M. A. Zahid v. Jindal Saw Ltd

16. Under the 1996 Act, power of the Arbitrator to grant interest is governed by Section 31(7). This provision is in two parts. Under Clause (a), in the absence of an agreement between the parties to the contrary, an Arbitrator can award interest for the period between the date of cause of action to the date of the award, either for the whole or part of the said period. Clause (b) provides that unless the award otherwise directs, the sum directed to be paid by the Arbitrator shall carry interest @ 2% higher than current rate of interest from the date of the award to the date of payment. This amendment was brought about from 23.10.2015 by virtue of Amendment Act No. 3 of 2016. Be it noted that this Court is not delving into the pre-reference and pendente lite interest as the contest in the present case is only with respect to post-award interest.

17. Read simply and as observed by the Supreme Court in Morgan Securities and Credits Private Limited v. Videocon Industries Limited, 2022 SCC OnLine SC 1127, both clauses (a) and (b) of Section 31(7) are qualified. While clause (a) is qualified by the arbitration agreement, clause (b) is qualified by the arbitration award and placement of the phrases is crucial to their interpretation. As can be seen from the amended Section, the phrase ‘unless otherwise agreed by the parties’, occurs at the beginning of clause (a) qualifying the entire provision while phrase ‘unless the award otherwise directs’, occurs after the words ‘a sum directed to be paid by an arbitral award shall’ and before the words ‘carry interest at the rate of two per cent’, and therefore, the phrase qualifies the rate of post-award interest. It is settled that the Arbitrator has a wide discretion to grant: (a) prereference; (b) pendente lite; and (c) post-award interest. In North Delhi Municipal Corporation v. S.A. Builders Ltd., 2024 SCC OnLine SC 3768, the Supreme Court held that grant of post award interest serves a salutary purpose and primarily acts as a disincentive to the award-debtor not to delay payment of arbitral amount to the award-holder.

18. In Morgan Securities (supra), albeit the Supreme Court was dealing with unamended Section 31(7)(b), it was held that Section 31(7)(a) confers a wide discretion on the Arbitrator to grant pre-award interest and determine the rate of interest, the sum on which it is to be paid and the period and when a discretion has been conferred in regard to grant of pre-award interest, it would be against the grain of statutory interpretation to presuppose that legislative intent was to reduce the discretionary power of the Arbitrator for grant of post-award interest under clause (b). It was observed that clause (b) only contemplates a situation where the arbitral award is silent on the post-award interest, in which event the award-holder is entitled to the post-award interest @ 18% stipulated in Section 31(7)(b), the unamended provision. It was held that the Arbitrator has the discretion to grant post-award interest and this discretion is not fettered by clause (b) albeit it is open to the Arbitrator to decline interest in its discretion. It was highlighted that purpose of granting post-award interest is to ensure that the award-debtor does not delay the payment of the awarded amount. With proliferation of arbitration, issues involving both high and low financial implications are referred to arbitration and Arbitrator takes note of various factors such as financial standing of the award-debtor and circumstances of the parties in dispute before awarding interest. No provision under the 1996 Act restricts the exercise of discretion to grant post-award interest by the Arbitrator though Arbitrator must exercise the discretion in good faith taking into account relevant considerations and must act reasonably and rationally. It was concluded by the Supreme Court that according to Section 31(7)(b) only where the Arbitrator does not grant post-award interest, provisions of second part of sub-clause (b) will come into play.

19. In the present case, the learned Arbitrator has exercised his discretion to grant post-award interest @ 12% per annum for 90 days from 23.05.2016 and 16% per annum from expiry of 90 days till actual payment. The postaward interest is based on a sound reasoning which precedes the grant. Arbitrator has observed that in the various documents executed on 22.07.2013 between the parties, there was acknowledgement of liability by the Petitioner and there was no mention of interest. Parties entered into settlement in the spirit of goodwill, bonhomie and to maintain long term business relations. Respondent was satisfied with the Petitioner paying the principal amount on lifting of the attachment by Income Tax Authorities and/or selling properties. There was no intent of charging interest in the settlement. On this ground, Arbitrator declined interest from 01.06.2011, as sought by the Respondent. Thereafter, the Arbitrator refers to the legal notice dated 23.05.2016 from which date Respondent started demanding the admitted payment expressing its intention to the Petitioner to charge interest. Admittedly, Petitioner made no effort to pay the admitted amount and constrained by circumstances, Respondent invoked arbitration. Arbitrator notes the provisions of the 1996 Act and judgments relating to grant of interest cited by the Respondent as also the fact that the transaction between the parties was undoubtedly a commercial one and the Petitioner though not denying its liability to pay the principal sum even in the reply dated 07.08.2016 to Respondent’s legal notice, did not make good his obligation and commitment to pay. In light of the fact that Respondent was denied of the amount admittedly due to the Respondent for several years, Arbitrator in his discretion awarded interest. The question is whether any interference is warranted in the award to the extent of grant of dual rate of interest for two separate periods.

20. It needs no reiteration that jurisdiction of the Court under Section 34 of the 1996 Act is extremely circumscribed and is limited to the grounds enumerated therein. Petitioner urges that by awarding exorbitant and dual interest, the award is vitiated by ‘patent illegality appearing on the face of the award’. The Supreme Court and High Courts have time and again affirmed that ‘patent illegality’ is an illegality which goes to the root of the matter and cannot be of a trivial nature. [Ref.: Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49 and Larsen Air Conditioning and Refrigeration Company v. Union of India and Others, (2023) 15 SCC 472]. Proviso to Section 34(2A) itself stipulates that an award shall not be set aside merely on erroneous application of law. Division Bench of this Court in Aksh Optifibre Limited v. Nantong Siber Communication Co. Ltd., 2024 SCC OnLine Del 4011, has held that it is well-settled that fundamental policy of Indian law does not refer to violation of any Statute but fundamental principles on which Indian law is founded. Any difference or controversy as to rate of interest clearly falls outside the scope of challenge on the ground of conflict with the public policy of India unless it is evident that the rate of interest awarded is so perverse and so unreasonable so as to shock the conscience of the Court sans which no interference is warranted in the award, whereby interest is awarded by the Arbitrator. Against the said judgment, the Supreme Court dismissed the SLP (C) NO. 22495/2024 on 21.10.2024.

21. On a plain reading of the impugned award in the instant case and applying the settled law, the reasoning adopted by the learned Arbitrator for awarding the rate of interest cannot be faulted with. Arbitrator has considered all relevant factors such as: (a) Petitioner’s admission of his liability to pay the principal amount to the Respondent; (b) violation of the terms of settlement in the Deed of Settlement and related documents executed on the same day; (c) financial loss caused to the Respondent; and

(d) the admitted fact of the Respondent being deprived of its right to enjoy the monies due to it for several years, etc. Arbitrator has exercised the discretion vested in him judiciously, taking into consideration relevant facts/factors and eschewing irrelevant considerations.

22. It is a settled law that in the absence of an express bar in the contract between the parties, it is the Arbitrator who enjoys absolute discretion and has the jurisdiction to award interest including post-award interest. [Ref.: State of Rajasthan and Another v. Ferro Concrete Construction Private Limited, (2009) 12 SCC 1; and Indian Railway Construction Company Limited v. National Buildings Construction Corporation Limited, (2023) 7 SCC 390]. Clearly, the Deed of Settlement contains no express bar regarding interest and it was thus open to the Arbitrator to award the interest. Once interest is awarded by the Arbitrator, Section 37(1)(b) comes into play where the phrase ‘unless the award otherwise directs’, qualifies the rate of post-award interest, which means that once the award grants interest, award-debtor cannot claim any other rate of interest, save and except, where the rate of interest is so excessive or unreasonable that it shocks the conscience of the Court, which is not the case here.

23. Counsel for the Petitioner laid much stress on the judgment of the Supreme Court in Vedanta Limited (supra), to argue that awarding dual interest and that too at an exorbitant rate of 15% was held to be unjustified by the Supreme Court. In my view, this argument is misconceived and need not detain this Court in light of the judgment of the Supreme Court in Reliance Infrastructure Limited v. State of Goa, 2023 SCC OnLine SC 604, as also judgments of the Bombay High Court and this Court, to which I shall advert later. In Reliance Infrastructure (supra), the Supreme Court was examining the legality of the award including the issue of grant of prereference and post-award interest. Insofar as the post-award interest is concerned, the High Court had reduced the rate of interest from 15 to 10% following the decision in Vedanta Limited (supra) and principle of proportionality. The Supreme Court observed that the reduction of rate of interest by the High Court was unjustified. Referring to provisions of Section 31(7)(b), more particularly, the phrase ‘unless the award otherwise directs’, and distinguishing the decision in Vedanta Limited (supra), the Supreme Court held that the observation of the High Court that Court may reduce interest awarded by the Arbitrator when such interest does not reflect the prevailing economic condition or where it is not found reasonable or where it promotes interest of justice, based on the decision in Vedanta Limited (supra), was without any basis since in the case of Vedanta Limited (supra), the Supreme Court was dealing with an International Commercial Arbitration involving Rupee as well Euro components and moreover, the rate of interest was reduced in respect of foreign currency component to bring the interest rate in line with international rate on the ground that rate of interest prevailing on the rupee debt in India and on international currency in abroad were different and international rates were lower, which was not the case before the Supreme Court in Reliance Infrastructure (supra). It was further held that the Arbitral Tribunal was well within its jurisdiction under Section 31 to award interest at the rate of 15% per annum and no justification was found to reduce the same. Significantly, it was also observed that the High Court was not exercising any equity jurisdiction to re-settle the rate of interest as deemed fit by it as this was a matter relating to an award made by an Arbitral Tribunal in a commercial dispute. Relevant passages from the judgment in Reliance Infrastructure (supra), are as follows:-

90. We are of the view that the aforesaid reduction of rate of interest by the High Court is also unjustified. We have noticed the provisions of Section 31(7)(b) that unless the award otherwise directs, the sum payable under the arbitral award shall carry interest @ 2% higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment. The expression “current rate of interest” has been explained in the Explanation to the said section to have the same meaning as assigned under Section 2(b) of the Interest Act, 1978. The High Court has referred to the decision in Vedanta [Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., (2019) 11 SCC 465: (2019) 4 SCC (Civ) 724] to hold that a Court may reduce interest awarded by the arbitrator when such interest does not reflect the prevailing economic condition or where it is not found reasonable or where it promotes interest of justice.

91. We do not find any basis in the impugned judgment [State of Goa v. Reliance Infrastructure Ltd., 2021 SCC OnLine Bom 306] of the High Court for reducing the rate of interest, as in Vedanta [Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., (2019) 11 SCC 465: (2019) 4 SCC (Civ) 724], wherein this Court was dealing with an International Commercial Arbitration involving rupee as well as euro components. Moreover, in Vedanta [Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., (2019) 11 SCC 465: (2019) 4 SCC (Civ) 724], the rate of interest was reduced in respect of the foreign currency component to bring the interest rate in line with the international rate on the ground that the rate of interest prevailing on the rupee debt in India and on international currency abroad were different and the international rates were lower. Such a situation is not obtaining in the present case.

92. The High Court seems to have not considered the relevant factual aspects. On the contrary, as has been submitted before us as well as the High Court, the prevailing interest rate being the prime lending rate of State Bank of India was in the range of 13% to 14% p.a. Thus, the Arbitral Tribunal was justified in granting interest @ 15% p.a. post-award. In our view, the Arbitral Tribunal was well within its jurisdiction under Section 31 of the Act to award interest @ 15% p.a. and there was no justification to reduce the same to 10% p.a. We may observe with respect that the High Court was not exercising any equity jurisdiction so as to resettle the rate of interest as deemed fit by it. It had been a matter relating to an award made by the Arbitral Tribunal in a commercial dispute.”

24. In this context, I may also allude to the judgment of the Division Bench of this Court in Aksh Optifibre (supra), where the only ground to challenge the award under Section 34 of the 1996 Act was that the rate of interest @ 8% per annum fell foul of public policy of India and reliance was placed by the Appellant on the judgment in Vedanta Limited (supra). The Division Bench held that the judgment was distinguishable as in the said case, the Supreme Court had considered an award in two separate currencies but with the same rate of interest and in that context, it was found that the same rate of interest in currencies that operate in different fiscal regimes was inapposite and moreover, the judgment was rendered under Article 142 of the Constitution of India, as earlier observed by another Division Bench of this Court in Pradeep Vinod Const. Co. v. Union of India, 2022 SCC OnLine Del 4937. The same view was taken by the Bombay High Court in Maa Ashish Textile Industries Private Limited v. National Insurance Company Limited, 2019 SCC OnLine Bom 887, relevant paragraphs of which are as follows:-

34. In direct contradiction of his findings in paragraph 32 of the award, the Arbitrator proceeds to simultaneously find that the Addendum Report has been issued in violation of the timeline and other conditions prescribed in Regulation 9 of the IRDA Regulations. The Arbitrator comes to the conclusion that after the Final Survey Report was issued on 03.08.2011, the Final Survey Report dated 29.10.2011 was issued pursuant to certain queries raised by respondent. The Arbitrator proceeds to hold that a further second query (which was issued by respondent almost 4 months after receiving the Final Survey Report dated 29.10.2011) which is not contemplated under Regulation 9, resulted in the Addendum Report. The Arbitrator thus arrives at the finding in paragraph 35 of the award that respondent has violated the IRDA Regulations. By acknowledging that the Addendum Report was issued in contravention of the IRDA Regulations (which are binding on insurance companies) but at the same time permitting respondent to rely on the same to substantially reduce petitioner's claim, the Arbitrator has allowed respondent to take advantage of its own violation of the law. The Arbitrator, in paragraph 36 of the award, has once again recognised the Final Survey Report dated 03.08.2011 as the valid survey report and states that petitioner, after a meeting with the Surveyors on 09.08.2011, has accepted the settlement of Rs. 17,63,78,222/-. The Arbitrator also proceeds to record that such amount of Rs. 17,63,77,222/- ought to have been paid by respondent to petitioner within 7 days from 09.08.2011, as required by the IRDA Regulations. This is inconsistent with the Arbitrator's findings in paragraph 32 of the award where he holds that petitioners agreed to accept the sum of Rs. 15,81,22,177/- as the settlement sum.”

25. In light of the aforesaid judgments, reliance placed by the Petitioners on the judgment in Vedanta Limited (supra) in the facts and circumstances of this case is wholly inapt. Equally misplaced is the reliance on the judgment of the Division Bench of this Court in V[4] Infrastructure (supra). Reading of the judgment shows that the claim before the Arbitrator was for specific performance of Space Buyer Agreements and damages for failure to handover possession of property along with interest. The Arbitral Tribunal rendered an award for refund of the amount paid towards sale consideration along with interest @ 18% per annum, which was questioned in a Section 34 petition before the learned Single Judge of this Court on several grounds. Petition being dismissed, appeal was filed before the Division Bench under Section 37(1) of the 1996 Act. It was inter alia contended by the Appellant that grant of refund with 18% interest was incomprehensible in view of the fact that Appellant was prevented from deriving any benefit from the property at the instance of the Respondent. The Division Bench found the interest rate to be perverse, unjustifiable and contrary to the record in the context of a finding based on record that Respondent had never accepted the offer of the Appellant and instead initiated legal proceedings to enforce the agreement. There was no application by the Respondent giving up the claim of specific relief and pressing only refund of sale consideration. Nevertheless, issues were framed by the Arbitrator revolving around claim of refund and thus midstream the arbitration claims got altered and were adjudicated on the erroneous premise that specific performance could not be granted with no reasoning to arrive at this conclusion. It is in this backdrop that the Court held that since the dynamics of the claims were radically and substantively changed, the reason for awarding interest was on a wrong substratum and thus interest of 18% was perverse. The Division Bench also noted that it was conspicuous that during the pendency of the arbitration proceedings, property in dispute continued to be subjected to status quo order at the instance of Respondent and could not be sold. If the Respondent’s ultimate relief was only for refund of sale consideration, the extent of interim order would have been different. It was also observed that had the status quo order not operated, Appellant could have taken benefit from the property and thus there was no rationale for award of interest. Relevant paragraphs are as follows:- “20. Respondent never accepted that offer of the Appellant and, instead, initiated legal proceedings to specifically enforce the agreements. If the Respondent was genuinely interested in the alternate claim for refund of the amount paid in terms of the agreements, then it would have accepted the offer of the Appellant contained in the letter dated 19.08.2011. On the basis of the record produced before us, there is also no clarity as to how the transformation or variation was introduced during the course of the arbitration. There is no application filed by the Respondent giving up the claim of specific relief and pressing only for refund of the entire sale consideration. Nevertheless, the issues as framed by the learned arbitrator seem to suggest that the Respondent's claims revolved around the claim of refund of the consideration amount. Thus midstream, the arbitration claims got altered and were adjudicated for refund of money not as an alternate, but as a primary relief. There is also nothing to show that the Respondent ever abandoned the claim of specific performance, just as there is nothing to show that it did not press for specific performance before the Arbitrator. This vital aspect has been completely ignored by the learned arbitrator. Respondent's claims were adjudicated on the erroneous premise that specific performance could not be granted. Curiously, the award is completely silent on the reasoning for arriving at this conclusion or for permitting the Respondent to proceed on this basis. In this situation, the dynamics of the claims were radically and substantively changed, and the reason for award of interest as made out in the award are on a wrong substratum, rendering award of interest @ 18% as perverse, unjustifiable and contrary to the record.

21. It is also conspicuous that during the pendency of the arbitration proceedings, the property in dispute continued to be subjected to the status quo order at the instance of the Respondent. As a result, the property could not be sold off and was lying vacant. The order of status quo was obtained by the Respondent for preservation of the property in question, till the final adjudication of the relief of specific performance of the agreement. However, if the Respondent's ultimate relief was only to be refund of the consideration amount, the nature and extent of the interim order would be vastly different. In money claims relating to refund of consideration, courts ordinarily do not grant status quo and entangle the property in dispute. This is because in such situations, there is no need to preserve the property in dispute. At the highest, the amount - of which refund is sought, is directed to be secured. In the present case, the Appellant was deprived of the right to deal with the properties in question, solely at the instance of the Respondent and on account of the status quo order obtained by the Respondent on a claim of specific performance. During the course of proceedings, the goalpost was changed. Though the claim petition was for specific performance, the relief granted was for recovery or money/damages without any express relinquishment of the relief of specific relief. The reason for this remains a mystery and grant of interest @ 18% p.a. has had huge ramifications on the final relief granted by the learned arbitrator. We are not suggesting that the Respondent did not have the right to seek damages, recovery of money with interest. In fact, undeniably the law and, in particular the unamended Section 21 of the Specific Relief Act, 1963, applicable to the facts of the case enables the Respondent to choose its relief and confine it to one for recovery of compensation, instead of specific performance. However, in such circumstances, the nature of the interim order obtained by the Respondent was not justified, and the Respondent should also bear the consequences of seeking and obtaining interim relief which was not commensurate with the final relief sought. This, surely, is a key consideration to be taken into account while awarding the final relief. This fundamental change in the circumstances would be a mitigating feature to be weighed with by the court for granting the final relief. If the property would not have been the subject matter of the status quo order, it would have enabled the Appellant to dispose of the same to its benefit. We therefore cannot find the rationale of awarding interest @ 18% p.a. to the Respondent on the refunded amount.

22. We are strengthened in our view by the judgment of the Supreme Court in Best Sellers Retail (India) Pvt. Ltd. v. Aditya Birla Nuvo Ltd., (2012) 6 SCC 792, where it has been held that an injunction would not lie in a suit for specific performance, where the alternate remedy of refund has been claimed in the suit. If the alternate remedy is to be granted by the court in finality, then the injury suffered on account of refusal of injunction cannot be said to be irreparable. In the said case, the Respondent had claimed specific performance for certain agreements with alternate relief of expenses and losses amounting to Rs. 20 crores. The Respondent also prayed for temporary injunction restraining the plaintiffs from alienating the suit property, which was granted by the Additional City Civil Judge and approved by the High Court. Sitting in appeal, the Supreme Court vacated the injunction since the Respondent could not satisfy that any irreparable harm would be caused to him if the injunction was refused. The Supreme Court noted that the High Court had erred in approving the injunction since if the Respondent ultimately succeeded in getting the alternate relief, no irreparable injury could have been suffered by the Respondent.

23. In the final analysis, lets view this controversy from another angle. Is the award of award of interest by way of damages at exceptionally high rate of interest in comparison to the prevalent market rate, sustainable? In a suit for specific performance, the Court is empowered to award compensation in certain cases as provided under Section 21 of the Specific Relief Act, 1963. As on the date of passing of the award, the unamended Section 21(1) of the Specific Relief Act, 1963 provided that in a suit of specific performance of a contract, the plaintiff may also claim compensation for its breach either in addition to, or in substitution of such performance. Section 21(2) of the Specific Relief Act, 1963 provides that in a suit where the Court decides that specific performance ought not to be granted, but there is a contract between the parties which has been broken by the Respondent, the plaintiff is entitled to compensation for that breach and it shall award him such compensation accordingly. Further, Section 21(3) of the Specific Relief Act, 1963 stipulates that in such a suit where the court decides that specific performance ought to be granted, but that it is not sufficient to satisfy the justice of the case and that some compensation for breach of the contract should also be made to the plaintiff, it shall award him such compensation accordingly. Section 21(4) of the Specific Relief Act, 1963 further stipulates that the award of compensation shall be governed by the principles specified in Section 73 of the Indian Contract Act, 1872. Further Section 21(5) of the Specific Relief Act, 1963 stipulates that no compensation shall be awarded unless the plaintiff had claimed such compensation in the plaint. Thus, the award of compensation in terms of the Specific Relief Act, 1963, is inherently linked to the claim for specific performance of a contract. In these circumstances, even if we were to hold that refund of the consideration amount is an exercise of discretionary power in a proceedings pertaining to specific performance, yet the compensation/damages awarded would have to withstand the test laid down for grant of compensatory relief under Section 73 of the Indian Contract Act. In the instant case the arbitrator has not only awarded damages of Rs. 35 lakhs, but also awarded interest on the principal amount @18% p.a. The learned arbitrator had to be mindful of the fact that under the agreement in question, there is no specified rate of interest. In fact, there is no stipulation under the agreement which enables the Respondent to seek refund of the consideration amount. There is also merit in the stand of the Appellant that if the Respondent was genuinely interested in the refund of the consideration, it should have accepted the offer extended to it vide letter dated 19.08.2011, and the controversy would have been put to rest or, at least, narrowed down. If the learned arbitrator was to award refund of the amount, as an alternate relief under Section 21 of the Specific Relief Act, 1963 it was imperative to first come to a conclusion that the facts of the case did not justify the grant of specific performance and, instead, the relief of compensation would be the appropriate relief. This is obviously not the way the claims have to be adjudicated. Ergo, the award of interest by way of damages had to be tested and examined on a different yardstick-Section 73/74 of the Indian Contract Act. In this exercise the claim had to be examined and adjudicated having regard to the terms and conditions of the agreement which, as noted above, are silent as to the contractual right to seek refund. We, therefore, find that the learned arbitrator has committed a perversity which has gone unnoticed by the learned Single Judge. There are contradictory findings in the arbitral award and the impugned order. On one hand, learned Single Judge has observed that even though the Respondent in its statement of claim had sought the relief of specific performance of the agreements, but on the other hand, it is observed that the said relief was not pressed as no issue was claimed in this regard and it would be the discretion of the learned arbitrator as to whether to award specific performance of the agreement, or to award damages in lieu thereof. The learned arbitrator proceeded on a wrong premise, assuming that the Respondent had not claimed relief of specific performance and was instead seeking refund of the sale consideration with interest as a primary relief of damages.”

26. From a reading of the aforesaid judgment, it is palpably clear that it was in the facts and circumstances of the case captured therein that the Court had interfered with the rate of interest and reduced the same to 9%. The facts of the case in the present case are completely distinguishable and the judgment in V[4] Infrastructure (supra) cannot aid the Petitioner.

27. For all the aforesaid reasons, I am of the view that the impugned award calls for no interference in exercise of jurisdiction under Section 34 of the 1996 Act.

28. Petition is accordingly dismissed.