Discretionary Power of Arbitration in Awarding Interest: Is it unfettered?

Mayank Bhageria[i]


 

Introduction


Arbitrators have the discretionary authority in granting interest if it seems that the arbitral award is for the payment of money. It can be pendente lite, pre-reference or post-award interest. Arbitrators do not only have the power to award interest but they can also determine the rate of interest. Although arbitrators have the discretionary power in awarding interest on the whole or part of the money awarded and determining the rate, at the same time, it should neither be unreasonable nor based simply on the intuition of the arbitrator. It is a well-established principle that arbitrators have to act according to the terms of the agreement, and within the four walls of the contract. This article aims to analyse, whether the discretionary power is unrestricted and the way it can be restrained in the light of a landmark judicial pronouncement.


Absence of Specific Contract


Section 31(7)(a) of the Arbitration & Conciliation Act, 1996 elaborates upon about the arbitrator's power to award interest. In the recent judgement in Punjab State Civil Supplies Corporation Limited (PUNSUP) v. Ganpati Rice Mills, the question was regarding the power of the arbitrator in awarding interest in the absence of any specific contract. In this case, the court held that the “arbitrator has substantial discretion in awarding interest under Section 31(7)(a) of the Arbitration Act.” The court further made a distinction between the 1940 and 1996 arbitration legislations with a reference to the case of A.P. State Trading Corporation Limited v. G.V Malla Reddy & Company wherein the court had held that in the absence of any specific contract, interest should not normally exceed 9 per cent per annum. But, in the recent judgment, the court articulated its belief that the 1996 Act gives the discretionary power to the arbitrator in the absence of any contract and they have the authority to decide the rate of interest, as it seems reasonable.

Furthermore, while the arbitrators have discretion, any award has to be given by keeping in view the reasonableness of the award. In the case of Hyder Consulting (UK) Limited v. Governor, State of Orissa, the court observed that “discretion of the arbitrators is not unfettered and is not exercisable upon the mere whims and fancies of the tribunal.

Furthermore, in Principles of Statutory Interpretation, Justice G.P Singh, 14th ed. at page 381, it has been stated that:

“Even where there is not much indication in the Act of the ground upon which discretion is to be exercised it does not mean that its exercise is dependent upon the mere fancy of the Court or Tribunal or Authority concerned. It must be exercised in the words of Lord Halsbury, ‘according to the rules of reason and justice, not according to private opinion; according to Law and not humour; it is to be not arbitrary, vague and fanciful, but legal and regular’.”

In light of this statement, the author believes that every discretionary authority has to be exercised as per the rule of law and within the parameters of the legislation. The legislation emphasises that the reasonableness of the award has to be kept in mind while awarding the interest.


Interest Barring Clause


In the modern arbitration legislation, i.e., the Act of 1996, the contract entered into between the parties was given paramount importance, particularly when posited against the power of the arbitrator. The Arbitrator’s power can be curtailed by the “Interest Barring Clause” in the agreement. The Arbitration and Conciliation Act, 1996 prohibits the arbitrators from granting interest pre-reference, post-award and pendente lite. However, as per the Arbitration Act of 1940, there was no explicit prohibition on awarding interest

Do arbitrators have the power to award interest if the contract entered into between the parties itself barred the payment of interest during the pendency of the suit? This question was answered by the Supreme Court in its judgement in the case of Garg Builders v. Bharat Heavy Electricals Limited.

In this case, Garg Builders and BHEL (‘Parties’) had entered into a contract for the construction of a boundary wall. The contract, inter alia, contained an interest barring clause. The dispute arose between the parties, and Garg Builders, the appellant, inter alia claimed pendente lite, pre-reference and post-award 24 per cent interest on the value of the award. After hearing both the parties, the arbitrator granted 10 per cent interest to Garg Builders.

When the matter reached the Supreme Court after the High Court, the apex court held that the interest barring clause is not ultra vires to the contract. Furthermore, the Court held that if the contract itself prohibits the payment of interest, then the arbitrators cannot award it.

The Court recognizes the principle of party autonomy in the arbitration legislation as arbitrators get the power from the contract itself. The contract entered into between the parties is paramount, and if it expressly barred the payment of interest, then the arbitrators have no authority to award further. Any act that arbitrators do beyond the contract is ultra vires and would be without jurisdiction.


Analysis


The obvious answer to the question “why arbitration is an emerging law” is based on the fact that it gives the right to the contracting parties to decide the way they want to settle the disputes. Party autonomy is an important aspect of arbitration law. By the time the courts elucidated the difference between the 1940 Arbitration Act, which did not have an explicit prohibition on awarding interest, and the present legislation, which incorporates the restriction on the arbitrators to award interest. Where there is no specific contract concerning payment of interest, the arbitrator’s power has to be exercised reasonably and must be based on the rule of law. Parties can put the interest barring clause in the contract to restrain the power of the arbitrators in awarding the interest. As per the 1996 arbitration legislation, every act that the arbitrators do against the contract entered into between the parties will be ultra vires of the tribunal authority. Despite the authority and the legislation, there is still ambiguity regarding the rate of interest and arbitrator’s authority to award interest on the whole or part of the award. The author believes that there should be parameters for deciding the rate of interest and periods of the award.


Conclusion


In a developed arbitration regime, the disputes arising out of commercial transactions are settled by the way the parties agree. It is well established that although the discretionary power is given to arbitrators, it can be curtailed by the contract itself. Indian arbitration legislation itself gives paramount importance to the principle of party autonomy by quoting “unless otherwise agreed by the parties” before the main text of the provisions. Every discretionary power of the arbitrators must be exercised reasonably in view of the facts and circumstances of each case. Because the arbitration legislation emphasizes upon the reasonableness of the arbitral award and the rate of interest, anything that seems to be unreasonable and arbitrary according to the Act of 1996 would be beyond the jurisdiction of the said act.


 

Mayank Bhageria is a 3rd year law student at UPES Dehradun. He has keen interest in corporate and commercial laws. He is looking forward for any discussion on this article.



Discretionary Power of Arbitration in Awarding Interest Is it unfettered
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