Supreme Court: Duty Of Arbitral Tribunals And Courts To Examine Contract Clauses In Arbitration

Supreme Court: Duty Of Arbitral Tribunals And Courts To Examine Contract Clauses In Arbitration

The Supreme Court recently underscored the obligation of courts and arbitral tribunals to thoroughly examine contract clauses in arbitration matters. In a recent decision, the Court upheld the Calcutta High Court's ruling to overturn an arbitrator's award that granted compensation for losses due to idle machinery and labor, which was prohibited under the contract. The Court stated:

“In fact, High Court did what the Arbitrator should have done. Examine what the contract provides. This is not even a matter of interpretation. It is the duty of every Arbitral Tribunal and Court alike and without exception, for contract is the foundation of the legal relationship…The Arbitrator did not even refer to the contractual provisions and the District Court dismissed the objections under Section 34 with a standard phrase as extracted hereinabove.”

The bench, comprising Justices Pamidighantam Sri Narasimha and Pankaj Mithal, also highlighted that under Section 31(7) of the Arbitration and Conciliation Act, 1996, an arbitrator is authorized to grant pre-reference interest unless the contract specifically prohibits it. The Court remarked that the High Court had no reason to alter the arbitral award concerning pre-reference interest since the contract did not prohibit it.

The State of West Bengal had awarded Pam Developments Pvt. Ltd. a contract for widening and strengthening the Egra Bajkul road, with an 18-month deadline starting from December 23, 2010. However, the project faced a delay of approximately five months and was completed on November 9, 2012. The appellant submitted a bill for Rs. 77,85,290, along with seven additional claims due to delays by the respondent, who denied liability, leading to arbitration.

Arbitration Award

On January 30, 2018, the Arbitrator awarded Rs. 1,37,25,252 with interest to the appellant, covering:

• Loss of Business (Claim No. 1): Rs. 3,87,530

• Uneconomic Utilization of Plant and Machinery (Claim No. 2): Rs. 61,22,000

• Labour Charges for Uneconomical Stoppage of Work (Claim No. 3): Rs. 5,80,500

• Interest on Delayed Payment of Running Account Bills and Escalation Bill (Claim No. 4): Rs. 54,84,024

• Escalation (Claim No. 5): Rs. 11,51,198

• Interest on Awarded Sum (Claim No. 6): Interest at 12% per annum from April 12, 2016, to January 30, 2018, and 9.25% per annum post-award

• Costs (Claim No. 7): Rs. 4 lakhs

The State of West Bengal challenged the arbitration award under Section 34 of the Arbitration Act. The District Judge set aside Claims 1 and 2 but upheld Claims 3, 4, 5, and 6. Both parties appealed the District Judge's decision under Section 37 of the Arbitration Act. The Calcutta High Court set aside Claim 1, restored Claim 2, invalidated Claims 3 and 4 as impermissible under the contract, retained Claim 5, and removed the pre-reference interest from Claim 6.

Supreme Court's Verdict

Claim No. 3: Loss Due to Idle Labour and Machinery

The Supreme Court agreed with the High Court's decision to set aside this claim, noting that the contract prohibited claims for idle labor and additional establishment costs.

Claim No. 4: Interest on Delayed Payment

The Supreme Court reinstated the Arbitrator's award for interest on delayed payments. The Court found that the High Court's conclusion that bills were paid soon after preparation was insufficient to overturn the award. The Court emphasized that the Arbitrator's reasoning was not perverse or against public policy.

Claim No. 6: Interest Awarded

The Supreme Court restored the Arbitrator’s original award of interest, including pre-reference interest. The High Court’s modification to exclude pre-reference interest was overturned, as the contract did not explicitly prohibit such interest.