M/S LARSEN AIR CONDITIONING AND REFRIGRATION COMPANYversusUNION OF INDIA AND ORS.

                    [2023] 11 S.C.R. 86 : 2023 INSC 708



                              CASE DETAILS

    M/S LARSEN AIR CONDITIONING AND REFRIGRATION
                      COMPANY
                                        v.
                      UNION OF INDIA AND ORS.
                       (Civil Appeal No. 3798 of 2023)
                              AUGUST 11, 2023
       [S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]

                                HEADNOTES

       Issue for consideration : Whether the High Court erred in modifying
the arbitral award to the extent of reducing the interest, from compound
interest of 18% to 9% simple interest per annum.
      Arbitration and Conciliation Act, 1996 – s.31 – Modification of
interest by the High Court – Propriety of:
       Held : In the instant case, given that the arbitration commenced in
1997, i.e., after the Act of 1996 came into force on 22.08.1996, the arbitrator,
and the award passed by them, would be subject to this statute – Under the
enactment, i.e. s.31(7), the statutory rate of interest itself is contemplated
at 18% p.a. – This is in the event the award does not contain any direction
towards the rate of interest – Therefore, there is little to no reason, for the
High Court to have interfered with the arbitrator’s finding on interest accrued
and payable – Unlike in the case of the old Act, the court is powerless to
modify the award and can only set aside partially, or wholly, an award on
a finding that the conditions spelt out u/s. 34 of the 1996 Act have been
established. [Para 13]
       Arbitration and Conciliation Act, 1996 – s.34 – Jurisdiction under:
       Held : The limited and extremely circumscribed jurisdiction of the
court u/s. 34 of the Act, permits the court to interfere with an award, sans
the grounds of patent illegality, i.e., that “illegality must go to the root of the
matter and cannot be of a trivial nature”; and that the 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
                                         86
    M/S LARSEN AIR CONDITIONING AND REFRIGRATION                              87
              COMPANY v. UNION OF INDIA

award can be set aside on this ground”– The other ground would be denial
of natural justice. [Para 15]
     Arbitration and Conciliation Act, 1996 – s.37 – Scope of Appellate
Court to review findings:
       Held : In appeal, s.37 of the Act grants narrower scope to the appellate
court to review the findings in an award, if it has been upheld, or substantially
upheld u/s. 34 – It is important to notice that the old Act contained a provision
which enabled the court to modify an award – However, that power has
been consciously omitted by Parliament, while enacting the Act of 1996 –
This means that the Parliamentary intent was to exclude power to modify
an award, in any manner, to the court. [Para 15]

        LIST OF CITATIONS AND OTHER REFERENCES

       K. Marappan v. Superintending Engineer TBPHLC Circle Anantapur
[2019] 5 SCR 152; M/s Raveechee & Co. v. Union of India [2018] 5 SCR
138; Ambica Construction v. Union of India (2017) 14 SCC 323; Shahi v.
State of UP & Ors. [2019] 11 SCR 640; Secretary, Irrigation Department,
State of Orissa v. G.C. Roy [1991] Supp. 3 SCR 417; Municipal Corporation
of Greater Mumbai and Anr v. Pratibha Industries Ltd. & Ors. [2018] 14
SCR 1143; Oriental Structural Engineers Pvt. Ltd. v. State of Kerala [2021]
4 SCR 137; Post Graduate Institute of Medical Education and Research,
Chandigarh v. Kalsi Construction Company (2019) 8 SCC 726; Associate
Builders v. Delhi Development Authority [2014] 13 SCR 895; Ssangyong
Engineering Construction Co. Ltd v. National Highways Authority of India
(NHAI) [2019] 7 SCR 522; Delhi Airport Metro Express Pvt. Ltd. v Delhi
Metro Rail Corporation Ltd [2021] 5 SCR 984; National Highways Authority
of India v M. Hakeem [2021] 5 SCR 368 – referred to.

        OTHER CASE DETAILS INCLUDING IMPUGNED
               ORDER AND APPEARANCES

        CIVIL APPELLATE JURISDICTION : Civil Appeal No.3798 of
2023.
      From the Judgment and Order dated 17.07.2019 of the High Court
of Judicature at Allahabad in FAFO No.1227 of 2003.
88              SUPREME COURT REPORTS                              [2023] 11 S.C.R.


        Appearances:
      R.K. Singh, Mrs. Neeraj Singh, Kumar Gaurav, Ajay Chaudhary,
Praveen Pathak, Aman Rastogi, Sanjay Rastogi, Advs. for the Appellant.
     Vikramjeet Banerjee, A.S.G., A K Kaul, Nachiketa Joshi, Bhuvan
Mishra, Akshit Pradhan, Sachin Sharma, Siddhartha Sinha, Shivam
Singhania, N. Chamwibo Zeliang, Suraj Mishra, Ms. Akansha, Arvind
Kumar Sharma, Advs. for the Respondents.

         JUDGMENT / ORDER OF THE SUPREME COURT

                                   JUDGMENT
        S. RAVINDRA BHAT, J.
       1. Aggrieved by the impugned judgment1 of the Allahabad High
Court, the appellant has approached this court with a simple question of
law, as to whether the High Court erred in modifying the arbitral award to
the extent of reducing the interest, from compound interest of 18% to 9%
simple interest per annum.
        Facts
       2. The dispute between the appellant and Union of India (hereafter
‘respondent-state’) arose from a contract entered into pursuant to being
awarded the tender. In the course of work, certain disputes arose. On
22.04.1997, the respondent-state referred the dispute to arbitration, and
the proceedings closed on 24.10.1998. The tribunal published its award on
21.01.1999 and directing the first four respondents to pay 18% pendente lite
and future compound interest on the award in respect of Claim Nos. 1-8.
       3. The respondent-state challenged the award under Section 34
of the Arbitration and Conciliation Act, 1996 (hereafter ‘the Act’). The
district court2, dismissed the challenge on the ground that it could not sit in
appeal over the award and since the respondent-state had failed to file any
proof of the grounds alleged. Aggrieved, the respondent-state, preferred an
appeal before the High Court in 2003. In the interim, the respondent-state
deposited `10,00,000 in the District Court, Kanpur on 06.06.2003 against
`1,82,878.11 due at the time.
1    Judgment dated 17.07.2019 passed by Allahabad High Court in First Appeal from
     Order No. 1227/2003.
2    Judgment dated 06.03.2003 passed by the District Judge, Kanpur Nagar in Misc. Case
     No. 64/70 of 1999.
    M/S LARSEN AIR CONDITIONING AND REFRIGRATION                                 89
    COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.]

        4. Partly allowing the appeal, the High Court disapproved the reasoning
in the award on Claim No. 6; it held that the sum of `3 lakhs awarded towards
compensation for loss caused due to non-issue of tender document and
paralysing business could not have been granted. The High Court held that
it could not be said that the proceedings (in the present case) were under the
Arbitration Act, 1940, and therefore, the rate of interest granted should not
be 18%. The High Court referred to this court’s judgments in K. Marappan v.
Superintending Engineer TBPHLC Circle Anantapur3, M/s Raveechee & Co.
v. Union of India4 and Ambica Construction v. Union of India5 while deciding
this question of pendente lite interest; it was held that the bar to award interest
on the amounts payable under the contract would not be sufficient to deny
the payment of interest pendente lite. The High Court proceeded to reduce
the rate of interest from 18% (as ordered by the arbitrator), to 9% per annum.
The remaining amount was directed to be deposited by the appellants as
expeditiously as possible, with the interest accrued, not later than 12 weeks
from the date of the judgment. On other grounds, it was held that there was
no scope for interference in the arbitral award.
       Contentions of parties
       5. The ground pressed by the appellant in the present proceedings, relates
to the modification of the rate of interest (relating to award in Claim No. 9), and
the scope of this appeal is limited to this question.
        6. Mrs. Neeraj Singh, counsel appearing on behalf of the appellant,
submitted that their claim was in fact for 24% pendente lite interest, and the
arbitrator had already reduced it to the 18% granted. Pointing to pre-amended
Section 31(7)(b) of the 1996 Act, it was contended that the High Court erred in
reducing the ‘statutory interest rate’; this provision prescribed that in the event
the Arbitrator did not give any specific directions as regards rate of interest on
amount awarded, such amount ‘shall’ carry interest of 18% per annum. The
Arbitrator had properly considered the matter and accordingly granted 18% past
pendente lite and future compound interest on 8 claims, which was affirmed by
the district court. Counsel also pointed out Clause 70 of the General Conditions
of Contract (GCC), which stipulates that the award of the arbitrator shall be final
and binding on both parties. It was urged, therefore, that there was no justification
3   [2019] 5 SCR 152
4   [2018] 5 SCR 138
5   (2017) 14 SCC 323
90             SUPREME COURT REPORTS                        [2023] 11 S.C.R.


for judicial interference so as to reduce the statutory interest rate from 18%
to 9% per annum. Counsel drew attention to Shahi v. State of UP & Ors.6
wherein this court, in light of Section 31(7), upheld 18% per annum as rate
of interest, as justifiable.
       7. Further, reliance was placed on this court’s judgment in Secretary,
Irrigation Department, State of Orissa v. G.C. Roy7 to argue that when the
agreement between the parties does not prohibit grant of interest and where
the party claims interest in the dispute referred to an arbitrator, then the
arbitrator does have the power to award interest pendente lite.
       8. Mr. Vikramjit Banerjee, Additional Solicitor General (ASG),
appearing on behalf of the Respondent-state, argued that the impugned
judgment had taken a holistic view of the matter, and rightfully reduced
the interest from 18% compound interest to 9% simple interest, in addition
to disallowing Claim No. 6 of ` 3,00,000 awarded by the arbitrator for
non-issuance of tender. The High Court, it was urged, had considered all the
aspects of the Indian Contract Act, 1872 and the Arbitration and Conciliation
Act, 1996 before deciding to reduce the interest to a more reasonable rate.
       9. It was asserted that even the counsel for the appellants at the time,
before the High Court, had agreed that the statutory rate of interest should
be 1 or 2% higher or lower than the bank rate, which in the last decade has
been about 7-8%. As a result, 18% compound rate of interest was completely
unjustified, and warranted revision.
       10. The ASG relied on several judgments of this court: Municipal
Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd. &
Ors.8 to stress on the scope of the inherent powers of the High Court as
a constitutional court; Oriental Structural Engineers Pvt. Ltd. v. State of
Kerala9 wherein the contract did not stipulate a rate of interest, and 18%
awarded by the tribunal was held to be excessive and therefore, reduced
to 8% simple interest by this court; and similarly Post Graduate Institute
of Medical Education and Research, Chandigarh v. Kalsi Construction
Company10 wherein this court reduced the rate of interest from 18% awarded
6    [2019] 11 SCR 640
7    [1991] Supp. 3 SCR 417
8    [2018] 14 SCR 1143
9    [2021] 4 SCR 137
10   (2019) 8 SCC 726
    M/S LARSEN AIR CONDITIONING AND REFRIGRATION                          91
    COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.]

by the tribunal, to 9% simple interest, despite 18% having been the agreed
upon rate of interest, given that the award was passed roughly 20 years
prior.
      Analysis and conclusion
       11. Section 31(7)(b) of the 1996 Act, was amended by Act 3 of
2016, w.e.f. 23.10.2015. The pre-amended provision, empowers the
arbitrator to award both pre-award and post-award interest, and specifies
that the awarded sum would carry an interest of 18% per annum, unless
provided otherwise, from the date of award till the date of payment. The
pre-amended section, as it stood on the date of award by the arbitrator
(21.01.1999), read as follows:
     “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.
     (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.”
                                                       (emphasis provided)
      12. This court in Shahi & Associates (supra), which was relied
upon by the appellants, dealt with a similar situation as the present factual
matrix, and is squarely applicable:
     “11. Section 31(7)(b) of the 1996 Act clearly mandates that, in the
     event the arbitrator does not give any specific directions as regards
     the rate of interest on the amount awarded, such amount “shall”
     carry interest @ 18% p.a. from the date of award till the date of
     payment. Since the Arbitration Act, 1940 has been repealed by
     way of Section 85 of the 1996 Act, the Schedule to the Arbitration
     Act, including the State amendment, also stands repealed. The only
92            SUPREME COURT REPORTS                          [2023] 11 S.C.R.


     exception is provided in sub-section (2)(a) of Section 85 where a
     proceeding which had commenced when the Arbitration Act of 1940
     was in force and continued even after coming into force of the 1996
     Act, and all parties thereto agreed for application of the old Act of
     1940. Therefore, the provisions of Arbitration Act, 1940 including the
     State amendment, namely, para 7-A inserted by Section 24 of the U.P.
     Amendment Act will have no application to the proceedings commenced
     after coming into force of the 1996 Act.
     12. In the instant case, though the agreement was earlier to the date
     of coming into force of the 1996 Act, the proceedings admittedly
     commenced on 27-10-1999 and were conducted in accordance with
     the 1996 Act. If that be so, para 7-A inserted by Section 24 of the U.P.
     Amendment Act has no application to the case at hand. Since the rate
     of interest granted by the arbitrator is in accordance with Section
     31(7)(b) of the 1996 Act, the High Court and the District Judge were
     not justified in reducing the rate of interest by following the U.P.
     Amendment Act.”
         13. In the present case, given that the arbitration commenced in 1997,
i.e., after the Act of 1996 came into force on 22.08.1996, the arbitrator,
and the award passed by them, would be subject to this statute. Under
the enactment, i.e. Section 31(7), the statutory rate of interest itself is
contemplated at 18% per annum. Of course, this is in the event the award
does not contain any direction towards the rate of interest. Therefore, there is
little to no reason, for the High Court to have interfered with the arbitrator’s
finding on interest accrued and payable. Unlike in the case of the old Act,
the court is powerless to modify the award and can only set aside partially,
or wholly, an award on a finding that the conditions spelt out under Section
34 of the 1996 Act have been established. The scope of interference by the
court, is well defined and delineated [refer to Associate Builders v. Delhi
Development Authority11, Ssangyong Engineering Construction Co. Ltd v.
National Highways Authority of India (NHAI)12 and Delhi Airport Metro
Express Pvt. Ltd. v Delhi Metro Rail Corporation Ltd13].


11 [2014] 13 SCR 895
12 [2019] 7 SCR 522
13 [2021] 5 SCR 984
    M/S LARSEN AIR CONDITIONING AND REFRIGRATION                                         93
    COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.]

        14. The reliance on Kalsi Construction Company (supra) by the
respondent-state, is inapt, given that this court had exercised its Article 142
jurisdiction in light of three pertinent factors – the award had been passed
20 years prior, related to construction of a Paediatrics Centre in a medical
institute, and that the parties in that case had left the matter to the discretion of
the court. Similarly, in Oriental Structural Engineers (supra) this court held
that since the contract stipulated interest entitlement on delayed payments,
but contained no mention of the rate of interest applicable – the Tribunal
ought to have applied the principles laid down in G.C. Roy (supra), and
therefore, in exercise of Article 142, this court reduced the rate of interest
awarded by the tribunal on the sum left unpaid. The judgment in Municipal
Corporation of Greater Mumbai (supra) no doubt discusses the inherent
powers of the High Court as a superior court of record, but relates specifically
to the jurisdiction to recall its own orders, and offers little assistance in the
present dispute.
        15. The limited and extremely circumscribed jurisdiction of the court
under Section 34 of the Act, permits the court to interfere with an award, sans
the grounds of patent illegality, i.e., that “illegality must go to the root of the
matter and cannot be of a trivial nature”; and that the 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” [ref: Associate Builders (supra)]. The other
ground would be denial of natural justice. In appeal, Section 37 of the Act
grants narrower scope to the appellate court to review the findings in an award,
if it has been upheld, or substantially upheld under Section 34. It is important
to notice that the old Act contained a provision14 which enabled the court
to modify an award. However, that power has been consciously omitted by
Parliament, while enacting the Act of 1996. This means that the Parliamentary
intent was to exclude power to modify an award, in any manner, to the court.
14 “15. Power of court to modify award
— The court may by order modify or correct an award
— (a) where it appears that a part of the award is upon a matter not referred to arbi-
    tration and such part can be separated from the other part and does not affect the
    decision on the matter referred; or
(b) where the award is imperfect in form, or contains any obvious error which can be
    amended without affecting such decision; or
(c) where the award contains a clerical mistake or an error arising from an accidental
    slip or omission.”
94             SUPREME COURT REPORTS                        [2023] 11 S.C.R.


This position has been iterated decisively by this court in Project Director,
National Highways No. 45E and 220 National Highways Authority of India
v M. Hakeem15:
      “42. It can therefore be said that this question has now been settled
      finally by at least 3 decisions [McDermott International Inc. v. Burn
      Standard Co. Ltd., (2006) 11 SCC 181] , [Kinnari Mullick v. Ghanshyam
      Das Damani, (2018) 11 SCC 328 : (2018) 5 SCC (Civ) 106] , [Dakshin
      Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies (P) Ltd.,
      (2021) 7 SCC 657] of this Court. Even otherwise, to state that the
      judicial trend appears to favour an interpretation that would read into
      Section 34 a power to modify, revise or vary the award would be to
      ignore the previous law contained in the 1940 Act; as also to ignore
      the fact that the 1996 Act was enacted based on the Uncitral Model
      Law on International Commercial Arbitration, 1985 which, as has
      been pointed out in Redfern and Hunter on International Arbitration,
      makes it clear that, given the limited judicial interference on extremely
      limited grounds not dealing with the merits of an award, the “limited
      remedy” under Section 34 is coterminous with the “limited right”,
      namely, either to set aside an award or remand the matter under the
      circumstances mentioned in Section 34 of the Arbitration Act, 1996.”
       16. In view of the foregoing discussion, the impugned judgment
warrants interference and is hereby set aside to the extent of modification
of rate of interest for past, pendente lite and future interest. The 18% per
annum rate of interest, as awarded by the arbitrator on 21.01.1999 (in Claim
No. 9) is reinstated. The respondent-state is hereby directed to accordingly
pay the dues within 8 weeks from the date of this judgment.
      17. The present appeal, and pending application(s) if any, stand
disposed of in the above terms, with no order as to costs.

Headnotes prepared by:                                        Appeal disposed of.
Ankit Gyan




15 [2021] 5 SCR 368