[Cites 40, Cited by 0]
Delhi High Court
Mcd vs Anil Gupta And Ors on 6 April, 2026
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 05.02.2026
Judgment pronounced on: 06.04.2026
+ O.M.P. 709/2011
MCD .....Petitioner
Through: Mr. Sunil Goel, Standing
Counsel with Ms. Dimple
Aggarwal, Mr. Himanshu Goel,
Ms. Varsha, Advocates along
with Bhanu Pratap AE, MCD
versus
ANIL GUPTA AND ORS .....Respondents
Through: Mr Aditya Chhibber, Advocate.
CORAM:
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
JUDGMENT
HARISH VAIDYANATHAN SHANKAR, J.
1. The present Petition has been instituted under Section 34 of the
Arbitration and Conciliation Act, 19961, by the Municipal
Corporation of Delhi2, seeking setting aside of the Arbitral Award
dated 01.04.20113 rendered in the arbitration proceedings titled ―Shri
Anil Gupta v. Municipal Corporation of Delhi‖.
A&C Act
MCD/Petitioner
Impugned Award
2. The Impugned Award arises out of disputes emanating from the
Work Order dated 28.08.20044, awarded by the Petitioner to
Respondent No.1 for execution of certain works.
3. At the outset, it is noted that the present Petition was earlier
disposed of by a Judgment dated 12.12.2018. Subsequently, upon an
application filed by the Petitioner seeking modification, the learned
Coordinate Bench modified the said judgment vide Order dated
08.08.2019, whereby the learned Single Judge set aside the interest
component awarded under the Impugned Award in toto. Aggrieved
thereby, Respondent No. 1 preferred an appeal before the Division
Bench of this Court, which, vide Judgment dated 30.11.2023,
remanded the matter for fresh adjudication confined to the limited
issue of grant of interest. Consequently, the present Petition is now
listed before this Court for consideration on the said issue.
4. At this stage, the parties are ad idem that the controversy stands
narrowed to the issue of interest, which remains the sole surviving
point of contention between them. Accordingly, the present
adjudication is confined to this aspect alone.
BRIEF FACTS:
5. The present proceedings arise out of disputes between the MCD
and Respondent No. 1 in relation to a works contract awarded for the
construction of the Zonal Building at Narela. The said work was
originally awarded in the year 1998 to another contractor, namely, M/s
Satish Chander Ramesh Kumar. However, the said contractor
abandoned the work after completing only the basement structure.
Work Order
6. Subsequently, the Petitioner invited fresh tenders for
completion of the remaining work. Pursuant thereto, the Petitioner
issued the Work Order in favour of Respondent No. 1 for the balance
work of construction of the Zonal Office Building at Narela for a
contractual value of ₹4,29,00,830/-, with a stipulated completion
period of 24 months. The work was to commence shortly thereafter
and the stipulated date of completion was 03.09.2006.
7. Disputes subsequently arose between the parties in relation to
certain claims raised by Respondent No. 1, including, inter alia,
escalation under Clause 10CC, watch and ward expenses, and interest.
In view of the arbitration clause contained in the contract, the disputes
were referred to arbitration and Shri Amrit Lal Agarwal, Chief
Engineer (Retd.), MCD, was appointed as the Sole Arbitrator by
Order dated 28.10.2009 passed by this Court in ARB. P. 120/2009.
8. Respondent No. 1 filed his Statement of Claims before the
learned Arbitrator seeking various monetary claims, whereas the
Petitioner herein filed its Statement of Defence and also preferred
counter-claims. Upon completion of the arbitral proceedings, the
learned Arbitrator rendered the Impugned Arbitral Award dated
01.04.2011, whereby certain claims of Respondent No. 1 were
allowed, including a claim towards escalation under Clause 10CC and
watch and ward charges, together with interest at the rate of 18% per
annum and costs.
9. Aggrieved by the said Arbitral Award, the Petitioner instituted
the present proceedings under Section 34 of the A&C Act, before this
Court, seeking the setting aside of the Impugned Award.
10. The present Petition was initially adjudicated by a learned
Single Judge of this Court vide Judgment dated 12.12.2018, whereby
the Impugned Arbitral Award was partially upheld. The learned Single
Judge set aside the award in respect of Claim No. 2, which pertained
to reimbursement of the amount expended on watch and ward
arrangements after completion of the work. Further, the learned Single
Judge modified the award of interest to a limited extent.
11. While the learned Arbitrator had granted interest at the rate of
18% per annum from the date of cause of action, i.e., 08.03.2004, the
learned Single Judge held that interest would instead run only from
the date of invocation of arbitration, i.e., 06.07.2008, till the date of
the Award at the rate of 18% per annum. Additionally, for the period
during which the Section 34 petition remained pending before this
Court, the rate of interest was reduced to simple interest at 12% per
annum on the awarded amount, applicable up to the date of the
decision on the Section 34 petition. The learned Single Judge further
held that if the entire payment is made within a period of eight weeks,
no further interest shall be payable. However, in the event the
payment is not made within the stipulated period of eight weeks, the
entire outstanding amount shall carry simple interest at the rate of
18% per annum.
12. Subsequently, the Petitioner filed an Application being I.A. No.
2364/2019 seeking modification of the Judgment dated 12.12.2018,
placing reliance upon certain documents relating to the tender
negotiations which, according to the Petitioner, demonstrated that the
condition pertaining to 24% interest mentioned in the tender had been
withdrawn prior to the award of the contract.
13. The learned Single Judge, upon consideration of the said
application, vide the Judgement dated 08.08.2019, modified the earlier
judgment and held that Respondent No. 1 would not be entitled to
interest as well as the costs of the arbitral proceedings, and
accordingly directed the Petitioner to pay only the principal amount
awarded under Claim No. 1.
14. Aggrieved by the Judgments dated 12.12.2018 and 08.08.2019,
Respondent No. 1 preferred an appeal before the Division Bench of
this Court being FAO(OS)(COMM) 315/2019 titled ―Anil Kumar
Gupta v. Municipal Corporation of Delhi & Anr.‖.
15. The Division Bench, upon hearing the parties on the issue of
interest, rendered its Judgment dated 30.11.2023, whereby it set aside
the aforesaid judgements passed by the learned Single Judge and
restored the present Petition for fresh consideration in light of the
observations contained in the said judgment.
16. In view of the aforesaid Judgment dated 30.11.2023, the present
Petition stood restored to the file of this Court for fresh adjudication,
confined to the issue of interest, in accordance with law.
CONTENTIONS ON BEHALF OF THE PETITIONER:
17. Learned counsel appearing for the Petitioner would contend that
the learned Arbitrator has erred in law in awarding interest at the rate
of 18% per annum, which, according to the Petitioner, is excessive,
arbitrary and contrary to the statutory framework governing the grant
of interest.
18. Learned counsel for the Petitioner would further contend that
the amounts awarded under Claim No. 1 (escalation under Clause
10CC) are essentially in the nature of compensation or damages, and
therefore, the grant of interest upon such amounts is legally
impermissible. It would be contended that interest itself constitutes a
form of compensation and, therefore, awarding interest upon
compensation effectively amounts to granting interest on interest,
which is prohibited under Section 3(3)(c) of the Interest Act, 19785.
19. Learned counsel would further contend that the learned
Arbitrator has awarded interest at the rate of 18% per annum without
assigning any cogent or legally sustainable reasons, particularly when
the prevailing bank rates during the relevant period were substantially
lower. It would be contended that in terms of Section 3(1) of the
Interest Act, interest ought not to exceed the ―current rate of interest‖,
which broadly corresponds to the rates offered by scheduled banks,
and which during the relevant period ranged around 6-7% per annum.
20. Learned counsel would further contend that the learned
Arbitrator has erroneously proceeded on the basis that Respondent
No. 1 had demanded interest at higher rates in certain communications
and that such demands were not disputed by the Petitioner. It would
be contended that the mere demand of interest by a claimant cannot
justify the grant of such a rate by the learned Arbitral Tribunal without
independently examining the reasonableness and legality of the rate so
claimed.
21. Learned counsel would also contend that the learned Arbitrator
has adopted an erroneous method of computation, which effectively
results in the grant of interest upon amounts that already include
Interest Act
previously calculated interest, thereby leading to interest on interest,
which is impermissible in law.
22. Learned counsel would further contend that the learned
Arbitrator has adopted an incorrect starting point for the computation
of interest by treating 08.03.2004 as the date from which interest is
payable. It would be contended that the said date corresponds to the
issuance of the tender and not the accrual of any cause of action.
23. Learned counsel would contend that the Work Order was issued
subsequently on 25.08.2004, and therefore, the adoption of
08.03.2004 as the starting point for interest is factually erroneous. It
would further be contended that, at the highest, interest could have
been considered only from the date of invocation of arbitration, i.e.,
06.07.2008.
24. Learned counsel would also contend that the Petitioner is a
public authority discharging statutory functions under the Delhi
Municipal Corporation Act, 1957, and the work in question was
undertaken as part of its public duties and not as a commercial
venture. It would therefore be contended that the grant of interest at
such a high rate imposes an undue burden upon the public exchequer
and is contrary to the settled principles governing the award of interest
in matters involving public authorities.
25. On the aforesaid grounds, learned counsel for the Petitioner
would contend that the award of interest at the rate of 18% per annum
is patently illegal and excessive, and therefore, warrants interference
by this Court within the limited parameters of Section 34 of the A&C
Act.
CONTENTIONS ON BEHALF OF RESPONDENT No. 1:
26. Per contra, learned counsel appearing on behalf of Respondent
No. 1 would contend that the challenge laid by the Petitioner to the
grant of interest at the rate of 18% per annum is wholly misconceived
and does not fall within the limited parameters of interference
prescribed under Section 34 of the A&C Act.
27. Learned counsel for Respondent No. 1 would contend that
Respondent No. 1, in the Statement of Claim, had specifically claimed
interest at the rate of 18% per annum. It would be contended that the
learned Arbitrator has taken note of the fact that Respondent No. 1
had, on multiple occasions, demanded interest at the said rate through
various communications addressed to the Petitioner, and that the said
demands were never disputed by the Petitioner.
28. Learned counsel for Respondent No. 1 would further contend
that the award of interest at the rate of 18% per annum is fully in
consonance with the statutory framework governing arbitral
proceedings under the pre-amendment regime of the A&C Act.
29. It would also be contended that, in terms of Section 31(7) of the
A&C Act, as it stood prior to the 2015 amendment, where the Arbitral
Award does not otherwise specify the rate of post-award interest, the
awarded sum shall carry interest at the rate of 18% per annum from
the date of the award until payment.
30. Learned counsel would contend that the statutory recognition of
18% interest under Section 31(7) of the A&C Act itself reflects the
legislative benchmark as to what constitutes a reasonable rate of
interest in arbitral proceedings governed by the unamended Act. It
would thus be contended that the grant of 18% interest by the learned
Arbitrator cannot be characterised as excessive or unconscionable,
particularly when the statute itself prescribes the said rate as the
default rate of interest.
31. Learned counsel for Respondent No. 1 would further contend
that the aforesaid position has been consistently recognised in judicial
pronouncements, including the decision of the Hon'ble Supreme
Court in Sayeed Ahmed & Co. v. State of Uttar Pradesh & Ors.6,
wherein the Court observed that under the scheme of Section 31(7)(b)
of the A&C Act, an award would carry interest at the rate of 18% per
annum in the absence of any contrary direction in the award.
32. Learned counsel for Respondent No. 1 would further contend
that the learned Arbitrator has not granted interest solely on the basis
of any condition relating to 24% interest in the tender document. It
would be contended that the primary basis for the grant of interest was
the consistent demand made by Respondent No. 1 in its
communications and the failure of the Petitioner to dispute such
demands at the relevant time.
33. Learned counsel for Respondent No. 1 would further contend
that the documents relied upon by the Petitioner in the subsequent
proceedings to contend that the condition relating to 24% interest
stood withdrawn cannot be looked into for the purpose of deciding the
present petition. It would be contended that the said documents were
neither part of the Arbitral Record nor produced before the learned
Arbitrator and were sought to be introduced at a belated stage after the
disposal of the Section 34 petition. According to Respondent No. 1,
(2009) 12 SCC 26
such material cannot be relied upon in proceedings under Section 34
of the A&C Act.
34. Learned counsel would further contend that the Division Bench
of this Court, vide Judgment dated 30.11.2023 in FAO(OS)(COMM)
315/2019, has already held that the Court exercising jurisdiction under
Section 34 does not possess the power to modify or vary an arbitral
award, and therefore, the scope of interference is extremely limited.
35. Learned counsel for Respondent No. 1 would thus contend that
the award of interest at the rate of 18% per annum is a result of a
reasoned exercise of discretion by the learned Arbitrator and does not
disclose any patent illegality, perversity, or violation of public policy
so as to warrant interference under Section 34 of the A&C Act.
ANALYSIS:
36. This Court has heard the learned counsel appearing on behalf of
the parties at length and, with their able assistance, has carefully
perused the paperbook and other material documents placed on record,
including the record of the Arbitral Tribunal, as well as the written
submissions filed by the respective parties.
37. At the outset, it is apposite to note that this Court is conscious
of the limited scope of its jurisdiction while examining an objection
petition under Section 34 of the A&C Act. The contours of judicial
intervention in such proceedings have been authoritatively delineated
and settled by a consistent and evolving line of precedents of the
Hon'ble Supreme Court.
38. In this regard, a three-judge Bench of the Hon'ble Supreme
Court, after an exhaustive consideration of a catena of earlier
decisions, in OPG Power Generation (P) Ltd. v. Enexio Power
Cooling Solutions (India) (P) Ltd.7, while dealing with the grounds of
conflict with the public policy of India and perversity, grounds which
have also been urged in the present case, made certain pertinent
observations, which are reproduced hereunder:
"Relevant legal principles governing a challenge to an arbitral
award
30. Before we delve into the issue/sub-issues culled out above, it
would be useful to have a look at the relevant legal principles
governing a challenge to an arbitral award. Recourse to a court
against an arbitral award may be made through an application for
setting aside such award in accordance with sub-sections (2), (2-A)
and (3) of Section 34 of the 1996 Act. Sub-section (2) of Section
34 has two clauses, (a) and (b). Clause (a) has five sub-clauses
which are not relevant to the issues raised before us. Insofar as
clause (b) is concerned, it has two sub-clauses, namely, (i) and (ii).
Sub-clause (i) of clause (b) is not relevant to the controversy in
hand. Sub-clause (ii) of clause (b) provides that if the Court finds
that the arbitral award is in conflict with the public policy of India,
it may set aside the award.
Public policy
31. ―Public policy‖ is a concept not statutorily defined, though it
has been used in statutes, rules, notification, etc. since long, and is
also a part of common law. Section 23 of the Contract Act, 1872
uses the expression by stating that the consideration or object of an
agreement is lawful, unless, inter alia, opposed to public policy.
That is, a contract which is opposed to public policy is void.
*****
35. In Renusagar Power Co. Ltd. v. General Electric Co., 1994
Supp (1) SCC 644, a three-Judge Bench of this Court observed
that the doctrine of public policy is somewhat open--textured and
flexible. By citing earlier decisions, it was observed that there are
two conflicting positions which are referred to as the ―narrow
view‖ and the ―broad view‖. According to the narrow view, courts
cannot create new heads of public policy whereas the broad view
countenances judicial law making in these areas. In the field of
private international law, it was pointed out, courts refuse to apply
a rule of foreign law or recognise a foreign judgment or a foreign
arbitral award if it is found that the same is contrary to the public
policy of the country in which it is sought to be invoked or
enforced. However, it was clarified, a distinction is to be drawn
(2025) 2 SCC 417
while applying the rule of public policy between a matter governed
by domestic law and a matter involving conflict of laws. It was
observed that the application of the doctrine of public policy in the
field of conflict of laws is more limited than that in the domestic
law and the courts are slower to invoke public policy in cases
involving a foreign element than when a purely municipal legal
issue is involved. It was held that contravention of law alone will
not attract the bar of public policy, and something more than
contravention of law is required.
*****
37. What is clear from above is that for an award to be against
public policy of India a mere infraction of the municipal laws of
India is not enough. There must be, inter alia, infraction of
fundamental policy of Indian law including a law meant to serve
public interest or public good.
*****
40. In ONGC Ltd. v. Western Geco International Ltd., (2014) 9
SCC 263, paras 35, 38 & 39, which also related to the period prior
to the 2015 Amendment of Section 34(2)(b)(ii), a three-Judge
Bench of this Court, after considering the decision inONGC
Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, without exhaustively
enumerating the purport of the expression ―fundamental policy of
Indian law‖, observed that it would include all such fundamental
principles as providing a basis for administration of justice and
enforcement of law in this country. The Court thereafter
illustratively referred to three fundamental juristic principles,
namely:
(a) that in every determination that affects the rights of a citizen or
leads to any civil consequences, the court or authority or quasi-
judicial body must adopt a judicial approach, that is, it must act
bona fide and deal with the subject in a fair, reasonable and
objective manner and not actuated by any extraneous
consideration;
(b) that while determining the rights and obligations of parties the
court or Tribunal or authority must act in accordance with the
principles of natural justice and must apply its mind to the
attendant facts and circumstances while taking a view one way
or the other; and
(c) that its decision must not be perverse or so irrational that no
reasonable person would have arrived at the same.
41. In Associate Builders v. DDA, (2015) 3 SCC 49, a two-Judge
Bench of this Court, held that audi alteram partem principle is
undoubtedly a fundamental juristic principle in Indian law and is
enshrined in Sections 18 and 34(2)(a)(iii) of the 1996 Act. In
addition to the earlier recognised principles forming fundamental
policy of Indian law, it was held that disregarding:
(a) orders of superior courts in India; and
(b) the binding effect of the judgment of a superior court would
also be regarded as being contrary to the fundamental policy of
Indian law.
Further, elaborating upon the third juristic principle (i.e. qua
perversity), as laid down in ONGC Ltd. v. Western Geco
International Ltd., (2014) 9 SCC 263, it was observed that where:
(i) a finding is based on no evidence; or
(ii) an Arbitral Tribunal takes into account something irrelevant to
the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision
would necessarily be perverse [Associate Builders case,
(2015) 3 SCC 49, para 31].
To this a caveat was added by observing that when a court applies
the ―public policy test‖ to an arbitration award, it does not act as a
court of appeal and, consequently, errors of fact cannot be
corrected; and a possible view by the arbitrator on facts has
necessarily to pass muster as the arbitrator is the ultimate master of
the quantity and quality of evidence to be relied upon when he
delivers his arbitral award. It was also observed that an award
based on little evidence or on evidence which does not measure up
in quality to a trained legal mind would not be held to be invalid on
that score. Thus, once it is found that the arbitrator's approach is
not arbitrary or capricious, it is to be taken as the last word on
facts.
The 2015 Amendment in Sections 34 and 48
42. The aforementioned judicial pronouncements were all prior to
the 2015 Amendment. Notably, prior to the 2015 Amendment the
expression ―in contravention with the fundamental policy of Indian
law‖ was not used by the legislature in either Section 34(2)(b)(ii) or
Section 48(2)(b). The pre-amended Section 34(2)(b)(ii) and its
Explanation read:
*****
44. By the 2015 Amendment, in place of the old Explanation to
Section 34(2)(b)(ii), Explanations 1 and 2 were added to remove
any doubt as to when an arbitral award is in conflict with the public
policy of India.
45. At this stage, it would be pertinent to note that we are dealing
with a case where the application under Section 34 of the 1996 Act
was filed after the 2015 Amendment, therefore the newly
substituted/added Explanations would apply [SsangyongEngg. &
Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131].
46. The 2015 Amendment adds two Explanations to each of the
two sections, namely, Section 34(2)(b)(ii) and Section 48(2)(b), in
place of the earlier Explanation. The significance of the newly
inserted Explanation 1 in both the sections is two-fold. First, it does
away with the use of words : (a) ―without prejudice to the
generality of sub-clause (ii)‖ in the opening part of the pre-
amended Explanation to Section 34(2)(b)(ii); and (b) ―without
prejudice to the generality of clause (b) of this section‖ in the
opening part of the pre-amended Explanation to Section 48(2)(b);
secondly, it limits the expanse of public policy of India to the three
specified categories by using the words ―only if‖.
Whereas, Explanation 2 lays down the standard for adjudging
whether there is a contravention with the fundamental policy of
Indian law by providing that a review on merits of the dispute shall
not be done. This limits the scope of the enquiry on an application
under either Section 34(2)(b)(ii) or Section 48(2)(b) of the 1996
Act.
47. The 2015 Amendment by inserting sub-section (2-A) in Section
34, carves out an additional ground for annulment of an arbitral
award arising out of arbitrations other than international
commercial arbitrations. Sub-section (2-A) provides that the Court
may also set aside an award if that is vitiated by patent illegality
appearing on the face of the award. This power of the Court is,
however, circumscribed by the proviso, which states that an award
shall not be set aside merely on the ground of an erroneous
application of the law or by reappreciation of evidence.
48. Explanation 1 to Section 34(2)(b)(ii), specifies that an arbitral
award is in conflict with the public policy of India, only if:
(i) the making of the award was induced or affected by fraud or
corruption or was in violation of Section 75 or Section 81; or
(ii) it is in contravention with the fundamental policy of Indian law;
or
(iii) it is in conflict with the most basic notions of morality or
justice.
49. In the instant case, there is no allegation that the making of the
award was induced or affected by fraud or corruption, or was in
violation of Section 75 or Section 81. Therefore, we shall confine
our exercise in assessing as to whether the arbitral award is in
contravention with the fundamental policy of Indian law, and/or
whether it conflicts with the most basic notions of morality or
justice. Additionally, in the light of the provisions of sub-section
(2-A) of Section 34, we shall examine whether there is any patent
illegality on the face of the award.
50. Before undertaking the aforesaid exercise, it would be apposite
to consider as to how the expressions:
(a) ―in contravention with the fundamental policy of Indian law‖;
(b) ―in conflict with the most basic notions of morality or justice‖;
and
(c) ―patent illegality‖ have been construed.
In contravention with the fundamental policy of Indian law
51. As discussed above, till the 2015 Amendment the expression
―in contravention with the fundamental policy of Indian law‖ was
not found in the 1996 Act. Yet, in Renusagar Power Co.
Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, in the
context of enforcement of a foreign award, while construing the
phrase ―contrary to the public policy‖, this Court held that for a
foreign award to be contrary to public policy mere contravention of
law would not be enough rather it should be contrary to:
(a) the fundamental policy of Indian law; and/or
(b) the interest of India; and/or
(c) justice or morality.
*****
55. The legal position which emerges from the aforesaid discussion
is that after ―the 2015 Amendments‖ in Section 34(2)(b)(ii) and
Section 48(2)(b) of the 1996 Act, the phrase ―in conflict with the
public policy of India‖ must be accorded a restricted meaning in
terms of Explanation 1. The expression ―in contravention with the
fundamental policy of Indian law‖ by use of the word
―fundamental‖ before the phrase ―policy of Indian law‖ makes the
expression narrower in its application than the phrase ―in
contravention with the policy of Indian law‖, which means mere
contravention of law is not enough to make an award vulnerable.
To bring the contravention within the fold of fundamental policy of
Indian law, the award must contravene all or any of such
fundamental principles that provide a basis for administration of
justice and enforcement of law in this country.
56. Without intending to exhaustively enumerate instances of such
contravention, by way of illustration, it could be said that:
(a) violation of the principles of natural justice;
(b) disregarding orders of superior courts in India or the binding
effect of the judgment of a superior court; and
(c) violating law of India linked to public good or public interest,
are considered contravention of the fundamental policy of
Indian law.
However, while assessing whether there has been a contravention
of the fundamental policy of Indian law, the extent of judicial
scrutiny must not exceed the limit as set out in Explanation 2 to
Section 34(2)(b)(ii).
*****
Patent illegality
65. Sub-section (2-A) of Section 34 of the 1996 Act, which was
inserted by the 2015 Amendment, provides that an arbitral award
not arising out of international commercial arbitrations, may also
be set aside by the Court, if the Court finds that the award is visited
by patent illegality appearing on the face of the award. The proviso
to sub-section (2-A) states that an award shall not be set aside
merely on the ground of an erroneous application of the law or by
reappreciation of evidence.
66. In ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, while
dealing with the phrase ―public policy of India‖ as used in Section
34, this Court took the view that the concept of public policy
connotes some matter which concerns public good and public
interest. If the award, on the face of it, patently violates statutory
provisions, it cannot be said to be in public interest. Thus, an award
could also be set aside if it is patently illegal. It was, however,
clarified that illegality must go to the root of the matter and if the
illegality is of trivial nature, it cannot be held that award is against
public policy.
67. In Associate Builders v. DDA, (2015) 3 SCC 49, this Court
held that an award would be patently illegal, if it is contrary to:
(a) substantive provisions of law of India;
(b) provisions of the 1996 Act; and
(c) terms of the contract [See also three-Judge Bench decision of
this Court in State of Chhattisgarh v. SAL Udyog (P) Ltd.,
(2022) 2 SCC 275].
The Court clarified that if an award is contrary to the substantive
provisions of law of India, in effect, it is in contravention of
Section 28(1)(a) of the 1996 Act. Similarly, violating terms of the
contract, in effect, is in contravention of Section 28(3) of the 1996
Act.
68. In SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131 this Court specifically dealt with the 2015
Amendment which inserted sub-section (2-A) in Section 34 of the
1996 Act. It was held that ―patent illegality appearing on the face
of the award‖ refers to such illegality as goes to the root of matter,
but which does not amount to mere erroneous application of law. It
was also clarified that what is not subsumed within ―the
fundamental policy of Indian law‖, namely, the contravention of a
statute not linked to ―public policy‖ or ―public interest‖, cannot be
brought in by the backdoor when it comes to setting aside an award
on the ground of patent illegality [See SsangyongEngg. &
Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131]. Further, it
was observed, reappreciation of evidence is not permissible under
this category of challenge to an arbitral award
[See SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131].
Perversity as a ground of challenge
69. Perversity as a ground for setting aside an arbitral award was
recognised inONGC Ltd. v. Western Geco International Ltd.,
(2014) 9 SCC 263. Therein it was observed that an arbitral
decision must not be perverse or so irrational that no reasonable
person would have arrived at the same. It was observed that if an
award is perverse, it would be against the public policy of India.
70. In Associate Builders v. DDA, (2015) 3 SCC 49 certain tests
were laid down to determine whether a decision of an Arbitral
Tribunal could be considered perverse. In this context, it was
observed that where:
(i) a finding is based on no evidence; or
(ii) an Arbitral Tribunal takes into account something irrelevant to
the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision
would necessarily be perverse.
However, by way of a note of caution, it was observed that when a
court applies these tests it does not act as a court of appeal and,
consequently, errors of fact cannot be corrected. Though, a possible
view by the arbitrator on facts has necessarily to pass muster as the
arbitrator is the ultimate master of the quantity and quality of
evidence to be relied upon. It was also observed that an award
based on little evidence or on evidence which does not measure up
in quality to a trained legal mind would not be held to be invalid on
that score.
71. In SsangyongEngg. & Construction Co. Ltd. v. NHAI, (2019)
15 SCC 131, which dealt with the legal position post the 2015
Amendment in Section 34 of the 1996 Act, it was observed that a
decision which is perverse, while no longer being a ground for
challenge under ―public policy of India‖, would certainly amount
to a patent illegality appearing on the face of the award. It was
pointed out that an award based on no evidence, or which ignores
vital evidence, would be perverse and thus patently illegal. It was
also observed that a finding based on documents taken behind the
back of the parties by the arbitrator would also qualify as a decision
based on no evidence inasmuch as such decision is not based on
evidence led by the parties, and therefore, would also have to be
characterised as perverse [See SsangyongEngg. & Construction
Co. Ltd. v. NHAI, (2019) 15 SCC 131].
72. The tests laid down in Associate Builders v. DDA, (2015) 3
SCC 49 to determine perversity were followed in SsangyongEngg.
& Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 and later
approved by a three-Judge Bench of this Court in Patel Engg.
Ltd. v. North Eastern Electric Power Corpn. Ltd., (2020) 7 SCC
73. In a recent three-Judge Bench decision of this Court in DMRC
Ltd. v. Delhi Airport Metro Express (P) Ltd., (2024) 6 SCC 357,
the ground of patent illegality/perversity was delineated in the
following terms: (SCC p. 376, para 39)
―39. In essence, the ground of patent illegality is available
for setting aside a domestic award, if the decision of the
arbitrator is found to be perverse, or so irrational that no
reasonable person would have arrived at it; or the
construction of the contract is such that no fair or
reasonable person would take; or, that the view of the
arbitrator is not even a possible view. 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 under the head of ―patent illegality‖.
An award without reasons would suffer from patent
illegality. The arbitrator commits a patent illegality by
deciding a matter not within its jurisdiction or violating a
fundamental principle of natural justice.‖
Scope of interference with an arbitral award
74. The aforesaid judicial precedents make it clear that while
exercising power under Section 34 of the 1996 Act the Court does
not sit in appeal over the arbitral award. Interference with an
arbitral award is only on limited grounds as set out in Section 34 of
the 1996 Act. A possible view by the arbitrator on facts is to be
respected as the arbitrator is the ultimate master of the quantity and
quality of evidence to be relied upon. It is only when an arbitral
award could be categorised as perverse, that on an error of fact an
arbitral award may be set aside. Further, a mere erroneous
application of the law or wrong appreciation of evidence by itself is
not a ground to set aside an award as is clear from the provisions of
sub-section (2-A) of Section 34 of the 1996 Act.
75. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.,
(2019) 20 SCC 1, paras 27-43, a three-Judge Bench of this Court
held that courts need to be cognizant of the fact that arbitral awards
are not to be interfered with in a casual and cavalier manner, unless
the court concludes that the perversity of the award goes to the root
of the matter and there is no possibility of an alternative
interpretation that may sustain the arbitral award. It was observed
that jurisdiction under Section 34 cannot be equated with the
normal appellate jurisdiction. Rather, the approach ought to be to
respect the finality of the arbitral award as well as party's autonomy
to get their dispute adjudicated by an alternative forum as provided
under the law.
*****
Scope of interference with the interpretation/construction of a
contract accorded in an arbitral award
84. An Arbitral Tribunal must decide in accordance with the terms
of the contract. In a case where an Arbitral Tribunal passes an
award against the terms of the contract, the award would be
patently illegal. However, an Arbitral Tribunal has jurisdiction to
interpret a contract having regard to terms and conditions of the
contract, conduct of the parties including correspondences
exchanged, circumstances of the case and pleadings of the parties.
If the conclusion of the arbitrator is based on a possible view of the
matter, the Court should not intefere [See: SAIL v. Gupta Brother
Steel Tubes Ltd., (2009) 10 SCC 63; Pure Helium India (P)
Ltd. v. ONGC, (2003) 8 SCC 593; McDermott International
Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181; MMTC
Ltd. v. Vedanta Ltd., (2019) 4 SCC 163]. But where, on a full
reading of the contract, the view of the Arbitral Tribunal on the
terms of a contract is not a possible view, the award would be
considered perverse and as such amenable to interference [South
East Asia Marine Engg. & Constructions Ltd. v. Oil India Ltd.,
(2020) 5 SCC 164].
Whether unexpressed term can be read into a contract as an
implied condition
85. Ordinarily, terms of the contract are to be understood in the
way the parties wanted and intended them to be. In agreements of
arbitration, where party autonomy is the grund norm, how the
parties worked out the agreement, is one of the indicators to
decipher the intention, apart from the plain or grammatical
meaning of the expressions used [BALCO v. Kaiser Aluminium
Technical Services Inc., (2016) 4 SCC 126].
86. However, reading an unexpressed term in an agreement would
be justified on the basis that such a term was always and obviously
intended by the parties thereto. An unexpressed term can be
implied if, and only if, the court finds that the parties must have
intended that term to form part of their contract. It is not enough for
the court to find that such a term would have been adopted by the
parties as reasonable men if it had been suggested to them. Rather,
it must have been a term that went without saying, a term necessary
to give business efficacy to the contract, a term which, although
tacit, forms part of the contract [Adani Power (Mundra)
Ltd. v. Gujarat ERC, (2019) 19 SCC 9].
87. But before an implied condition, not expressly found in the
contract, is read into a contract, by invoking the business efficacy
doctrine, it must satisfy the following five conditions:
(a) it must be reasonable and equitable;
(b) it must be necessary to give business efficacy to the contract,
that is, a term will not be implied if the contract is effective
without it;
(c) it must be obvious that ―it goes without saying‖;
(d) it must be capable of clear expression;
(e) it must not contradict any terms of the contract [Nabha Power
Ltd. v. Punjab SPCL, (2018) 11 SCC 508, followed in Adani
Power case, (2019) 19 SCC 9].
(emphasis supplied)
39. The solitary issue that arises for consideration in the present
Petition pertains to the legality and sustainability of the Award of
interest at the rate of 18% per annum granted by the learned
Arbitrator.
40. At this stage, this Court finds it apposite, before adverting to the
rival submissions advanced by the parties, to extract and examine the
findings recorded by the learned Arbitrator in respect of Claim No. 4
in the Impugned Award pertaining to the award of interest. The
relevant portion of the Impugned Award is reproduced herein below:
―Claim No.: 4 Interest @ 18% on Pre suit and pendente lite
and future
The claimant in his claim no. 4 has stated that since the claimants
genuine amount got block and could not be used or put to rotation.
and became a bad debt as: such the claimant suffered loss and to
compensate the loss, the payment of interest is a must. The
claimant has sought interest @ 18% on all the above amount with
effect from 01.01.2007 under 10 CC and for the delayed payment
of running bills from the due date of payment to the date of actual
payment.
In this case the claimant vide his letters no C 13 dt. 02.02.2008, C
14 dt. 17.04.2008, C 15 dt. 05.06.2008 and C 16 dt. 06.07.2008
had been repeatedly requesting the respondent to the pay the
amount as per clause 10 CC of the agreement with 18% interest per
annum. But no action in respect of payments was taken by the
respondent. The claimant in his reply has invoked clause 3 (1) a of
the interest act which reads as under
CLAUSE 3 (1) A OF THE INTEREST ACT
3. Power of court to allow interest. - (1) In any proceedings for
the recovery of any debt or damages or in any proceedings in
which a claim for interest in respect of any debt or damages
already paid in made, the court may, If It thinks fit, allow interest
to the-person entitled to the debt or damages or to the person
making such claim, as the case may be, at a rate not exceeding the
current rate of interest, for the whole or part of the following
period, that is to. say-
(a) If the proceedings, rebate to a debt payable by virtue of a
written instrument at a certain time, then, from the date when the
debt is payable to the date of institution of the proceedings.
Comments (vi) In case of notice was sent by plaintiff demanding
interest on amount advanced by him to defendant the plaintiff
entitled to interest for period from date of service of notice on
defendant to date of filing of suit; M.S. Rajput. V. M/s. The Cellar,
AIR 1993 Kant 9.
As per this clause interest not exceeding the current rate can be
paid from the date when the debt is payable to the date of
institution of proceedings i.e. up to 31.12.2009. When the
proceedings started on 7.01.2010. The claimant in his reply has
also dragged the judgement of Delhi High Court, in the case of
DDA V/s S.S. Jatley, where in the Hon'ble High Court has upheld
pre-suit and pendente lite suit interest @12% awarded by the
arbitrator on demand by the claimant and from the date of demand
till the date of filing of suit and till the date of decree and future
interest from the date of degree awarded:@.16% per annum.
In another case referred by the claimant is of Hon'ble Andhra
Pradesh High court in the case of Union of India V/s Satya
Narayan. Construction Company where the High Court has upheld
the interest of 12% per annum awarded by the arbitrator from the
date of degree to the date of payment.
The respondent has at no stage challenged the calculation
submitted by the claimant. The respondent in their reply to claims
has stated that the claimant did not serve any notice of interest to
the respondent and there is not provision in the agreement for the
payment of interest. In this regard it is pointed out that the
respondent submitted copy of the agreement dt 25.08.2004 and
copy of the work order dt: 8.03.2004. The perusal shows that the
claimant laid down encircled condition at page R-18 that "our rate
are hold good for monthly payments. If monthly payments are not
done then 24% interest will be charged.
The cause of action arose on 8.03.2004, when the claimant gave in
writing to have his right to claim interest @ 24% in case monthly
payments are not made. The Hon'ble Supreme Court of India has
upheld this version in the case of Major (Regd) Inder Singh Rekhi
V/s DDA (Decision on 24.03.1988)
This version has also been upheld by the Hon'ble Supreme court of
India in the case of Union of India and other V/s L.K. Ahuja and
Company decided on 05:04.1988.
It is therefore concluded that the stand of the respondent has no
standing and is turned down and the claim of the claiming for
demand of interest @ 24% w.e.f. 8.03.2004 holds good without
any shadow of doubt, for all intents and purchases and up to date
of payment in the interest of justice. But at the time of submission
of claim and in his correspondence, the claimant has stuck to
interest @ 18% only. Therefore his claim of interest @ 18% w.e.f,
the date of cause of action i.e. 08:03.2004 till the date of filing suit,
date of degree and date of payment holds goods as per law. It will
be worth pointing out that the respondent has never objected to the
rate of interest of 18%, claimed by the claimant repeatedly almost
in all letters. The details of the claim worked out is attached.‖
(emphasis added)
41. A careful perusal of the aforesaid findings recorded by the
learned Arbitrator reveals that the grant of interest essentially was
neither mechanical nor arbitrary. On the contrary, the learned
Arbitrator undertook an examination of the various factors, including
the correspondence exchanged between the parties, and the conduct of
the Petitioner during the subsistence of the dispute. The relevant
portion of the Impugned Award indicates that the learned Arbitrator
took into account the repeated communications addressed by
Respondent No. 1/Claimant therein seeking payment of its dues along
with interest at the rate of 18% per annum, which communications
were not controverted by the Petitioner at the material time.
42. The reasoning adopted by the learned Arbitrator further reflects
that although Respondent No. 1 had, at an earlier stage, alluded to a
higher rate of interest, the claim was consciously restricted before the
learned Tribunal to interest at the rate of 18% per annum. The learned
Arbitrator, therefore, proceeded to evaluate the claim on the basis of
the rate actually pressed before the learned Tribunal and arrived at a
finding that the said rate was justified.
43. Viewed in this light, the reasoning contained in the Impugned
Award is cogent and reflects a clear and reasonable nexus between the
factual findings recorded by the learned Arbitral Tribunal and the
ultimate determination regarding the grant of interest.
44. Now turning to the principal plank of the challenge raised by
the Petitioner, which is predicated upon the provisions of the Interest
Act. It has been contended that in terms of Section 3(1) of the said
Interest Act, interest cannot be awarded at a rate exceeding the
―current rate of interest‖, which expression under Section 2(b) of the
Interest Act is understood to mean the highest of the deposit rates
offered by scheduled banks. The Petitioner, therefore, has submitted
that, given that the prevailing fixed deposit rates during the relevant
period were in the vicinity of 6-7% per annum, the learned Arbitrator
could not have granted interest at a rate as high as 18% per annum,
and that the Impugned Award of interest is consequently contrary to
the statutory framework governing the grant of interest.
45. At first blush, the submission advanced by the Petitioner
appears attractive; however, upon a closer scrutiny of the statutory
framework governing arbitral proceedings, the said contention does
not withstand judicial examination.
46. The arbitral proceedings in the present case are governed by the
A&C Act, which constitutes a special and self-contained legislative
framework regulating arbitral adjudication, including the authority of
the learned Arbitral Tribunal to award interest. Significantly, the
arbitral proceedings were invoked on 06.07.2008, i.e., much prior to
the amendment introduced to the A&C Act by Act 3 of 2016 with
effect from 23.10.2015. Consequently, the present dispute necessarily
falls to be examined under the statutory regime prevailing prior to the
2015 amendment, and the issue pertaining to the grant of interest must
therefore be determined in accordance with Section 31(7) of the A&C
Act as it stood prior to the said amendment. The pre-amended
provision, which governed the field at the time the Arbitral Award in
the present case came to be rendered, read as under:
"Section 31(7) -
***
(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
cent per annum from the date of the award to the date of payment.‖
(emphasis added)
47. Under the statutory framework prevailing prior to the 2015
amendment, Section 31(7)(a) of the the A&C Act, conferred a wide
and substantive discretion upon the learned Arbitral Tribunal to award
pre-reference as well as pendente lite interest at such rate as it deemed
reasonable, unless the parties had expressly agreed otherwise. The
provision, in its plain terms, recognised the autonomy of the Arbitral
forum to determine the appropriate rate of interest having regard to the
factual matrix of the dispute, the conduct of the parties, and the period
during which the claimant was deprived of monies found due.
48. In the present case, it is not in dispute that the Agreement
executed between the parties is conspicuously silent with respect to
the prohibition or restriction on the grant of interest. In the absence of
such contractual embargo, the statutory discretion vested in the
learned Arbitrator remained wholly unfettered.
49. Equally significant is the scheme embodied in Section 31(7)(b)
in its pre-amendment form, which stipulated that a sum directed to be
paid by an arbitral award shall, unless the award otherwise directs,
carry interest at the rate of 18% per annum from the date of the award
until payment. The legislative prescription of 18% per annum as the
statutory default rate of interest unmistakably indicates the benchmark
contemplated by the Parliament within the arbitral framework. When
the statute itself envisaged interest at the said rate as the normative
default, it would be wholly incongruous to characterise the grant of
interest at 18% per annum as per se excessive or unconscionable.
50. Viewed through this statutory lens, the determination of the
learned Arbitrator granting interest at the rate of 18% per annum
cannot be regarded as aberrant or disproportionate. On the contrary,
the rate awarded finds resonance with the legislative design of the
A&C Act as it stood at the relevant time. The power to award interest
under Section 31(7) of the A&C Act is intended to compensate a party
for the deprivation of the legitimate use of money during the
subsistence of the dispute. Interest, in such circumstances, operates
not as a punitive device but as a restorative and compensatory
mechanism, ensuring that the successful claimant is not left
economically disadvantaged by the delay inherent in the adjudicatory
process.
51. The jurisprudence on the subject consistently recognises that
pre-award, pendente lite, and future interest serve the important
purpose of placing the claimant, as far as monetary compensation can,
in the position they would have been in, had the amounts due been
paid on time. The statutory discretion vested in the Arbitral Tribunal
is therefore to be respected unless the rate awarded is demonstrably
arbitrary, capricious, or so unconscionable as to shock the judicial
conscience. The legal position in this regard has been authoritatively
clarified by the Hon'ble Supreme Court in North Delhi Municipal
Corporation v. S.A. Builders Ltd.8, wherein the Court elucidated the
underlying rationale governing the grant of interest, observing as
follows:
(2025) 7 SCC 132
"39. Generally, going by the provisions contained in Section 31(7)
of the 1996 Act, it is evident that an Arbitral Tribunal has the
power to grant: (i) pre-award, (ii) pendente lite, and (iii) post-
award interest. Intention behind awarding pre-award interest is
primarily to compensate the claimant for the pecuniary loss
suffered from the time the cause of action arose till passing of the
arbitral award. Further, this is also to ensure that the arbitral
proceeding is concluded within a reasonable period to minimise the
impact of the pre-award interest as well as interest pendente lite;
thereby promoting efficiency in the arbitration process. Similarly,
grant of post-award interest also serves a salutary purpose. It
primarily acts as a disincentive to the award debtor not to delay
payment of the arbitral amount to the award-holder.‖
(emphasis added)
52. This Court now proceeds to consider the contention advanced
on behalf of the Petitioner that the Impugned Award results in the
grant of ―interest upon interest‖, which, according to the Petitioner, is
impermissible in law.
53. In the considered opinion of this Court, the aforesaid
submission of the Petitioner is equally devoid of merit. The legal
position on this aspect stands conclusively settled by the Hon'ble
Supreme Court in Hyder Consulting (UK) Ltd. v. Governor, State of
Orissa9, wherein a three-Judge Bench authoritatively interpreted
Section 31(7) of the A&C Act. The Apex Court clarified that the
expression "sum directed to be paid by an arbitral award" occurring
in Section 31(7)(b) is not confined merely to the principal amount but
would include the aggregate amount determined by the arbitral
tribunal, including any interest awarded for the pre-award period
under Section 31(7)(a). Consequently, where the arbitral tribunal
includes pre-reference or pendente lite interest in the amount
determined as payable, the composite sum so awarded constitutes the
(2015) 2 SCC 189
―sum‖ for the purposes of Section 31(7)(b), and post-award interest
may legitimately run on such amount. The grant of such interest
therefore does not amount to impermissible ―interest upon interest‖,
but represents a statutorily recognised compensatory mechanism
intended to account for the continued deprivation of money found due
to the claimant. The relevant portions of Hyder Consulting (supra)
read as under:
―66. Clause (a) of Sub-section (7) provides that where an Award is
made for the payment of money, the Arbitral Tribunal may include
interest in the sum for which the Award is made. In plain terms,
this provision confers a power upon the Arbitral Tribunal while
making an Award for payment of money, to include interest in the
sum for which the Award is made on either the whole or any
part of the money and for the whole or any part of the period for
the entire pre-award period between the date on which the
cause of action arose and the date on which the Award is made. To
put it differently, Sub-section (7)(a) contemplates that an Award,
inclusive of interest for the pre-award period on the entire amount
directed to be paid or part thereof, may be passed. The ―sum‖
awarded may be principal amount and such interest as the Arbitral
Tribunal deems fit. If no interest is awarded, the ―sum‖ comprises
only the principal. The significant words occurring in Clause
(a) of Sub-section (7) of Section 31 of the Act are ―the sum for
which the award is made.‖ On a plain reading, this expression
refers to the total amount or sum for the payment for which the
Award is made. Parliament has not added a qualification like
―principal‖ to the word ―sum,‖ and therefore, the word ―sum‖ here
simply means ―a particular amount of money.‖ In Section 31(7),
this particular amount of money may include interest from the
date of cause of action to the date of the award.
67. The Oxford Dictionary gives the following meaning to the
word ―sum‖:
Sum, ‗if noun' : A particular amount of money.
Sum, ‗if verb' : The total amount resulting from the
addition of two or more numbers, amounts, or items.
68. In Black's Law Dictionary, the word ―sum‖ is given the
following meaning:
SUM. In English law-A summary or abstract; a
compendium; a collection. Several of the old law treatises
are called ―sum.‖ Lord Hale applies the term to
summaries of statute law. Burrill. The sense in which the
term is most commonly used is ―money‖; a
quantity of money or currency; any amount indefinitely, a
sum of money, a small sum, or a large sum. U.S. v. Van
Auken 96 US 366 (1877): 24 L.Ed. 852;
Donovan v. Jenkins 52 Mont. 124, 155 P. 972, 973.
69. Thus, when used as a noun, as it seems to have been used in
this provision, the word ―sum‖ simply means ―an
amount of money‖; whatever it may include- ―principal‖ and
―interest‖ or one of the two. Once the meaning of the word ―sum‖
is clear, the same meaning must be ascribed to the word in Clause
(b) of Sub-section (7) of Section 31 of the Act, where it provides
that a sum directed to be paid by an Arbitral Award ―shall carry
interest....‖ from the date of the Award to the date of the payment
i.e., post-award. In other words, what Clause (b) of Sub-section
(7) of Section 31 of the Act directs is that the ―sum,‖ which is
directed to be paid by the Award, whether inclusive or
exclusive of interest, shall carry interest at the rate of eighteen per
cent per annum for the post-award period, unless otherwise
ordered.
70. Thus, Sub-section (7) of Section 31 of the Act provides, firstly,
vide Clause (a) that the Arbitral Tribunal may include interest
while making an award for payment of money in the sum for
which the Award is made and further, vide Clause (b) that the sum
so directed to be made by the Award shall carry interest at a certain
rate for the post award period.
71. The purpose of enacting this provision is clear, namely, viz. to
encourage early payment of the awarded sum and to discourage the
usual delay, which accompanies the execution of the Award in the
same manner as if it were a decree of the court vide Section
36 of the Act.
72. In this view of the matter, it is clear that the interest, the sum
directed to be paid by the Arbitral Award under Clause (b) of Sub-
section (7) of Section 31 of the Act is inclusive of interest pendent
lite.
*****
77. In the result, I am of the view that S.L. Arora's case is wrongly
decided in that it holds that a sum directed to be paid by an Arbitral
Tribunal and the reference to the Award on the substantive claim
does not refer to interest pendente lite awarded on the ―sum
directed to paid upon Award‖ and that in the absence of any
provision of interest upon interest in the contract, the Arbitral
Tribunal does not have the power to award interest upon interest,
or compound interest either for the pre-award period or for the
post-award period. Parliament has the undoubted power to legislate
on the subject and provide that the Arbitral Tribunal may award
interest on the sum directed to be paid by the Award, meaning a
sum inclusive of principal sum adjudged and the interest, and this
has been done by Parliament in plain language.‖
(emphasis added)
54. At this juncture, this Court also deems it apposite to refer to the
judgment of a Co-ordinate Bench of this Court in Delhi Development
Authority v. MSJ Constructions Pvt. Ltd. 10, wherein the Court had
occasion to expound upon the legal position pertaining to the grant of
interest upon interest. The relevant portions of the said judgment read
as follows:
17. In Oil & Natural Gas Commission (supra), the Supreme Court
was concerned with a case where the two main claims were
themselves relating to interest for delayed payment, and after
awarding the two main claims, the Arbitrator had awarded interest
at 12% per annum from the date of award till the date of award till
realization. On the question of whether, on the said interest
amount, further interest would be liable to be awarded from the
date ofaward till realization, the Supreme Court observed as under:
"3. Shri B. Datta, learned senior counsel for the
appellant, contended that what was awarded by the
Arbitrators in respect of the two claims referred to earlier
in the course of this order is itself interest for different
periods. He, therefore, submitted that Arbitrators could
not have further awarded interest on the claims awarded
at 12% per annum from the date of award till realisation,
He did not dispute, and very fairly and correctly, that the
Arbitrators do have the power to grant interest on the
amount claimed in the arbitration and the power of the
Arbitrators was very characteristically described by him
as „before, during and after‟ of the arbitration
proceedings. His point is that there cannot be interest
upon interest when the claim itself is one of interest and
interest upon that amount could not have been granted by
the Arbitrators and relied upon Section 3 of the Interest
Act.
4. There cannot be any doubt that the Arbitrators have
powers to grant interest akin to Section 34 of the CPC
which is the power of the court in view of Section 29 of the
Arbitration Act, 1940. It is clear that interest is not
granted upon interest awarded but upon the claim made.
The claim made in the proceedings is under two heads -
2021 SCC OnLine Del 5166
one is the balance of amount claimed under invoices and
letter dated February 10, 1981 and the amount certified
and paid by the appellant and the second is the interest on
delayed payment. That is how the claim for interest on
delayed payment stood crystallized by the time the claim
was filed before the Arbitrators. Therefore, the power of
the Arbitrators to grant interest on the amount of interest
which may, in other words, be termed as interest on
damages or compensation for delayed payment which
would also become part of the principal. If that is the
correct position in law, we do not think that Section 3 of
the Interest Act has any relevance in the context ofthe
matter which we are dealing with in the present case.
Therefore, the first contention raised by Shri Datta,
though interesting, deserves to be and is rejected."
18. In Three Circles (supra), the Supreme Court once again had the
occasion to examine the Arbitrator's power to award interest upon
interest. In this regard, the Supreme Court relied upon the decision
in McDermott International Inc. v. Burn Standard Co. Ltd.,
[(2006) 11 SCC 181] and held that the same was permissible in
law, and observed as under:
15. Now the question comes which is related to
awarding of „interest on interest‟. According to the
appellant, they have to pay interest on an amount which
was inclusive of interest and the principal amount and,
therefore, this amounts to a liability to pay „interest on
interest. This question is no longer res integra at the
present point of time. This Court in McDermott
International Inc. v. Burn Standard Co. Ltd. (2006) 11
SCC 181 has settled this question in which it had observed
as follows:
The Arbitrator has awarded the principal
amount and interest thereon upto the date of
award and future interest thereupon which do
not amount to award on interest on interest as
interest awarded on the principal amount upto
the date of award became the principal
amount which is permissible in law.
16. The High Court on this question has also rightly relied
on a decision of this Court in the case of Oil and Natural
Gas Commission v. M.C. Clelland Engineers S.A. AIR
1999 SCW 1224. That being the position, we are unable to
find any ground to set aside the judgment of the Division
Bench of the High Court while considering the ground of
„interest on interest‟.
(emphasis added)
55. In the facts of the present case, the learned Arbitrator has
awarded interest in exercise of the discretion vested under Section
31(7)(b) of the A&C Act, on the sum determined as payable to
Respondent No. 1. In view of the legal position noticed hereinabove,
the grant of interest on the awarded sum cannot be construed as
impermissible interest upon interest. The contention advanced by the
Petitioner on this ground, therefore, does not merit acceptance.
56. At this juncture, this Court considers it apposite to advert to the
judgment rendered by the three-Judge Bench of the Hon'ble Supreme
Court in Shahi & Associates v. State of U.P.11, wherein the factual
matrix bore close resemblance to the circumstances obtaining in the
present case. In the said decision, the Hon'ble Supreme Court
examined the issue relating to the grant of interest within the statutory
framework prevailing prior to the 2015 amendment to the A&C Act,
and clarified the governing principles applicable to Arbitral Awards
rendered during that period. The Apex Court noted that in the
proceedings before the High Court, the rate of interest awarded by the
Arbitral Tribunal had been reduced from 18% per annum to 6% per
annum.
57. However, in the said decision, upon a detailed consideration of
Section 31(7) of the A&C Act as it then stood, the Hon'ble Supreme
Court reversed the said finding and restored the rate of interest to 18%
per annum, holding that the determination of interest by the Arbitral
Tribunal fell squarely within the statutory discretion conferred under
the pre-amendment regime. The relevant portions of the said judgment
are reproduced herein below:
(2019) 8 SCC 329
―9. The 1996 Act has come into force with effect from 22-8-1996.
Section 85 of the 1996 Act expressly repeals the provisions of the
Arbitration Act, 1940. Thus, the 1996 Act would be applicable to
all arbitral proceedings which have commenced on or after the said
Act came into force. Para 7-A inserted by Section 24 of the U.P.
Amendment Act was an amendment to the First Schedule of the
Arbitration Act, 1940. This amendment was introduced by the U.P.
Act No. 57 of 1976. The provisions of the Arbitration Act, 1940
including the State amendment will have no application to the
proceedings commenced after coming into force of the 1996 Act.
10. Section 31(7)(b) of the 1996 Act, before its amendment by Act
3 of 2016, which has come into force with effect from 23-10-2015,
is relevant for the purpose of this case, empowers the arbitrator to
award pre-award and post-award interest. This section clearly
states that unless otherwise specified, the awarded sum would
carry an interest @ 18% p.a., as extracted below:
―31. Form and contents of arbitral award. - (1)-(6)
***
(7)(a) Unless otherwise agreed by the parties, where
and insofar 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 supplied)
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.‖
(emphasis added)
58. The aforesaid legal position has further been asserted by the
Hon'ble Supreme Court in Larsen Air Conditioning & Refrigeration
Co. v. Union of India12, wherein, following the reasoning in Shahi &
Associates (supra), the Apex Court observed that under Section 31(7)
of the A&C Act, as it stood prior to the 2015 amendment, the Arbitral
Tribunal enjoys a wide discretion to award pre-reference and pendente
lite interest at such rate as it deems reasonable, and that such
determination ought not to be interfered with by a court exercising
jurisdiction under Section 34 of the A&C Act, save in cases of patent
illegality or manifest arbitrariness. The relevant portions of the said
judgment are reproduced herein below:
―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% p.a.,
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 (21-1-1999), read as follows:
*****
13. In the present case, given that the arbitration commenced in
1997 i.e. after the 1996 Act came into force on 22-8-1996, 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% p.a. Of course, this is in the
event the award does not contain any direction towards the rate of
(2023) 15 SCC 472
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. DDA, (2015) 3 SCC 49, Ssangyong Engg. &
Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 and Delhi
Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131].
14. The reliance on Post Graduate Institute of Medical Education
& Research v. Kalsi Construction Co., (2019) 8 SCC 726 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 (P) Ltd. v. State of Kerala, (2021)
6 SCC 150 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 [State of Orissa v. G.C. Roy,
(1992) 1 SCC 508] , 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 Corpn. of Greater
Mumbai v. Pratibha Industries Ltd., (2019) 3 SCC 203, 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 v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204],
SCC p. 81, para 42]. 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.
16. 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
1996 Act. This 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 NHAI v. M.
Hakeem, (2021) 9 SCC 1: (SCC p. 28, para 42)
―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], [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.‖
17. In view of the foregoing discussion, the impugned judgment
[Union of India v. Larsen Air Conditioning & Refrigeration Co.,
2019 SCC OnLine All 7205] 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% p.a. rate of interest, as
awarded by the arbitrator on 21-1-1999 (in Claim 9) is reinstated.
The respondent State is hereby directed to accordingly pay the
dues within 8 weeks from the date of this judgment.‖
(emphasis added)
59. The principles emerging from the aforesaid decisions, when
applied to the facts of the present case, leave no room for doubt. The
arbitral proceedings herein were invoked on 06.07.2008, and the
Impugned Award was rendered squarely within the pre-2015 statutory
regime of the A&C Act. Consequently, the determination relating to
interest necessarily falls to be examined in the light of Section 31(7)
of the A&C Act as it stood prior to the amendment. Under the said
framework, the Arbitral Tribunal was vested with a broad statutory
discretion to award pre-reference and pendente lite interest at such rate
as it deemed reasonable, subject only to any contractual stipulation to
the contrary.
60. In the present case, it is an undisputed fact that the Agreement
between the parties does not contain any clause either prohibiting or
regulating the grant of interest. The learned Arbitrator, upon
consideration of the material placed on record, concluded that
Respondent No. 1 was entitled to interest at the rate of 18% per
annum. The reasoning adopted by the learned Arbitrator demonstrates
a conscious exercise of the statutory discretion vested under Section
31(7) of the A&C Act and cannot be said to suffer from any infirmity
in law.
61. Viewed in this backdrop, the contention advanced by the
Petitioner seeking a reduction of the rate of pendente lite interest is
wholly unsustainable. The impugned determination does not disclose
any patent illegality, perversity, or contravention of the fundamental
policy of Indian law, nor does it transgress the terms of the contract
between the parties. Interference by this Court would, in effect,
amount to re-appreciating the merits of the arbitral determination and
substituting the Court's view in place of the arbitrator's, an exercise
which stands expressly proscribed within the narrow confines of
jurisdiction under Section 34 of the A&C Act.
62. Accordingly, in the considered opinion of this Court, the award
of interest at the rate of 18% per annum by the learned Arbitrator
constitutes a lawful, justified, and reasoned exercise of arbitral
discretion within the contours of the governing statutory framework.
The challenge mounted by the Petitioner on this aspect is, therefore,
devoid of merit and does not warrant acceptance on any of the
grounds urged hereinbefore.
63. However, at this stage, this Court considers it necessary to
closely scrutinize the grant of interest by the learned Arbitrator in the
Impugned Award insofar as it has been directed to run from the
alleged date of cause of action, i.e., 08.03.2004.
64. In the considered opinion of this Court, the award of interest
from the aforesaid date cannot be sustained for multiple, cogent
reasons. At the outset, it is pertinent to note that it was not even the
case of the Claimant therein/Respondent No. 1 herein to seek interest
from 08.03.2004. On the contrary, a specific and conscious claim for
interest was made only from a later date, namely, 01.01.2007. This
position is not in dispute and, in fact, stands duly reflected in the
Impugned Award itself.
65. In such circumstances, the learned Arbitrator could not have
travelled beyond the scope of the claim as laid before it and granted
interest from an anterior date which was neither prayed for nor
pressed during the arbitral proceedings. Such a grant, being dehors the
pleadings and the reliefs sought, is legally untenable and liable to be
interfered with.
66. At this stage, this Court is guided by the judgment of the
Constitution Bench of the Hon'ble Supreme Court in Gayatri
Balasamy v. M/s ISG Novasoft Technologies Limited13, which
comprehensively delineates the principles governing the award of
interest in arbitral proceedings, as well as the limited contours within
2025 SCC OnLine SC 986
which modification thereof may be undertaken in proceedings under
Section 34 of the A&C Act.
67. Having due regard to the ratio laid down therein, and in order to
ensure that the grant of interest is in consonance with the statutory
framework and settled legal principles, this Court considers it
appropriate to recalibrate the operative period for which such interest
is to be awarded. The exercise undertaken herein is not in the nature of
a reappreciation of the merits of the award, but a limited correction to
align the relief with the permissible legal parameters.
68. Accordingly, while maintaining the rate of interest at 18% per
annum as awarded by the learned Arbitrator, it is directed that the said
interest shall run from the date of invocation of arbitration, i.e.,
06.07.2008, and shall continue until the date of realization.
CONCLUSION:
69. In view of the foregoing discussion, the rate of interest at 18%
per annum, as awarded in the Impugned Award, is upheld. However,
the date of applicability of such interest is modified, and it shall now
be computed from the date of invocation of arbitration, i.e.,
06.07.2008, instead of 08.03.2004.
70. Accordingly, the present Petition, being O.M.P. 709/2011,
insofar as it pertains to the issue of interest, stands disposed of in the
above terms.
71. Pending application(s), if any, also stand disposed of.
72. No order as to costs.
HARISH VAIDYANATHAN SHANKAR, J.
APRIL 06, 2026/sm/kr
