Larsen para 15, 16

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Page 1 Tuesday, October 03, 2023

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2023 SCC OnLine SC 982
In the Supreme Court of India

(BEFORE S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.)
Larsen Air Conditioning and Refrigration Company

… Appellant(s);
Versus
Union of India and Others … Respondent(s).
Civil Appeal No(s). 3798 of 2023
Decided on August 11, 2023
Advocates who appeared in this case :
For Appellant(s) Mr. R. K. Singh, Adv.
Mrs. Neeraj Singh, Adv.
Mr. Kumar Gaurav, Adv.
Mr. Aman Rastogi, Adv.
Mr. Sanjay Rastogi, AOR
For Respondent(s) Mr. Vikramjeet Banerjee, A.S.G.
Mr. Nachiketa Joshi, Adv.
Mr. A K Kaul, Adv.
Mr. Bhuvan Mishra, Adv.
Mr. Akshit Pradhan, Adv.
Mr. Sachin Sharma, Adv.
Mr. Arvind Kumar Sharma, AOR
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.:— 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
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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 Rs. 10,00,000 in the District
Court, Kanpur on 06.06.2003 against Rs. 1,82,878.11 due at the time.
4. Partly allowing the appeal, the High Court disapproved the
reasoning in the award on Claim No. 6; it held that the sum of Rs. 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 , 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 for judicial interference
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so as to reduce the statutory interest rate from 18% to 9% per annum.

Counsel drew attention to Shahi v. State of UP6 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 Rs. 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 v. Pratibha Industries Ltd.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 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:
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“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
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
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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 Ltd.13 ].
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
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means that the Parliamentary intent was to exclude power to modify an

award, in any manner, to the court. 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.
———
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.
3 (2019) 5 SCR 152
4 (2018) 5 SCR 138
5 (2017) 14 SCC 323
6
(2019) 11 SCR 640
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7 1991 Supp (3) SCR 417
8 (2018) 14 SCR 1143
9 (2021) 4 SCR 137
10 (2019) 8 SCC 726
11 (2014) 13 SCR 895
12
(2019) 7 SCR 522
13 (2021) 5 SCR 984
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 arbitration
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.”
15 (2021) 5 SCR 368
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SCC Online Web Edition, © 2023 EBC Publishing Pvt. Ltd.

Page 1 Tuesday, October 03, 2023

2023 SCC OnLine SC 982

In the Supreme Court of India

Larsen Air Conditioning and Refrigration Company

so as to reduce the statutory interest rate from 18% to 9% per annum.

“31. Form and contents of arbitral award

arbitrator, and the award passed by them, would be subject to this

means that the Parliamentary intent was to exclude power to modify an

3 (2019) 5 SCR 152

4 (2018) 5 SCR 138

5 (2017) 14 SCC 323

7 1991 Supp (3) SCR 417

8 (2018) 14 SCR 1143

9 (2021) 4 SCR 137

10 (2019) 8 SCC 726

11 (2014) 13 SCR 895

13 (2021) 5 SCR 984

15 (2021) 5 SCR 368

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