Evaluating The Scope of Arbitral Tribunal To Award Interest



- Pranjal Pandey* & Ayushi Pandit**~


In the recent case of V4 Infrastructure Pvt Ltd v Jindal Biochem Pvt Ltd.[1], the Delhi High Court has held that an arbitral tribunal cannot award interest on basis of reasons which are perverse, unjustifiable and contrary to the record. The Division Bench of Delhi High Court in the instant case was deciding on the appeal filed against the arbitral award under Section 37 of the Arbitration and Conciliation Act, 1996(“the Act”). The Court while deciding the challenge to the award observed that there was an inherent and glaring discrepancy in the claim made by the respondent and the relief granted by the arbitral tribunal. This mysterious change during the course of arbitration proceedings prompted the Court to intervene as this mystery shocked the conscience of the Court. The Court examined the arbitral award and expressed that the grant of refund along with eighteen percent rate of interest in addition to the damages by the arbitral tribunal was perverse, unreasonable and unjustified.


The Arbitral Award


The dispute arose out of the termination of a Space Buyer Agreement (agreement) between the appellant, V4 Infrastructure Pvt Ltd (VIPL) and the respondent Jindal Biochem Pvt Ltd (JBPL). In the statement of claim filed before the Arbitral Tribunal, JBPL claimed for specific performance of the agreement as well as damages for failure to handover possession of the property along with interest. The foremost controversy of the dispute revolved around the termination notice issued by the VIPL alleging that the JBPL had failed to discharge any of its obligations under the agreement. The Arbitral Tribunal adjudicated upon the allegations and found that the JBPL had not committed any breach of the agreement as in the termination notice issued by VIPL. The arbitral tribunal concluded that JBPL had performed its obligations under the agreement and was deprived possession illegally. Thus the Arbitral Tribunal rendered an award for a refund of the entire consideration amount under the agreement and damages for deprivation of use of premises along with interest at the rate of eighteen percent per annum from the date of payment, till the date of actual realization.

The challenge to Arbitral Award


The award was challenged by VIPL under Section 34 of the Act on the ground that the premise of the award was intrinsically flawed. The challenge to the award was based on the fact that the arbitrator had made an erroneous assumption premise Respondent had not claimed specific performance of the agreement. However, the learned Single Judge dismissed the challenge to the award under section 34 and confirmed the same by holding that there was no infirmity in the award. VIPL filed an appeal under Section 37 of the Act assailing the order passed by the Single Judge. During the pendency of the appeal, the appellant readily paid the principal amount to the respondent awarded by the arbitrator and only challenged the damages and the rate of interest. Thus the scope of review before the Division Bench was limited to the aspect of damages and rate of interest awarded by the tribunal. The Appellant had questioned the reasonability of the awarded rate of interest and it was argued that the rate of interest of eighteen percent was exorbitant, unreasonable and unjustifiable in the facts of the case. The foundation of this argument was based on the fact that the respondent had filed the claim seeking relief of specific performance, and then without there being any abandonment and relinquishment of the said relief, the learned arbitrator has proceeded to award the alternate relief of refund of consideration with damages and interest. On the other hand, the respondent justified the damages and the interest awarded by the arbitrator on account of the hardship suffered by the respondent for many years. It was also contended that the scope of judicial review while exercising jurisdiction under Sections 34 and 37 of the Act is limited, and the impugned award does not suffer from any perversity that would invite interference by any Court.

The Verdict

The Court at the outset stated that it is trite law that the scope of interference in the award under Section 37 of the Act is quite restrictive. However, on account of the inherent and glaring contradictions between the claim made by the Respondents and the relief granted by the arbitral tribunal, the Court deemed it fit to intervene. The court observed several instances wherein the Respondent were willing to seek execution of the sale deed in their favour. The Respondent had sought specific performance of agreement as primary relief, before ripening of the dispute the Respondent sent a letter to the Appellant, requesting execution of the sale deed in its favour and even during arbitral proceeding at the stage of recording evidence the Respondent’s witness admitted that he is seeking specific performance of the contract.

The court observed that there was conspicuous lack of material on record to show that the Respondent had abandoned the claim for specific performance and yet still the arbitral tribunal in the award stated that the Respondent had not sought the relief of specific performance and thus was entitled to the alternate relief of refund of entire payment. The Court inferred that the Respondent had a change of mind and the Respondent only became interested in pursuing the remedy of refund of the consideration amount, even after seeking specific performance as their primary relief. This inference was drawn by the Court on the basis that there was nothing on record to depict the Respondent abandoning the claim of specific performance before the Arbitrator. If the Respondent were genuinely interested in the property they would have argued for the relief of specific performance instead of pursuing the alternate remedy of refund of the entire consideration amount.

This vital aspect was missed by the arbitral tribunal while making the award as well by the Single Judge while adjudicating upon the challenge of the award under Section 34. Keeping this proposition in consideration, the Court then examined the justification of giving eighteen percent interest in the arbitral award in addition to the damages.

Perversity in the Award

The Court highlighted that under the disparity between the statement of claims filed by the Respondents before the arbitral tribunal and the observations of the arbitral tribunal. In the statement of claims, the Respondent had sought the Specific Performance of Space Buyer Agreement, however, in the award the arbitrator observed that there was no such claim of specific performance. The Court led that these findings in the award are ex-facie incorrect and contrary to the pleadings and evidence on record. It was this perversity in the award which compelled the Court to intervene and re-examine the award.

Grant of exorbitant interest rates


The Court held that the Respondent’s claims were adjudicated on the erroneous premise that specific performance could not be granted and the transformation in the claims without any reasonable cause was not justiciable. As the award was completely silent on this aspect the Court held that rendering of eighteen percent interest this basis of the wrong presumption that specific performance could not be granted was perverse, unjustifiable and contrary to the record.

Effect of the interim order


The Court also took note of the interim order granted in favour of Respondent prior to the constitution of the arbitral tribunal, which provided for maintaining status quo in relation to the property in question. This order was obtained by the Respondent for the preservation of the property in question, till the final adjudication of the relief of specific performance of the agreement and as a consequence of this order, the Appellant was deprived of the right to deal with the properties. Thus the Court held that the as the nature of the interim order obtained by Respondent was not justified, and thus Respondent should also bear the consequences of seeking and obtaining interim relief which was not commensurate with the final relief sought of refund of consideration amount. In the next part, the author analyses the legislative provisions relating to specific performance and damages as enunciated by the Court to justify the interference in the arbitral award.

In the instant case, the Court examined the same issue from a different angle. The Court after critically analysing of Section 21 of the Specific Relief Act, 1963 the Court held that the award of compensation under Section 21 is inherently linked to the claim for specific performance of a contract. Section 21 of the Specific Relief Act empowers the Court to award compensation in certain cases. When the contract has become impossible with no fault of the plaintiff, Section 21 enables the Court to award compensation in lieu of the specific performance. [2] It is pertinent to mention that the nature of relief to be awarded under Section 21 is one of the discretion of the Court which has to be exercised on sound principles and when the court gets into equity jurisdiction, the same would be guided by justice, equity, good conscience and fairness to both the parties.[3] Further, the Court emphasised that the compensation awarded would be determined as per Section 73 of the Indian Contract Act, 1872 (“Contract Act)”.

Relief under Section 21 must pass the muster of Section 73 of the Indian Contract Act, 1872

The Court noted that award of interest by way of damages at an exceptionally high rate of interest is not tenable when governed by the principles specified in Section 73 of the Contract Act. Section 73 provides that when a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has committed the breach, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from such breach.

It is pertinent to mention that while discussing Section 73 and Section 74 of the Indian Contract Act, the ruling of the constitutional bench in Fateh Chand can be said to be the torchbearer judgement.[4] In this landmark case, the Apex Court emphasized that while assessing damages the Court should award compensation as it deems reasonable in the light of all the circumstances of the case. Thus the circumstances do play a significant role in the process of assessment of damages. It is noteworthy to refer observation of Supreme Court in wherein after analysing various judicial pronouncements observed that Reasonable compensation will be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.”[5] Since it is imperative that the compensation awarded must pass the test of reasonability which would be determined as per the circumstances of every case, therefore any arbitral award arising out of an arbitration governed by Indian law must be governed by the same test of reasonability.


By applying the said test in the instant case it was observed by the Court that as the grant of damages along with the exorbitant interest of eighteen percent on the assumption that the Respondent had not claimed relief of specific performance and was only seeking a refund of the sale consideration was not reasonable. As it was evident from the record that the actual scenario was quite the contrary, thus the Court declared that the arbitrator had committed a perversity in the award. In order to make the award reasonable and resolve the perversity in the impugned award, the Court declared the interest rate of eighteen percent as unreasonable, irrational and unjustified, and reduced the same to nine percent, thus striking a balanced approach. Thus the Court considered the equitable interest of both the parties as well as their conduct during the proceedings and gave a ruling which was fair, just, and reasonable for both the parties.


Analysis


In any arbitration proceeding in addition to direct claims, the claim for interest on those due amounts and damages form an important part of the claim. The interest component is awarded as an equitable remedy for the loss incurred to the claimant due to the delay in receiving the payments while the dispute is finally adjudicated upon. It is submitted by the author that the claim of interest is also based on the concept of fairness. Fairness is a multidimensional concept and it would also be unfair to the successful party if it were deprived of the fruits of its labour as a result of a dissatisfied party raising a multitude of arid technical challenges after an arbitral award has been made.[6] Thus in absence of an express bar, the arbitrator has the jurisdiction and authority to award interest for all the three periods pre-reference, pendente lite and future.

Power of Arbitral Tribunal to award interest

The arbitrator can grant interest at the rate specified in the contract or a reasonable rate of interest as long as there is no prohibition to grant interest.[7] The arbitrator cannot ignore the terms of the contract while awarding interest under Section 31(7) of the Act.[8] When the arbitrator grants interest in accordance with the terms of the contract between the parties, such award cannot be set aside by invoking the general principles of fairness or equity.[9] Even in the cases wherein the agreement, there is no specified rate of interest, the arbitral tribunal can exercise its discretion to award interest as compensation.


The Supreme Court of India has laid down that the discretion of the arbitrator to award interest must be exercised reasonably.[10] The rate of Interest must be compensatory as it is a form of reparation granted to the award­holder, while at the same time it must not be punitive, unconscionable or usurious in nature. In essence, an award of interest compensates a party for its forgone return on investment, or for money withheld without a justifiable cause. Courts may reduce the Interest rate awarded by an arbitral tribunal where such Interest rate it is not found reasonable.[11]

At this stage, it would be appropriate to refer a passage from the dissenting opinion of the then Chief Justice H.L. Dattu in the case of Hyder Consulting (UK) Ltd. v. State of Orissa:


The Arbitral Tribunal has the discretion to decide whether such interest would be imposed on the whole or a part of the money awarded, and further whether it would be imposed for the entire duration from the date of cause of action to the date of award, or on a part of it. However, such discretion is not unfettered and is not exercisable upon the mere whims and fancies of the tribunal. In Principles of Statutory Interpretation, Justice G.P. Singh, 13th Edn., 2012, at p. 482, it has been stated as “Even where there is not much indication in the Act of the ground upon which discretion is to be exercised it does not mean that its exercise is dependent upon mere fancy of the court or tribunal or authority concerned. It must be exercised in the words of Lord Halsbury, ‘according to the rules of reason and justice, not according to private opinion; according to law and not humour; it is to be not arbitrary, vague and fanciful, but legal and regular’..”[12]


Perverse Decisions


The said passage even though in the dissenting opinion holds significant relevance while discussing the scope of power of the arbitral tribunal to award interest. In the instant case, the Court held that the findings in the award were contrary to the evidence on record and there was no evidence to depict the Respondent had relinquished the relief of specific performance of the agreement. As enunciated in the case of Associate Builders v. Delhi Development Authority [13]. It is settled law that where a finding is based on no evidence such decision would necessarily be perverse. Indeed, it is trite law that a court does not sit in appeal over the award of an arbitral tribunal by reassessing or re appreciating the evidence.[14] However, 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.[15]


Interest: An Equitable Remedy


It is pertinent to mention that in the present case the appellants were willing to offer a settlement to the respondent on reasonable terms however the respondents refused to accept the same. This was a clear case of one party asserting its bargaining power on the other to reap out unnecessary profits. A similar case came up before the Delhi High Court where even after a repeated request by the respondent, the petitioner refused to offer any viable settlement to the respondent.[16] The Court upheld the rate of interest awarded by the arbitrator and held that since the petitioner took advantage of the law which had prescribed for an automatic stay on the enforcement of the arbitral award during the pendency of the petition under Section 34, therefore, the petitioner cannot claim any equity in the form of reduction of the rate of interest in their favour. Thus, it can be said that Interest rates should be adjusted to take into account any unreasonable refusal to consider and/or accept a reasonable settlement offer.[17]


Conclusion


‘a man shall not be permitted to blow hot and cold with reference to the same transaction’

The case of V4 Infrastructure Pvt Ltd v Jindal Biochem Pvt Ltd gives an impeccable example of justified interference by the Court under Section 37. The said ruling depicts how cautious the Courts need to be while examining the award and how important the conduct of parties becomes. The Respondents in the said case never particularly pressed for specific performance of the agreement during the arbitration however they did seek an interim order for preserving of property. the contrary findings of Arbitrator on no claim of specific performance being made along with the acquiescence of Respondents on this aspect compelled the Court to look re-examine the finding of the Court. The decision sets a categorical example that the scope of power of the arbitral tribunal to award interest is not unfettered and comes with the riders of justice, equity and fairness.


~ This article is an edited version of the 4th Best Entry in the 1st Case Summary Writing Competition. Suggestions were made by the Editorial Team of the Arbitration Workshop based on which the changes were made by the Authors.

* 5th Year, Maharashtra National Law University, Nagpur. The author has express interest in Corporate and Commercial Matters. The author can be reached at- pranjalpandey@nlunagpur.ac.in. ** 4th Year, Maharashtra National Law University, Nagpur. Immense Inclination towards International Commercial Arbitration and Capital Markets. The author can be reached at- ayushi.pandit@outlook.com [1] FAO(OS) (COMM) 107/2018 & CMs. 20269/2018 & 49639/2019,) 107. [2] Urmila Devi and Others vs. Deity, Mandir Shree Chamunda Devi 2018 (2) SCC 284 (Civil). [3] Kanshi Ram v. Om Prakash Jawal 1996 (4) SCC 593. [4] Fateh Chand v. Balkishan Das, 1964 SCR (1) 515. [5] Kailash Nath Associates v DDA (2015) 4 SCC 136, Para 43. [6] Vijay Karia v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine SC 177, 65. [7] Jaiprakash Associates Ltd Vs Tehri Hydro Development Corporation India Limited (2019) SCC Online SC 143. [8] Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189. [9] Videocon Industries Limited v. Morgan Securities & Credits Pvt Ltd., (2019) SCC OnLine Del 7034; BPL Ltd. v. Morgan Securities & Credits Pvt. Ltd., OMP (COMM) 176/2017. [10] Vedanta Ltd., v. Shenzen Shandong Nuclear Power Construction Co Limited, (2018) SCC Online SC 1922. [11] Manalal Prabhudhayal v. Oriental Insurance Company Ltd., 2009 17 SCC 296. [12] Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189, ¶ 69. [13] Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49. [14] P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd., (2012) 1 SCC 594, ¶ 21. [15] Ssangyong Engineering and Construction Company Limited v NHAI, (2019) 15 SCC 1. [16] PEL Industries Ltd. v. SE Investment Limited, (2018) SCC Online Dell 8746. [17]Gisèle Stephens-Chu & Joshua Kelly, Awards of Interest in International Arbitration: Achieving Coherence INDIAN JOURNAL OF ARBITRATION LAW, (June 25, 2020, 7:48 am) http://ijal.in/sites/default/files/IJAL_Volume_7_Issue_1_Gisele_Stephens_Chu_&_Joshua_Kelly.pdf.

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