-Space-Age and
Madnani are inapplicable for yet another reason. In Engineers-De-Space-Age
and Madnani the arbitrator had awarded interest for the pendente lite period.
This Court upheld the award of such interest under the old Act on the ground
that the arbitrator had the discretion to decide whether interest should be
awarded or not during the pendente lite period and he was not bound by the
contractual terms insofar as the interest for the pendente lite period. But in the
instant case the Arbitral Tribunal has refused to award interest for the pendente
lite period. Where the Arbitral Tribunal has exercised its discretion and refused
award of interest for the period pendente lite, even if the principles in those
two cases were applicable, the award of the arbitrator could not be interfered
with. On this ground also the decisions in Engineers-De-Space-Age and
Madnani are inapplicable. Be that as it may.
(emphasis supplied)
40. I am further in in agreement with the reliance of the Petitioner on the
decision of the Supreme Court in the case of Union of India v. Bright Power
Projects (India) Pvt. Ltd. (supra). In the aforesaid case, the relevant clause of
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the contract entered into between the parties stipulated that “No interest will
be payable upon the earnest money and the security deposit or amounts
payable to the contractor under the contract”, and upon disputes arising
between the parties, the same was referred to arbitration, wherein the Arbitral
Tribunal passed an award in favour of the Respondent-Contractor granting
interest from the date of reference till the ate of the arbitral award. The arbitral
award was challenged by the Appellant therein before this Court, and the
learned Single Judge had dismissed the petition filed by the Appellant, and
upon appeal the Division Bench had also dismissed the same. The dismissal
was thereafter challenged before the Supreme Court, which held that when
parties to the contract had agreed to the fact that interest would not be
awarded on the amount payable to the contractor under the contract, they
were bound by their understanding, and once the Respondent-Contractor
agreed that they would not claim any interest on the amount to be paid under
the contract, they could not have claimed interest either before a civil court or
before an Arbitral Tribunal. The Court held that the Arbitral Tribunal had
erred in awarding interest to the Respondent-Contractor by relying on a
decision of the Supreme Court which pertained to a different period, i.e.,
when the Arbitration Act, 1940 was in force. The Court therefore held that
pendente lite interest could not have been granted to the Respondent-
Contractor. Relevant paragraphs of the aforesaid decision are reproduced
below:-
10. Thus, it had been specifically understood between the parties that no
interest was to be paid on the earnest money, security deposit and the amount
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payable to the contractor under the contract. So far as payment of interest on
government securities, which had been deposited by the respondent contractor
with the appellant is concerned, it was specifically stated that the said amount
was to be returned to the contractor along with interest accrued thereon, but so
far as payment of interest on the amount payable to the contractor under the
contract was concerned, there was a specific term that no interest was to be paid
thereon.
11. When parties to the contract had agreed to the fact that interest would not
be awarded on the amount payable to the contractor under the contract, in our
opinion, they were bound by their understanding. Having once agreed that the
contractor would not claim any interest on the amount to be paid under the
contract, he could not have claimed interest either before a civil court or before
an Arbitral Tribunal.
12. Section 31(7) of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as "the Act") is clear to the effect that unless otherwise agreed by the
parties, the Arbitral Tribunal can award interest at reasonable rate for a period
commencing from that date when the cause of action arises till the date of the
award. Section 31(7) of the Act, reads as under
"31. (7)(a) Unless otherwise agreed by the parties, where and insofar as
an arbitral award is for the payment of money, the Arbitral Tribunal may
include in the sum for which the award is made interest, at such rate as it
deems reasonable, on the whole or any part of the money, for the whole
or any part of the period between the date on which the cause of action
arose and the date on which the award is made."
13. Section 31(7) of the Act, by using the words "unless otherwise agreed by
the parties", categorically specifies that the arbitrator is bound by the terms of
the contract so far as award of interest from the date of cause of action to date
of the award is concerned. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award interest.
…
15. The Arbitral Tribunal had mainly relied upon the judgment delivered by
this Court in G.C. Roy case In the said case, the situation was different. The
contract between the parties did not contain any condition that interest would
not be paid. In para 44 of the said judgment, it has been observed as under:
(SCC pp. 533-34)
"44. Having regard to the above consideration, we think that the
following is the correct principle which should be followed in this behalf:
Where the agreement between the parties does not prohibit grant of
interest and where a party claims interest and that dispute (along with
the claim for principal amount or independently) is referred to the
arbitrator, he shall have the power to award interest pendente lite. This is
for the reason that in such a case it must be presumed that interest was an
implied term of the agreement between the parties and therefore when
the parties refer all their disputes — or refer the dispute as to interest as
such — to the arbitrator, he shall have the power to award interest. This
does not mean that in every case the arbitrator should necessarily award
interest pendente lite. It is a matter within his discretion to be exercised
in the light of all the facts and circumstances of the case, keeping the
ends of justice in view."
16. Relying upon the aforestated judgment delivered by this Court, the Arbitral
Tribunal thought it proper to award interest on the amount payable to the
contractor for the period commencing from the date on which the reference
was entered upon till the date of the award. The Tribunal, however, failed to
consider the provisions of Section 31(7) of the Act and Clause 13(3) of the
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contract before awarding interest in the present case.
17. It is also pertinent to note that G.C. Roy case? had been decided on 12-12-
1991 on the basis of the provisions of the Arbitration Act, 1940, which was not
operative at the time when the dispute on hand was decided by the Arbitral
Tribunal.
18. Section 31(7)(a) of the Act ought to have been read and interpreted by the
Arbitral Tribunal before taking any decision with regard to awarding interest.
The said section, which has been reproduced hereinabove, gives more respect
to the agreement entered into between the parties. If the parties to the
agreement agree not to pay interest to each other, the Arbitral Tribunal has no
right to award interest pendente lite.
(emphasis supplied)
41. The decision of the Supreme Court in the case of Garg Builders v.
Bharat Heavy Electricals Limited (supra) is also apposite to the facts of the
present case. The dispute between the two parties in the aforesaid case had
been referred to arbitration, and the Arbitrator had passed an award in favour
of the Appellant therein granting interest pendente lite from the date of filing
the claim petition till the realization of the award amount. The Respondent-
BHEL had thereafter challenged the arbitral award before the Delhi High
Court, wherein the learned Single Judge had set aside the arbitral award with
respect to pendente lite interest, and the decision of the learned Single Judge
was upheld by the Division Bench upon appeal. The Appellant had therefore
challenged the order of the Division Bench before the Supreme Court,
wherein it was held that if the contract between the parties contains a specific
clause which expressly bars payment of interest, then it is not open for the
arbitrator to grant pendente lite interest. The Court further held that that
interest payments are governed in general by the Interest Act, 1978 in
addition to the specific statutes that govern an impugned matter, and that the
provisions of Section 3(3) of the Interest Act, 1978 explicitly allow the parties
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to waive their claim to an interest by virtue of an agreement, considering that
Section 3(3)(a)(ii) of the Interest Act, 1978 states that the statute will not
apply to situations where the payment of interest is barred by virtue of an
express agreement. The Court further held that the relevant clause which
barred the payment of interest to the Appellant was not ultra vires Section 28
of the Indian Contract Act, 1872. The Court also recognized that decisions
rendered in relation to the Arbitration Act, 1940 have no application in
matters governed by the Act. Relevant paragraphs of the aforesaid decision are
reproduced below:-
10. We have carefully considered the submissions of the learned counsel for
both the parties made at the Bar. The law relating to award of pendente lite
interest by arbitrator under the 1996 Act is no longer res integra. The
provisions of the 1996 Act give paramount importance to the contract entered
into between the parties and categorically restricts the power of an arbitrator to
award pre-reference and pendente lite interest when the parties themselves
have agreed to the contrary.
…
12. It is clear from the above provision that if the contract prohibits pre-
reference and pendente lite interest, the arbitrator cannot award interest for the
said period. In the present case, clause barring interest is very clear and
categorical. It uses the expression "any moneys due to the contractor" by the
employer which includes the amount awarded by the arbitrator.
…
17. Therefore, if the contract contains a specific clause which expressly bars
payment of interest, then it is not open for the arbitrator to grant pendente lite
interest. The judgment on which reliance was placed by the learned counsel for
the appellant in Ambica Construction= has no application to the instant case
because Ambica Construction- was decided under the Arbitration Act, 1940
whereas the instant case falls under the 1996 Act. This has been clarified in
Chittaranjan Maity as under : (Chittaranjan Maity case, SCC p. 616, para 16)
"16. Relying on a decision of this Court in Ambica Construction v. Union of
India5, the learned Senior Counsel for the appellant submits that mere bar to
award interest on the amounts payable under the contract would not be
sufficient to deny payment on pendente lite interest. Therefore, the arbitrator
was justified in awarding the pendente lite interest. However, it is not clear
from Ambica Construction 5 as to whether it was decided under the
Arbitration Act, 1940 (for short "the 1940 Act") or under the 1996 Act. It has
relied on a judgment of the Constitution Bench in Irrigation Deptt., State of
Orissa v. G.C. Roy. This judgment was with reference to the 1940 Act. In the
1940 Act, there was no provision which prohibited the arbitrator from
awarding interest for the pre-reference, pendente lite or post-award period,
whereas the 1996 Act contains a specific provision which says that if the
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agreement prohibits award of interest for the pre-award period, whereas the
1996 Act contains a specific provision which says that if the agreement
prohibits award of interest for the pre-award period, the arbitrator cannot
award interest for the said period. Therefore, the decision in Ambica
Construction cannot be made applicable to the instant case."
18. The decision in Raveechee & Co. relied on by the learned counsel for the
appellant is again under the Arbitration Act, 1940 which has no application to
the facts of the present case.
19. Having regard to the above, we are of the view that the High Court was
justified in rejecting the claim of the appellant seeking pendente lite interest on
the award amount
20. This takes us to the next question as to whether Clause 17 of the contract is
ultra vires in terms of Section 28 of the Contract Act, 1872. According to
Section 28, a contract is void to the extent it restricts absolutely a party from
enforcing his rights by usual proceedings in ordinary courts or if it limits the
time within which he may enforce his rights. Exception 1 to this section
contains a rule that a contract by which two or more persons agree that any
dispute which has arisen or which may arise between them in respect of any
subject or class of subjects shall be referred to arbitration is not illegal. The
question, therefore, is whether the contracts barring payment of interest
extinguish the rights of the parties. Exception 1 to Section 28 reads as under:
"Exception 1 : Saving of contract to refer to arbitration dispute that may
arise.—This section shall not render illegal a contract, by which two or
more persons agree that any dispute which may arise between them in
respect of any subject or class of subjects shall be referred to arbitration,
and that only the amount awarded in such arbitration shall be
recoverable in respect of the dispute so referred.”
21. Exception 1 to Section 28 saves contracts where the right to move the court
for appropriate relief is restricted but where the parties have agreed to resolve
their dispute through arbitration.Thus, a lawful agreement to refer the matter
to arbitration can be made a condition precedent before going to courts and it
does not violate Section 28. No cause of action then accrues until the arbitrator
has made the award and the only amount awarded in such arbitration is
recoverable in respect of the dispute so referred. Section 31(7)(a) of the 1996
Act which allows parties to waive any claim to interest including pendente lite
and the power of the arbitrator to grant interest is subject to the agreement of
the parties.
22. It is pertinent to note that interest payments are governed in general by the
Interest Act, 1978 in addition to the specific statutes that govern an impugned
matter. Section 2(a) of the Interest Act defines a "Court" which includes both a
tribunal and an arbitrator. In turn, Section 3 allows a "Court" to grant interest
at prevailing interest rates in various cases. The provisions of Section 3(3) of
the Interest Act, 1978 explicitly allow the parties to waive their claim to an
interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act
will not apply to situations where the payment of interest is "barred by virtue of
an express agreement".
23. Thus, when there is an express statutory permission for the parties to
contract out of receiving interest and they have done so without any vitiation of
free consent, it is not open for the arbitrator to grant pendente lite interest. We
are of the considered opinion that Clause 17 of the contract is not ultra vires in
terms of Section 28 of the Contract Act, 1872.
(emphasis supplied)
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42. I am further in agreement with the reliance of the learned counsel for
the Petitioner on the decision rendered in State of Haryana v. Jai Durgaa
Finvest Pvt. Ltd. (supra), inasmuch as though the same does not relate to
arbitral proceedings, the same has been rendered in the context of the an
agreement which bars the payment of interest. In the aforesaid case, the
relevant clause on the agreement executed between the parties stipulated that
the security deposited by the Respondent-Contractor would not carry interest,
and the same had to be refunded to them within a period of three months.
When the contract was subsequently terminated by the Appellant and the
security amount was forfeited by the Appellant, the matter was referred before
the Appellate Authority, which directed that the security amount could be
adjusted against the outstanding contract money and interest. Subsequently a
notice was issued by the Appellant for depositing the aforesaid amount, which
was challenged by the Respondent-Contractor before the Punjab and Haryana
High Court through a writ petition, while also challenging the legality of the
contract clause which barred interest. The petition was partly allowed, and
upon a SLP being filed before the Supreme Court, the matter was remanded
back to the High court for re-examination. The learned Single Judge in this
instance held that the clause barring interest was unsustainable in law, and the
same was held by the Division Bench in appeal. Thereafter, a Review Petition
was filed by the Appellant in this regard, which was dismissed, and this
dismissal was challenged before the Supreme Court. The Court held that
courts cannot re-write terms of a contract, however reasonable, and that the
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relevant clause barring interest could not be considered to be in opposition to
public policy, and that once the parties had voluntarily accepted a contract
they could not turn around and assail the same as oppressive after major part
of the contract period had gotten over. The Court however held that since the
Appellant was obligated to refund the security amount within three months,
which it failed to do, the Respondent-Contractor was entitled to interest after
the expiry of the period of 3 months from the determination of the contract.
Relevant paragraphs of the aforesaid decision are reproduced below:-
23. It is well settled that in matters of contract between the parties the function
of a Court is to interpret and enforce the terms as has been agreed between
parties. The Court will not re-write the terms howsoever reasonable the
substituted term may appear to be. In matters of commercial contracts where
the parties stand on equal footing and have committed to certain unambiguous
terms, the language of the contract is to be clearly looked into and parties are
bound by the same. Once the parties with their eyes open without any protest
whatsoever and with free will accept certain terms of a contract they cannot
afterwards be permitted to go back on the same merely because at a later point
of time the stipulation proves to be onerous. The agreed forfeiture/security
stipulation is to be enforced according to the terms of the contract as held in
National Highways Authority of India v. Ganga Enterprises, and Shri
Hanuman Cotton Mills v. Tata Aircraft Limited.
…
25. The Respondent was fully aware of the statutory Rules and Form as per the
terms of which there are certain conditions to be fulfilled and failure thereof
will entail certain consequences Likewise, the Respondent was also aware that
the security deposited will not carry any interest and it will be refunded within
three months from the date of the expiry of the contract or sooner
determination of the contract. The Respondent had at least two opportunities
of perusing the terms and conditions. Despite knowing the existence of the
clause, the Respondent applied for the bid and became a successful bidder.
Secondly when the Respondent signed the contract/agreement on 30.11.1998
as prescribed under Form-L, it was conscious of all the clauses, especially
Clause 19 which prescribed that the security deposited will not carry any
interest. It is not the case of the Respondent that it had been coerced into
signing the contract nor is it the case that when the contract was signed it was
under some mistake or undue influence. Respondent has voluntarily entered
into the contract by which they were obliged to deposit the amount as
prescribed therein and the failure would result in termination. It has been
consistently held by the learned Single Judge and the Division Bench of the
High Court that the termination of the contract was purely by the conduct of
the Respondent and it was the Respondent who is to be blamed for non-
performance and for not depositing the monthly payments on time. The courts
below have clearly examined the conditions and the exchange of letters and
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notices between the parties and have finally concluded that there was no failure
on the part of the Appellant for non-performance of the contract by the
Respondent.
26. It has been consistently found that the order of termination of the contract
was effected due to the failure of the Respondent in abiding by the conditions
as stipulated in the agreement. It has been noticed that after one year of the
execution of the agreement the Respondent-company sent a letter to the
Appellant stating that they have been obstructed by the land owners and,
therefore, they are unable to carry out the mining. However, it has been found
that the Respondent did not carry out the mining on their own and they have
had made up a false plea with regard to the issuance of a notice in order to
secure benefits from the Department. The Respondent was also required to
submit a monthly return about sand extracted and if it was not extracting any
sand due to problems created by the land owners then it would certainly submit
a monthly report to that effect mentioning therein that extraction of the sand is
Nil. It was clearly found by the High Court that the Respondent was negligent
in not reporting the matter though they were working in other villages and
carrying out mining. Though the Appellant had served a notice on the
Respondent calling upon them to make the payment of monthly instalment
failing which contract would be cancelled, Respondent did not abide by the
same and took excuses for not carrying out the obligation. Therefore, it has
been found by the courts below that the order of termination of the contract
does not suffer from any illegality particularly when the Respondent failed to
respond even to the notice of termination. This aspect has also attained finality,
especially in view of order dated 08.05.2009 passed by a coordinate bench of
this Court in SLP(C) Nos. 9761-9762 of 2009.
27. The High Court fell into error in declaring Clause 19 as unsustainable in
law and against public policy. The public policy cannot be pressed into service
to set at naught the commercial contract which expressly denies interest on
security deposit. Such a stipulation is neither immoral nor unlawful nor can it
be classified as unsustainable in the legal sense. The Respondent as a
commercial entity had participated in open auction and emerged as the highest
bidder and executed the standard statutory Form-L with full knowledge and
furnished an undertaking to abide by the same. Once parties have voluntarily
accepted a contract they cannot turn around and assail the same as oppressive
after major part of the contract period has gotten over. The reasoning of the
High Court that when State charges interest on belated instalment they should
pay interest on the security does not stand scrutiny. The stipulations in Clause
2 and in Clause 19 operate in different fields and they serve different purposes.
While Clause 2 provides for liquidated damages or compensation which is
payable or referable to the contractor's default on the timely payment which is
a consequence of the contractor's own breach, the security deposit in Clause 19
is a performance guarantee held by the State and the parties have clearly agreed
that it would carry no interest. There is no reciprocal obligation upon the State
to pay interest on the security. In fact, both the Clauses are seen in the same
contract which has been agreed between both the parties with their eyes open.
To reason otherwise and without interpreting the contract as agreed but to add
new terms which were not admittedly written therein amounts to rewriting the
contract which a Writ Court is not entitled to do.
28. Hence, it is held that Clause 19 is a valid binding term of the agreement
and the finding of the learned Single Judge as affirmed by the Division Bench
that Clause 19 is unsustainable in law and opposed to public policy is set-aside.
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43. This view is further fortified by the recent decision of the Supreme Court in
North Eastern Electric Power Corpn. Limited (NEEPCO) v. Astra Construction
(P) Ltd. (supra), wherein the relevant clause of the contract entered into between
the Appellant and the Respondent-Corporation provided that no claims for
interest or damages would be entertained by the Respondent-Corporation with
respect to any money or balance which may be lying with the Respondent-
Corporation owing to any dispute, difference or misunderstanding between the
Engineer-in-Charge on the one hand and contractor on the other or with respect
to any delay on the part of the Engineer-in-Charge making periodical or final
payments or in any other respect whatsoever. The Court while examining the
difference in the Act and the Arbitration Act, 1940 with regard to the power of the
arbitrator to grant interest had held that the issue was no longer res integra, and
rejected the contention that the bar under relevant clause was confined to interest
claimed on money or balances held up owing to a dispute, and that it did not
extend to interest on any other head of claim, including interest upon an award
itself. It held that the relevant clause of the agreement between the parties, by
naming delay in payment as a separate ground, standing on its own and not tied to
any dispute expressly had shut out a claim for interest arising from delayed
payment, whether or not there was any dispute about it at all. The Court therefore
held that the Arbitral Tribunal, in awarding pre-reference or pendente lite interest,
exceeded the bounds of its jurisdiction under Section 31(7)(a) of the Act. Relevant
paragraphs of the aforesaid decision are reproduced below:-
19. Clause 54 of the GCC is worded differently, and the difference matters. It bars
claims for interest or damages in two separate situations, not one. The first is the
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same as before, money or balance lying with the Corporation owing to a dispute,
difference or misunderstanding. But Clause 54 then adds, in its own right and
joined by the word “or”, a second, independent situation, “any delay on the part of
the Engineer-in-Charge making periodical or final payments”, before finally adding
the same closing words, “or in any other respect whatsoever.” This is not a small
drafting difference. By naming delay in payment as a separate ground, standing on
its own and not tied to any dispute, Clause 54 does what the clause in Harish
Chandra (supra) never did: it expressly shuts out a claim for interest arising from
delayed payment, whether or not there was any dispute about it at all. The very
situation that fell outside the bar in Harish Chandra (supra), delay in payment,
without more, is brought squarely inside the bar in Clause 54. That is the true and
complete answer to the High Court's view that the two clauses say the same thing;
they do not, and the difference is decisive.
20. This is also not a one-off or unusual way of drafting such a clause. The very same
structure, a separate, additional line barring interest on delayed payments, over and
above the bar on money withheld due to a dispute, appears in the clauses that this
Court examined in Sayeed Ahmed (supra) and THDC-II (supra), and in each of
those cases, for that very reason, this Court held that the clause was a complete bar
on the arbitrator's power to award interest, whether for the pre-reference period or
pendente lite. We respectfully agree with that reasoning and see no reason to depart
from it. It follows that the High Court was in error in treating Clause 54 as no
different from the clause in Harish Chandra (supra). The two clauses are worded
differently, and that difference in wording makes all the difference in law. It is the
line of decisions in Sayeed Ahmed (supra) and thereafter, not Harish Chandra
(supra), that governs this case.
…
23. For the foregoing reasons, we are of the considered view that Clause 54 of the
GCC bars the grant of interest for the pre-reference period, and that the Arbitral
Tribunal, in awarding such interest, exceeded the bounds of its jurisdiction under
Section 31(7)(a) of the 1996 Act. The High Court erred in equating Clause 54 with
the clause considered in Harish Chandra (supra), and in restoring the grant of pre-
reference interest on that basis. The impugned judgment, to the extent it restores the
grant of pre-reference interest, cannot be sustained and is accordingly set aside.
44. I am therefore not inclined to accept the contention of the Respondent that
pendente lite interest could be granted in the facts of the present case. Clause 24
of the Agreement being a bar from awarding any interest could not therefore be
disregarded, and pendente lite interest in the facts of the present case could not be
granted. I am also of the view that the decisions relied upon by learned counsel for
the Respondent in ONGC Ltd. v. G & T Beckfield Drilling Services (P) Ltd.
(supra), Reliance Cellulose Products Ltd. v. ONGC Ltd. (supra), and Ferro
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Concrete Construction (India) (P) Ltd. v. State of Rajasthan (supra) have been
rendered in a different fact pattern by the Supreme Court and hence cannot be
applied in the facts of the present case.
45. The decision of the Supreme Court in the case of ONGC Ltd. v. G & T
Beckfield Drilling Services (P) Ltd. (supra) is not apposite to the facts of the
present case, as the same was rendered in a different fact pattern, inasmuch as the
relevant clause in the aforesaid case was in respect of remittances from the
Appellant-Corporation to the Respondent pursuant to submission of invoices, and
the right of the Appellant-Corporation to withhold payment upon a question
being any item or items of an invoice until its resolution. The relevant clause in
this context stipulated that “No interest shall be payable by ONGC on any
delayed payment/disputed claim”. In fact, the Supreme Court itself has held that a
clause merely barring award of interest on delayed payment by itself could not be
readily inferred as a bar to award pendente lite interest by the Arbitral Tribunal.
The Court held that when read as a whole, the relevant clause does not expressly
or by necessary implication proscribe grant of pendente lite interest by the Arbitral
Tribunal. Since the relevant clause did not expressly put a bar on pendente lite
interest, the Court held that the same could be granted to the Respondent.
However, Clause 24 of the Agreement in the present case completely bars the
Agent (Respondent) from claiming any kind of interest on any of their claims as
per the Interest Act, 1978 or any other provisions, which includes interest granted
pendent lite. Therefore, the aforesaid decision will not be applicable to the facts of
the present case.
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46. I am further not in agreement with the contention of learned counsel on
behalf of the Respondent that the decision rendered in the case of Reliance
Cellulose Products Ltd. v. ONGC Ltd. (supra) will be applicable to the facts of the
present case, inasmuch as the same was rendered under the statutory provisions of
the Arbitration Act, 1940. The Court in the aforesaid decision itself has
differentiated between the Arbitration Act, 1940 and the Act, and held that under
the Arbitration Act, 1940, unless a contractor agrees that no claim for interest will
either be entertained or payable by the other party owing to dispute, difference, or
misunderstandings between the parties or in respect of delay on the part of the
engineer or in any other respect whatsoever leading the Court to find an express
bar against payment of interest, a clause which merely states that no interest will be
payable upon amounts payable to the contractor under the contract would not be
sufficient to bar an arbitrator from awarding pendente lite interest. The Court
further recognized that the position under Section 31(7) of the Act is wholly
different, inasmuch as it sanctifies agreements between the parties and states that
the moment the agreement says otherwise, no interest becomes payable right from
the date of the cause of action until the award is delivered. The Court had
observed that the relevant clause in the agreement between the Appellant-
Contractor and the Respondent only barred interest on delays in payments made
by the Respondents, and not in respect of any other amounts payable by the
Respondent. Therefore, upon strictly construing the relevant clause barring
payment of interest, the Court held that the clause confined itself to delays in
payment and not to any other amounts payable to the Appellant-Contractor under
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the contract, and therefore there was no bar to the payment of interest. The
dispute in the present case, is however governed by the Act, and Clause 24 of the
Agreement indicatively completely bars payment of all interest under the
Agreement, including pendente lite interest. Relevant paragraphs of the aforesaid
decision are reproduced below:-
24. A conspectus of the decisions that have been referred to above would show that
under the 1940 Act, an arbitrator has power to grant pre-reference interest under the
Interest Act, 1978 as well as pendente lite and future interest. However, he is
constricted only by the fact that an agreement between the parties may contain an
express bar to the award of pre-reference and/or pendente lite interest. Since interest
is compensatory in nature and is parasitic upon a principal sum not having been
paid in time, this Court has frowned upon clauses that bar the payment of interest. It
has therefore evolved the test of strict construction of such clauses, and has gone on
to state that unless there is a clear and express bar to the payment of interest that can
be awarded by an arbitrator, clauses which do not refer to claims before the
arbitrators or disputes between parties and clearly bar payment of interest, cannot
stand in the way of an arbitrator awarding pre-reference or pendente lite interest.
Thus, when one contrasts a clause such as the clause in Second Ambica Construction
case22 with the clause in Tehri Hydro Development Corpn. Ltd.18, it becomes clear
that unless a contractor agrees that no claim for interest will either be entertained or
payable by the other party owing to dispute, difference, or misunderstandings
between the parties or in respect of delay on the part of the engineer or in any other
respect whatsoever, leading the Court to find an express bar against payment of
interest, a clause which merely states that no interest will be payable upon amounts
payable to the contractor under the contract would not be sufficient to bar an
arbitrator from awarding pendente lite interest under the 1940 Act. As has been
held in First Ambica Construction case-, the grant of pendente lite interest depends
upon the phraseology used in the agreement, clauses conferring power relating to
arbitration, the nature of claim and dispute referred to the arbitrator, and on what
items the power to award interest has been taken away and for which period. We
hasten to add that the position as has been explained in some of the judgments
above under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section
31(7) of the 1996 Act sanctifies agreements between the parties and states that the
moment the agreement says otherwise, no interest becomes payable right from the
date of the cause of action until the award is delivered.
25. In the present case, Clause 16 of the General Conditions of Contract only speaks
of any delay in payment not making ONGC liable for interest. There is nothing in
this clause which refers even obliquely to the arbitrator's power to grant interest.
This Court finds that the aforesaid clause is narrower than the clause considered by
the three-Judge Bench in Second Ambica Construction case-which states that no
interest will be payable on amounts payable to the contractor under the contract.
Clause 16 in the present case confines itself only to delay in payment and not to any
other amounts payable to the contractor under the contract. Also, unlike the clause
in Tehri Hydro Development Corpn. Ltd., Clause 16 does not contain language
which is so wide in nature that it would interdict an arbitrator from granting
pendente lite interest. It will be remembered that the clause in Tehri Hydro
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Development Corpn. Ltd. spoke of no claim for interest being entertained or
payable in respect of any money which may be lying with the Government owing to
disputes, difference or misunderstanding between the parties and not merely in
respect of delay or omission; Further, the clause in Tehri Hydro Development
Corpn. Ltd. goes much further and makes it clear that no claim for interest is
payable "in any other respect whatsoever". It is, thus, clear that Clause 16 cannot
possibly interdict the payment of pendente lite interest on the facts of the present
case.
47. Along similar lines, the decision of the Supreme Court in the case of
Ferro Concrete Construction (India) (P) Ltd. v. State of Rajasthan (supra) is
not relevant to the facts of the present case, inasmuch it was delivered in the
context of the Arbitration Act, 1940. The Court in the aforesaid case had
reiterated that under the Arbitration Act, 1940, a stricter approach is followed
that requires a clear and express clause against the payment of interest in case
of difference, dispute, or misunderstanding, in case of delay of payment, or
any other case whatsoever, to constitute a bar on the arbitrator from granting
interest, while under the Act, Section 31(7)(a) sanctifies party autonomy, and
interest is not payable the moment the contract provides otherwise. The Court
also held that the arbitrator's power to grant interest would depend on the
contractual clause in each case, and whether it expressly takes away the
arbitrator's power to grant pendente lite interest, and that this would have to
be determined based on the phraseology of the agreement, clauses conferring
powers relating to arbitration, the nature of claim and dispute referred to the
arbitrator, and on what items the power to award interest is contractually
barred and for which period. The Court therefore held that the relevant
clause prohibited the Appellant-Contractor from claiming interest on any
payment, arrears or balance, which may be found due to him at any time, and
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applying the above-stated law, the relevant clause did not expressly bar the
award of pendente lite interest in the event of disputes, differences, or
misunderstandings between the parties, or on delayed payment, or in any
other respect whatsoever, and the Court had therefore not readily inferred a
bar on the payment of interest. However, the factual matrix of the present case
is governed by the provisions of the Act, particularly Section 31(7), where as
soon as Clause 24 of the Agreement provided that no interest would be
payable under the Interest Act, 1978 or any other provisions, there would be a
bar to interest of payment to the Respondent. Further, the decision in Ferro
Concrete Construction (India) (P) Ltd. v. State of Rajasthan (supra) has been
considered by the Supreme Court in Sree Kamatchi Amman Constructions v.
Railways (supra) wherein the Court recognized that the decision in Ferro
Concrete Construction (India) (P) Ltd. v. State of Rajasthan (supra) was
rendered under the statutory provisions of the Arbitration Act, 1940 and
refused to grant the prayer of pendente lite interest under the regime of the
Act in view of the express bar in the contract.
48. I am therefore of the view that the interest has not been rightly granted
pendente lite to the Respondent, and the findings on the same need to be
interfered with under Section 34 of the Act in the present petition, considering the
express bar in the Agreement entered into between the parties. The impugned
arbitral award is therefore set aside to that extent.
49. Tied in with the aforesaid claim is the third limb of the impugned arbitral
award, i.e., the post-award interest at the rate of 18% per annum of the sum
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awarded, which has been awarded in view of the provisions of Section 31(7)(b) of
the Act. The aforesaid provision, prior to its substitution by Act 3 of 2016
read as follows:-
"(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise
directs, carry interest at the rate of eighteen per centum per annum from the date of
the award to the date of payment.”
The amended provision which is applicable to the facts of the present case is as
follows:-
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise
directs, carry interest at the rate of two per cent. higher than the current rate of
interest prevalent on the date of award, from the date of award to the date of
payment.
Explanation- The expression "current rate of interest" shall have the same meaning
as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).
On a reading of the amended and the unamended provisions, it is clear that prior
to amendment, the arbitrator could direct future interest at the rate of 18% per
annum from the date of the arbitral award to the date of payment. However, the
amended section carries interest at a rate 2% higher than the current rate of
interest prevalent from the date of the arbitral award till the date of payment. In
the facts of the present case, the learned Sole Arbitrator has correctly awarded
post-award interest as per the mandate of Section 31(7)(b), however, to my mind,
he has mistakenly applied the rate of 18% per annum, which was the rate prior to
the amendment by Act 3 of 2016 with retrospective effect from 23 rd September
2015. In the facts of the present case, the date of the award is 1 st April 2019, and
the same will therefore be governed the amended provisions of Section 31(7)(b) of
the Act, and hence in my view the rate of interest would be 9% per annum,
considering that the date of award is 1st April 2019 and the rate of interest
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prevalent on the date of award was roughly between 7% to 7.8%, and Section
31(7)(b) allows the arbitrator to charge interest at a rate 2% higher than the
prevalent rate of interest. Hence, to that extent, the impugned arbitral award is
modified, and instead of an interest rate of 18% per annum till the payment and
realization of the awarded amount, an interest rate of 9% per annum would be
charged.
50. The setting aside of the impugned arbitral award on the issue of pendente
lite interest and the modification of the rate of post-award interest can be made in
view of the fact that both these limbs of the impugned arbitral award can be
severed from the other portions of the impugned arbitral award pursuant to the
decision of the Supreme Court in the leading case of Gayatri Balasamy v. ISG
Novasoft Technologies Ltd.15. In the aforesaid case it has been held that post-
award interest granted by the Arbitral Tribunal can be modified by the Court. The
relevant paragraphs of the aforesaid decision on the severability of arbitral awards
and the modification of post-award interest by the Court are reproduced below:-
32. In the present controversy, the proviso to Section 34(2)(a)(iv) is particularly
relevant. It states that if the decisions on matters submitted to arbitration can be
separated from those not submitted, only that part of the arbitral award which
contains decisions on matters non-submitted may be set aside. The proviso,
therefore, permits courts to sever the non-arbitrable portions of an award from
arbitrable ones. This serves a twofold purpose. First, it aligns with Section 16 of the
1996 Act, which affirms the principle of kompetenz-kompetenz, that is, the
arbitrators' competence to determine their own jurisdiction. Secondly, it enables the
Court to sever and preserve the "valid" parts) of the award while setting aside the
"invalid" ones.- Indeed, before us, none of the parties have argued that the Court is
not empowered to undertake such a segregation.
33. We hold that the power conferred under the proviso to Section 34(2)(a)(iv) is
clarificatory in nature. The authority to sever the "invalid" portion of an arbitral
award from the "valid" portion, while remaining within the narrow confines of
Section 34, is inherent in the Court's jurisdiction when setting aside an award.
15 (2025) 7 SCC 1
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34. To this extent, the doctrine of omne majus continet in se minus-the greater
power includes the lesser-applies squarely. The authority to set aside an arbitral
award necessarily encompasses the power to set it aside in part, rather than in its
entirety. This interpretation is practical and pragmatic. It would be incongruous to
hold that power to set aside would only mean power to set aside the award in its
entirety and not in part. A contrary interpretation would not only be inconsistent
with the statutory framework but may also result in valid determinations being
unnecessarily nullified.
35. However, we must add a caveat that not all awards can be severed or segregated
into separate silos. Partial setting aside may not be feasible when the "valid" and
"invalid" portions are legally and practically inseparable. In simpler words, the
"valid" and "invalid" portions must not be interdependent or intrinsically
intertwined. If they are, the award cannot be set aside in part.
…
40. A core principium of arbitration, an alternative dispute resolution (hereinafter
referred to as "ADR") mechanism, is to provide a quicker and cost-effective
alternative to courtroom litigation. While this suggests minimal judicial interference,
the role of domestic courts remains crucial, as they function in a supportive capacity
to facilitate and expedite the resolution of disputes. Therefore, it follows that judicial
intervention is legitimate and necessary when it furthers the ends of justice,
including the resolution of disputes.
41. To deny courts the authority to modify an award—particularly when such a
denial would impose significant hardships, escalate costs, and lead to unnecessary
delays—would defeat the raison d'être of arbitration. This concern is particularly
pronounced in India, where applications under Section 34 and appeals under
Section 37 often take years to resolve.
42. Given this background, if we were to decide that courts can only set aside and
not modify awards, then the parties would be compelled to undergo an extra round
of arbitration, adding to the previous four stages: the initial arbitration, Section 34
(setting aside proceedings), Section 37 (appeal proceedings), and Article 136 (SLP
proceedings). In effect, this interpretation would force the parties into a new
arbitration process merely to affirm a decision that could easily be arrived at by the
Court. This would render the arbitration process more cumbersome than even
traditional litigation.
43. Equally, Section 34 limits recourse to courts to an application for setting aside
the award. However, Section 34 does not restrict the range of reliefs that the Court
can grant, while remaining within the contours of the statute. A different relief can
be fashioned as long as it does not violate the guardrails of the power provided
under Section 34. In other words, the power cannot contradict the essence or
language of Section 34. The Court would not exercise appellate power, as envisaged
by Order 41 of the Code of Civil Procedure, 1908 (hereinafter referred to as "the
Code").
44. We are of the opinion that modification represents a more limited, nuanced
power in comparison to the annulment of an award, as the latter entails a more
severe consequence of the award being voided in toto. Read in this manner, the
limited and restricted power of severing an award implies a power of the Court to
vary or modify the award. It will be wrong to argue that silence in the 1996 Act, as
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projected, should be read as a complete prohibition.
45. We are thus of the opinion that the Section 34 Court can apply the doctrine of
severability and modify a portion of the award while retaining the rest. This is
subject to parts of the award being separable, legally and practically, as stipulated in
Part Il of our Analysis.
46. Mustill and Boyd have observed that an order varying an award is not equivalent
to an appellate process.30 The authors suggest that a modification order would only
be appropriate where the modification, including any adjustment of costs, follows
inevitably from the tribunal's determination of a question of law. This approach
would be beneficial, as it would reduce costs and delays. The courts need not engage
in any fact-finding exercise. By acknowledging the Court's power to modify awards,
the judiciary is not rewriting the statute. We hold that the power of judicial review
under Section 34, and the setting aside of an award, should be read as inherently
including a limited power to modify the award within the confines of Section 34.
…
73. The next question that arises is: Do courts possess the power to declare or
modify interest, especially post-award interest? In respect of pendente lite interest,
Section 31(7)(a) (Annexure A), states that unless otherwise agreed by the parties, the
Arbitral Tribunal may include in its sum for the award, interest, at such rate it deems
reasonable on whole or part of the money for whole or part of the period on which
the cause of action arose and the date on which the award is made. In respect of
post-award interest, Section 31(7)(b) (Annexure A) states that unless an award
provides for interest on a sum directed to be paid by it, the sum will carry an interest
at a 2% higher rate than the current rate of interest prevalent on the date of the
award, from the date of the award till the date of payment. The Explanation defines
the expression "current rate of interest".
74. There can be instances of violation of Section 31(7)(a), and the pendente lite
interest awarded may be contrary to the contractual provision. We are of the opinion
that, in such cases, the Court while examining objections under Section 34 of the
1996 Act will have two options. First is to set aside the rate of interest or second,
recourse may be had to the powers of remand under Section
75. For the post-award interest in terms of Section 31(7)(b), the courts will retain
the power to modify the interest where the facts justify such modification. This is
why the standard rate stipulated in clause (b) applies when the award itself does not
specify the applicable post-award interest. There can be a situation where the party
to be paid money is at fault and is guilty of delay which may require a modification
in the rate of interest. In the absence of grant of post-award interest in the award, the
Court also possesses the power to grant post-award interest. Clearly, as per the
legislative mandate, it is not the sole prerogative of the arbitrator.
76. Compare Section 31 of the 1996 Act with Section 31 of the Model Law. While
both sections are titled similarly-"Form and Contents of Award"-only the 1996 Act
addresses interest in Section 31(7). The Model Law does not provide standards
governing the determination of interest rates. Thus, Section 31(7) is a unique
creation of the Indian legislature. It was not borrowed from the Model Law.
Specifically, under Section 31(7)(b), the legislature has established a standard rate of
interest to guide the arbitrator's discretion when it comes to determining the post-
award interest rate. While the arbitrator retains his flexibility based on facts and
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circumstances of the case, the standard set by the legislature must weigh in on their
consideration. Further, as there is a standard prescribed by the legislature, the post-
award interest awarded can be scrutinised by courts against the standards prescribed.
77. Our reasoning is bolstered when considering the practical aspects. Ine Arbitral
Tribunals, when determining post-award interest, cannot foresee future issues that
may arise. Post-award interest is inherently future-oriented and depends on facts and
circumstances that unfold after the award is issued. Since the future is unpredictable
and unknown to the arbitrator at the time of the award, it would be unreasonable to
suggest that the arbitrator, as a soothsayer, could have anticipated or predicted future
events with certainty. Therefore, it is appropriate for the Section 34 Court to have
the authority to intervene and modify the post-award interest if the facts and
circumstances justify such a change.
78. Inherent in the discussion above, is the Court's power to both increase or
decrease the post-award interest rate. It would be incorrect to state that the Court's
power to interfere with this interest rate is limited solely to decreasing the interest
rate. Situations may arise where the rate should be increased due to delays or
obstructions in the execution of the award. Interest rates may also fluctuate over
time.
79. However, the Court, while exercising this power, must be cautious and mindful
not to overstep its role by altering the interest rate unless there are compelling and
well-founded reasons to do so. In exercising this power, the Court is not acting in an
appellate capacity, but rather under limited authority. For instance, the 1996 Act
stipulates a standard post-award interest rate. When the statute itself benchmarks a
standard, unless there are special and specific reasons, the rate of interest stipulated
by the statute should be applied.
80. Nevertheless, this limited power is significant, as it can help avoid further rounds
of litigation. Without it, the Court may be forced to set aside the entire award or
order a fresh round of arbitration because of an erroneous interest rate rather than
simply adjusting this rate.
…
87. Accordingly, the questions of law referred to by Gayatri Balasamy- are answered
by stating that the Court has a limited power under Sections 34 and 37 of the 1996
Act to modify the arbitral award. This limited power may be exercised under the
following circumstances:
87.1. When the award is severable, by severing the "invalid" portion from the "valid"
portion of the award, as held in Part II of our Analysis;
87.2. By correcting any clerical, computational or typographical errors which appear
erroneous on the face of the record, as held in Parts IV and V of our Analysis;
87.3. Post-award interest may be modified in some circumstances as held in Part IX
of our Analysis; and/or
87.4. Article 142 of the Constitution applies, albeit, the power must be exercised
with great care and caution and within the limits of the constitutional power as
outlined in Part XII of our Analysis.
(emphasis supplied)
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51. Coming to the last limb of the impugned arbitral award, i.e., the costs of Rs.
1,50,00,000/-, I am of the view that the same is governed by the provisions of
Section 31A of the Act, and the learned Sole Arbitrator has on the basis of the
statements of costs which have been submitted by both the parties, come to a
figure of Rs. 1,50,00,000/-. Section 31A of the Act is reproduced hereinbelow:-
31A. Regime for costs.-(1) In relation to any arbitration proceeding or a proceeding
under any of the provisions of this Act pertaining to the arbitration, the Court or
arbitral tribunal, notwithstanding anything contained in the Code of Civil
Procedure, 1908 (5 of 1908), shall have the discretion to determine-
(a) whether costs are payable by one party to another;
(b) the amount of such costs; and
(c) when such costs are to be paid.
Explanation.-For the purpose of this sub-section, "costs" means reasonable costs
relating to-
(i) the fees and expenses of the arbitrators, Courts and witnesses;
(ii) legal fees and expenses;
(iii) any administration fees of the institution supervising the arbitration; and
(iv) any other expenses incurred in connection with the arbitral or Court
proceedings and the arbitral award.
(2) If the Court or arbitral tribunal decides to make an order as to payment of costs,-
(a) the general rule is that the unsuccessful party shall be ordered to pay the costs of
the successful party; or
(b) the Court or arbitral tribunal may make a different order for reasons to be
recorded in writing.
(3) In determining the costs, the Court or arbitral tribunal shall have regard to all the
circumstances, including-
(a) the conduct of all the parties;
(b) whether a party has succeeded partly in the case;
(c) whether the party had made a frivolous counter-claim leading to delay in the
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disposal of the arbitral proceedings; and
(d) whether any reasonable offer to settle the dispute is made by a party and refused
by the other party.
(4) The Court or arbitral tribunal may make any order under this section including
the order that a party shall pay-
(a) a proportion of another party's costs;
(b) a stated amount in respect of another party's costs;
(c) costs from or until a certain date only;
(d) costs incurred before proceedings have begun;
(e) costs relating to particular steps taken in the proceedings;
(f) costs relating only to a distinct part of the proceedings; and
(g) interest on costs from or until a certain date.
(5) An agreement which has the effect that a party is to pay the whole or part of the
costs of the arbitration in any event shall be only valid if such agreement is made
after the dispute in question has arisen.
The Explanation to the word “costs” as given in the aforesaid section includes the
fees and expenses of the arbitrators, courts and witnesses, legal fees and expenses,
any administration fees of the institution supervising the arbitration, and any
other expenses incurred in connection with the arbitral or court proceedings and
the arbitral award. In the facts of the present case, it is clearly seen as recorded by
the learned Sole Arbitrator, that two rounds of arbitration have taken place, and
the parties have incurred considerable costs. In the present case, in fact, an expert
was also appointed with the consent of the parties to conduct a thorough
inspection of the accounts, charges of which also have to be included while
awarding costs. The learned Sole Arbitrator on the basis of the costs incurred has
to my mind rightly come to the figure of Rs. 1,50,00,000/-, and the findings on
the same need not be disturbed. The relevant part of the findings is reproduced
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below:-
91. Both parties were asked to submit their statement of costs. Claimant has
submitted his statement showing that he has incurred, during this entire period,
from 1996 to now, a sum of over Rs. 2 crs. Respondent have indicated that they
have incurred costs of Rs: 1,62,61946/-.
92. In this case it is seen that, during the Contract Period, Respondent has
collected a large sum of money. Even though Respondent has recovered from
Claimant, all that the Claimant was to pay the Respondent with interest at 24% p.a.
the Respondent has for the past over 20 years retained monies without accounting
for the same. Claimant has had to incur expenses and costs indicated above. These
are now claimed by Claimant. Even when the previous Arbitrator gave an Interim
finding in favour of Claimant, and clearly the Respondent had collected much more,
than what the previous Arbitrator had Awarded, the Respondent do not pay up the
paltry sum Awarded by way of Interim measure. Instead Respondent makes
allegations against the previous Arbitrator. As a result of such allegations the
previous Arbitrator resigns. Claimant then has to go to Court to get this Tribunal
appointed. Before this Tribunal also the Respondent have not given any details or
particulars of the amounts collected by them during the Contract Period. They have
held back the relevant records. They have forced Claimant to get information
through RTI inquiries. By adopting such tactics the Respondent has, for the past so
many years, not given to Claimant monies which rightly belongs to him. The
Claimant has had to adopt Court proceedings and invoke Arbitration. The
Arbitration has been dragged on for so many years. In my view this is a fit case
where Respondent must pay to Claimant substantial costs. Even though Respondent
may not be directed to pay the actual costs, claimed to have been incurred by
Claimant, the Respondent must pay substantial costs. In my view costs of Rs. 1.5
crores must be paid by Respondent to Claimant. There will accordingly be an Award
of costs in favour of the Claimant and against the Respondent in a sum of Rs. 1.5
crores.
(emphasis supplied)
52. I am therefore of the view that the reliance placed by learned counsel
on behalf of the Petitioner on the case of Sanjeev Kumar Jain v Raghubir
Saran Charitable Trust & Ors. (supra) to hold that in the present case the costs
of Rs. 1,50,00,000/- are exorbitant would not be apposite, inasmuch as the
same decision was rendered on a different fact pattern. In the aforesaid case, a
Division Bench of the Delhi High Court had held that since the dispute was a
commercial dispute, the party which would succeed in the dispute would be
entitled to costs for litigation expenses, payable by the unsuccessful party. The
parties to the dispute were directed to file memos indicating the expenses they
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had incurred during the course of litigating the dispute. Thereafter, the
dispute was decided in favour of the Respondents, and the Appellant-Tenant
was directed to pay costs as per the memo filed by the Respondents. The
Supreme Court however observed that that contrary to the Respondents’
contentions, the order directing payment of costs was not a consent order, and
that payment of costs had been ordered by the High Court in the absence of
an assessment being carried out by the Taxing Officer of the High Court as to
the efficacy of the memos filed by the parties. The Court had therefore set
aside the order of costs and reduced them from Rs. 45,28,000/- to Rs. 3,000/.
However, in the facts of the present case, the learned Sole Arbitrator has
examined the statements of costs filed by both the parties, the rather
chequered history of the dispute, and the conduct of the Petitioner during the
course of arbitral proceedings. The learned Sole Arbitrator has taken
cognizance of the fact that the Petitioner did not even pay to the Respondent
the sum payable pursuant to the interim award dated 23 rd November 2005,
and had instead leveled allegations against the erstwhile Sole Arbitrator, and
that by not disclosing documents had compelled the Respondents to acquire
the same through applications under the RTI Act. Therefore, in the present
case, in contrast to the facts in Sanjeev Kumar Jain v Raghubir Saran
Charitable Trust & Ors. (supra), the learned Sole Arbitrator has taken into
account the statements filed by the parties and their conduct to come to a
reasoned finding as to costs.
53. It is therefore my view that there is no patent illegality and no arbitrariness
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or perversity which could be demonstrated by the Petitioner in so far as granting
the monetary claim of Rs. 24,06,50,119.03/- as per the first limb of the
impugned arbitral award and the costs of Rs. 1,50,00,000/- as per the fourth limb
in the facts of the present case warranting interference under Section 34 of the
Act. I am, in fact, of the view that the impugned arbitral award has been passed
on detailed findings and on the basis of appreciation of the facts and
documentary evidence, on which a possible view has been arrived at by the
learned Sole Arbitrator. The view of the learned Sole Arbitrator was in fact
strengthened by the assistance rendered by the expert, who was a Chartered
Accountant firm, and therefore, to find fault in the impugned arbitral award and
substitute it with this Court’s view would result in travesty of justice. There is no
further fact finding which can be made under the mandate of Section 34 of the
Act, and the learned Sole Arbitrator has, considering the overall conduct of the
Petitioner, rightly awarded the amount of Rs. Rs. 24,06,50,119.03/- and costs of
Rs. 1,50,00,000/- to the Respondent. I am not satisfied that a case has been made
out for interference with the impugned arbitral award. Further, the impugned
arbitral award is set aside in respect of the pendente lite interest awarded as per
the second limb of the impugned arbitral award, in view of the discussion in
paragraph Nos. 36 to 48 of this judgement, and the impugned arbitral award is
modified to the extent as provided for in paragraph No. 49 above in respect of
post-award interest. Therefore, the Petition is disposed of in the aforesaid terms.
Interim Application(s), if any, shall be disposed of accordingly. Any amount
deposited in Court shall be released on the expiry of one month from the date
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this judgment is uploaded on the website of this Court. No costs.
(AARTI SATHE, J.)
1. After pronouncement of the Judgment, learned counsel Ms. Anushka Parab,
appearing on behalf of the Petitioner, seeks stay of the operation of the Judgment
to enable the Petitioner to challenge the same by availing appropriate remedies.
Learned counsel appearing for the Respondent opposes the said request.
2. The effect and operation of the Judgment shall remain stayed for a period of
three weeks from today.
(AARTI SATHE, J.)
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