The Supreme Court of India, on 30th September 2022 held that it is the duty of the Arbitral Tribunal to provide reasons behind the determination of the rate of interest on award. A Division Bench of the apex court in the case of Executive Engineer (R and B) & Ors. vs. Gokul Chandra Kanungo (Dead) through his LR¹s., held that when a discretion is vested to an arbitral tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable.

The brief facts that brought about the present dispute were that the Respondent (Gokul Chandra Kanungo) was awarded the contract for construction of a 3 kilometer long missing link on NH-6 from Kanjipani to Kuntala on 16th December, 1971. The said work was to be completed within 1 year from the time of awarding of the contract (i.e., before 15th December, 1972). However, the same could not be delivered by the Respondent and the construction was completed only by August of 1977. By then, a major portion of the contractual amount had already been paid to the Respondent. The Respondent, on 25th July, 1989 issued a notice to the Appellant (Executive Engineer) regarding the payment of the outstanding amount but he did not receive any favorable reply from the Appellant. The Respondent then filed a civil suit in Bhubaneshwar seeking reference of the dispute to arbitration. By the order of the trial court in the said matter in the February of 1990, the suit was decreed in the favor of the Respondent and he was directed to file the original agreement in the court in order to get the matter referred to arbitration. However, the Respondent failed to comply with the same and in the meanwhile, the new Arbitration and Conciliation Act of 1996 came into force and the earlier act was repealed. Thereafter, the Respondent filed an application in the disposed of suit and prayed for appointment of arbitrator which was then rejected by the Trial Court for lack of jurisdiction. The Respondent, then moved an application before the High Court and the said application was allowed by the High Court and an Arbitrator was appointed.

The Arbitrator awarded a claim amount along with interest pedente lite at the rate of 18% per annum effective from 1st April, 1976 to the date of award. Aggrieved with the award, the Appellant filed a petition before the District Judge for setting aside the award. The same was rejected. Consequently, the Appellant preferred an appeal before the High Court but the same was also rejected. The Appellant then approached the Supreme Court in the same matter.

On a perusal of Section 31(7)² of the Arbitration and Conciliation act, the Supreme Court held that “When a discretion is vested to an arbitral tribunal to award interest at a rate which it deems reasonable, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable”. The court further observed that the order of the District Judge and High Court revealed that the Arbitrator had awarded the interest without assigning any reasons for doing the same.

The Court also observed that a Party is not entitled to interest for the period during which the proceedings were deliberately delayed. Therefore, the Respondent would not be entitled for interest for the period from February 1990 to October 2001. The Court, while exercising its powers under Article 142 of the Constitution of India³ further reduced the rate of interest from 18% to 10% per annum.

By - C. George Thomas