Supreme Court Upholds Arbitral Award of Interest: Union of India vs. M/s. Susaka Pvt. Ltd. (2017)

Date of the Judgment: 08 December 2017

Citation: (2017) INSC 1088

Judges: Abhay Manohar Sapre, J., Navin Sinha, J.

Can a party raise a new objection to an arbitral award at the Supreme Court level when that objection was not raised in the initial arbitration proceedings or in the High Court? The Supreme Court of India addressed this question in a case involving a dispute over interest awarded in an arbitration. The Court had to determine whether the Union of India could challenge the award of interest based on a clause in the contract that was not previously argued. The judgment was authored by Justice Abhay Manohar Sapre, with Justice Navin Sinha concurring.

Case Background

The Union of India (Railways) awarded a works contract to M/s. Susaka Pvt. Ltd. on 19 December 1994 for repairing traction motors. Disputes arose during the execution of the contract, leading M/s. Susaka to invoke the arbitration clause under Clause 56(1) of the General Conditions of Contract (GCC). M/s. Susaka filed an application in the High Court of Bombay under Section 11(5) of the Arbitration and Conciliation Act, seeking the appointment of an Arbitral Tribunal.

Timeline

Course of Proceedings

The High Court of Bombay, on 27 July 2001, referred the disputes to a three-member Arbitral Tribunal. The Tribunal partly allowed M/s. Susaka’s claims on 11 September 2002, including interest for pre-reference, pendente lite, and post-reference periods. The Union of India challenged this award under Section 34 of the Arbitration and Conciliation Act before a Single Judge of the Bombay High Court, who modified the interest award on 21 April 2003. M/s. Susaka appealed to the Division Bench of the High Court, which set aside the Single Judge’s order on 11 February 2005, restoring the original arbitral award. The Union of India then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 11(5) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointing arbitrators when parties fail to agree on the appointment process.
• Section 34 of the Arbitration and Conciliation Act, 1996: This section outlines the grounds on which an arbitral award can be set aside by a court.
• Section 31(7) of the Arbitration and Conciliation Act, 1996: This section empowers the Arbitral Tribunal to award interest on the awarded sum and secondly, it is always subject to the agreement between the parties.
• Clause 56(1) of the General Conditions of Contract (GCC): This clause provides for the resolution of disputes through arbitration.
• Clause 13(3) of the General Conditions of Contract (GCC): This clause states that no interest will be payable on earnest money, security deposit, or amounts payable to the contractor, except for government securities.

The Supreme Court also considered the principle of waiver, which allows parties to forgo legal rights meant for their benefit, as long as it doesn’t violate public policy. The principle is encapsulated in the maxim: “Cuilibet licet renuntiare juri pro se introducto”.

Arguments

Appellant (Union of India) Arguments:

• The Arbitral Tribunal misconducted itself by awarding interest on various claims, which is a ground for setting aside the award under Section 34 of the Arbitration and Conciliation Act.
• Clause 13(3) of the GCC expressly prohibits the payment of interest on any amounts payable to the contractor, except for government securities.
• The arbitral award was legally unsustainable to the extent of awarding interest and should be set aside.

Respondent (M/s. Susaka Pvt. Ltd.) Arguments:

• The appellant did not raise the objection based on Clause 13(3) of the GCC at any stage of the proceedings before the Arbitral Tribunal or the High Court.
• The appellant had consented to refer the issue of interest to the Arbitral Tribunal in the Section 11(5) proceedings.
• The appellant’s failure to raise the objection at the appropriate stages constitutes a waiver of their right to raise it later.

Innovativeness of the argument: The respondent’s argument that the appellant waived their right to object by not raising it at earlier stages of the proceedings is a strong point, highlighting the importance of raising objections at the appropriate time.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the Arbitral Tribunal was justified in awarding interest on various claims for different periods to the claimant (respondent No.1), namely, (i) for a pre-reference period, i.e., 04.03.1996 to 05.05.1999 @ 15% p.a.; (ii) pendent lite, i.e., for the period from 06.05.1999 to 09.09.2002 @ 12% p.a.; and (iii) post reference period, i.e., 09.09.2002 till payment @ 18% p.a., total (first and second) Rs.12,89,033/- on the awarded sum.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Firm Kaluram Sitaram vs. The Dominion of India, AIR 1954 Bombay 50: This case, cited by the Court, emphasized that the State should not rely on technicalities when dealing with citizens and should act honestly.

Legal Provisions:

• Section 11(5) of the Arbitration and Conciliation Act, 1996: Pertaining to the appointment of arbitrators.
• Section 34 of the Arbitration and Conciliation Act, 1996: Pertaining to the grounds for setting aside an arbitral award.
• Section 31(7) of the Arbitration and Conciliation Act, 1996: Pertaining to the power of the Arbitral Tribunal to award interest.
• Clause 56(1) of the General Conditions of Contract (GCC): Pertaining to the arbitration clause.
• Clause 13(3) of the General Conditions of Contract (GCC): Pertaining to the prohibition of interest on amounts payable to the contractor.

Judgment

How each authority was viewed by the Court?

• Firm Kaluram Sitaram vs. The Dominion of India, AIR 1954 Bombay 50: The Court used this case to highlight the principle that the State should act fairly and not rely on technicalities.
• Section 11(5) of the Arbitration and Conciliation Act, 1996: The Court referred to this section to show that the appellant had consented to the reference of the dispute, including interest, to the Arbitral Tribunal.
• Section 34 of the Arbitration and Conciliation Act, 1996: The Court considered this section in the context of the appellant’s challenge to the arbitral award, ultimately determining that the appellant’s grounds for setting aside the award were not valid.
• Section 31(7) of the Arbitration and Conciliation Act, 1996: The Court considered this section to state that the Arbitral Tribunal can award interest on the awarded sum.
• Clause 56(1) of the General Conditions of Contract (GCC): The Court acknowledged this clause as the basis for invoking arbitration.
• Clause 13(3) of the General Conditions of Contract (GCC): The Court noted this clause but held that the appellant had waived its right to rely on it due to its failure to raise the objection at earlier stages of the proceedings.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of waiver. The Court noted that the Union of India had multiple opportunities to raise the objection based on Clause 13(3) of the GCC but failed to do so. This failure was seen as a deliberate abandonment of the plea, preventing the appellant from raising it at the Supreme Court level. The Court also emphasized the importance of respecting arbitral awards, which are binding on the parties once passed, and that interference is only warranted when the award is bad in law under Section 34 of the Arbitration and Conciliation Act. The Court also noted the observations made by former Chief Justice M.C. Chagla in Firm Kaluram Sitaram vs. The Dominion of India, AIR 1954 Bombay 50 that the State should not rely on technicalities when dealing with citizens and should act honestly.

The Court considered alternative interpretations, such as the possibility that the Arbitral Tribunal had exceeded its jurisdiction by awarding interest despite the contractual clause. However, the Court rejected this interpretation because the appellant had not raised the issue at the appropriate time, thereby waiving its right to object. The Court also considered the principle that arbitral awards should be respected and that interference should only occur when the award is clearly bad in law.

The Court’s decision was based on the principle of waiver, which prevents a party from raising an objection at a later stage if it had the opportunity to raise it earlier but failed to do so. The Court also emphasized the importance of respecting arbitral awards and the need for the State to act fairly and not rely on technicalities.

The court quoted the following from the judgment:

“Everyone has a right to waive and to agree to waive the advantage of a law made solely for the benefit and protection of the individual in his private capacity, which may be dispensed with without infringing any public right or public policy.”

“If a plea is available-whether on facts or law, it has to be raised by the party at appropriate stage in accordance with law. If not raised or/and given up with consent, the party would be precluded from raising such plea at a later stage of the proceedings on the principle of waiver.”

“It is a well-settled principle in Arbitration Law that the award of an Arbitral Tribunal once passed is binding on the parties. The reason being that the parties having chosen their own Arbitrator and given him an authority to decide the specific disputes arising between them must respect his decision as far as possible and should not make any attempt to find fault in each issue decided by him only because it is decided against one party.”

There was no minority opinion in this case.

Key Takeaways

• Parties must raise objections to arbitral proceedings at the appropriate stages. Failure to do so may result in a waiver of the right to raise such objections later.
• Arbitral awards are generally binding on the parties and should be respected. Courts should only interfere when the award is clearly bad in law.
• The State should act fairly and not rely on technicalities when dealing with citizens.
• Arbitral tribunals have the power to award interest on claims unless there is a clear contractual prohibition and the objection is raised at the appropriate stage.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that a party cannot raise an objection to an arbitral award at a later stage of the proceedings if it had the opportunity to raise it earlier but failed to do so. This judgment reinforces the principle of waiver and clarifies the importance of raising objections at the appropriate time. There is no change in the previous position of law, but this judgment clarifies the application of the waiver principle in the context of arbitration proceedings.

Conclusion

The Supreme Court dismissed the appeal filed by the Union of India, upholding the arbitral award of interest in favor of M/s. Susaka Pvt. Ltd. The Court held that the Union of India had waived its right to object to the interest award by not raising the objection based on Clause 13(3) of the GCC at any stage of the proceedings before the Arbitral Tribunal or the High Court. This case highlights the importance of raising objections at the appropriate time and the binding nature of arbitral awards.