"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, September 7, 2010

Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghat and Ors.

Decided by R.V. Raveendran and H.L. Gokhale, JJ on 20 August 2010, these Civil Appeal Nos. 6815-6816 of 2010 were pertaining to the question of award of interest.

In this dispute, the High Court had previously remitted the matter to the arbitral tribunal for making a reasoned award (the award was an unreasoned one) after fresh consideration. Instances where Courts have remitted the matter to the tribunals are rare. See, for example, Gayathri Projects Ltd. V. Airport Authority of India 2007(3) Arb. LR 416 (Del.); Union of India v. Prem Kumar Lihala 2005(Suppl.) Arb. LR 506 (Del.).

On remission, the tribunal considered the matter and had rejected all the claims raised by the Respondent (Railways) and a few claims raised by the Appellant (KAC). Hence the “cross petitions” under S 34. Dissatisfied with the decisions of the lower courts both KAC and Railways had approached the Supreme Court.

The Court had to consider two issues:

(i) whether the contract between the parties contains an express bar regarding award of interest?

(ii) If so whether the arbitral tribunal was justified in refusing interest for the period between the date of cause of action to date of award?

The court had to interpret Clause 16(2) of the General Conditions of the Contract. The said Clause read:

"No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposit in terms of Sub-clause (1) of this Clause will be repayable (with) interest accrued thereon."

The court interpreted the expression “amount payable… under the Contract” to mean any amount that the Railways had to pay as a part of the Contract. Thus, the Contractor could claim no right under the Contract for interest.

While deciding on the second question, that is, the correctness of the tribunal in refusing to award interest, this blawgger noticed an interesting aspect. While discussing the law on the power of the tribunal to award interest, the court listed the leading judgements on the point and only then did it look at the statute. Does this imply that the court accorded a higher stature to its own judgements even compared to the statute? Or is this blawgger reading more into the judgement than what it actually says?

The relevant provision [S 31(7)] in the Arbitration and Conciliation Act, 1996 on interest is quoted below:

"(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 percentum per annum from the date of the award to the date of payment

The judicial lingo used as regards interest rate is as follows:

Pre-reference interest: Interest prior to the period of reference to arbitration.
Pendente lite interest: Interest for the period when the litigation is pending.
Post-award interest: Interest between the date of award and the date of payment

Unlike the court, we shall first analyse the statutory provision. Note that S 31(7)(a) deals with pre-reference interest and pendente lite interest, and S 31(7)(b) deals with post-award interest. Note also that S 31(7)(a) is a Default Rule, and hence is subject to the contract to the contrary. However, prima facie, S 31(7)(b) does not seem to contain a Default Rule. Rather, it leaves it to the discretion of the arbitral tribunal. However, numerous judgements of the courts would tell us that the arbitral tribunal has to act within the “four corners” of the contract that forms the basis of their jurisdiction. Hence, if the contract provides for a particular post-award interest, the tribunal has no alternative but to enforce the same.

On the second question (whether the tribunal was justified in refusing to grant pendente lite interest?), the court held:

Where the arbitral tribunal has exercised its discretion and refused award of interest for the period pendente lite… the award of the arbitrator could not be interfered with.”

The court was probably right in refusing to set aside the award of the tribunal on this point. But, where is the question of the arbitral tribunal having “discretion”? The contract is very clear: No interest is payable on any amount payable under the contract. That being so, from where does this “discretion” arise?

In the passing, it may also be noted that there were two decisions under the 1940 Act which were decisions supporting a contrary point. The SC held that these decisions were under the 1940 Act and were not binding, considering that the wordings in both the respective provisions on interest rate being dissimilar. 
P.S.: On further reading materials pertaining to default rules, see the link given above on default rules. A poser to the readers. What are the Default Rules in the Indian Contract Act, 1872 (at least in the provisions pertaining to contracts generally)?

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