Supreme Court Upholds Arbitrator’s Award on Price Escalation and Interest: Assam State Electricity Board vs. Buildworth Pvt. Ltd. (2017)

Introduction

Date of the Judgment: July 4, 2017

Citation: Not available in the provided text.

Judges: Jagdish Singh Khehar, CJI, Dr. D.Y. Chandrachud, J, Sanjay Kishan Kaul, J. The judgment was authored by Dr. D.Y. Chandrachud, J.

Can an arbitrator award price escalation for work completed beyond the original contract period, and can interest be awarded for the period before the arbitration reference? The Supreme Court of India recently addressed these questions in a dispute between the Assam State Electricity Board and Buildworth Pvt. Ltd., concerning the supply and installation of a water piping system. The core issue revolved around the validity of an arbitral award that granted price escalation and pre-reference interest to the claimant, Buildworth Pvt. Ltd.

Case Background

On September 6, 1982, the Assam State Electricity Board (the Board) and Buildworth Pvt. Ltd. (the claimant) entered into an agreement for the supply and installation of a circulating water piping system for the Bongaigaon Thermal Power Station. The contract was valued at Rs 86.82 lakhs, with a completion period of 12 months from June 25, 1983. The completion date was later extended to September 6, 1983. However, the work was actually completed on May 28, 1985, with a portion of the work completed on January 31, 1986. During the course of the arbitration, the claimant raised several claims amounting to Rs 77.16 lakhs, including price variation, idling charges, and interest.

Timeline

Legal Framework

The case was primarily governed by the Arbitration Act, 1940, which was in force at the time of the arbitration. The key provisions of the Arbitration Act, 1940, relevant to this case include the power of the arbitrator to make an award and the court’s power to set aside an award. Additionally, the Interest Act, 1978, particularly Section 3(1)(b), played a crucial role in determining the award of interest on damages.

Section 3(1)(b) of the Interest Act, 1978 states:

“3. (1)(b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the date of institution of the proceedings:”

Arguments

The Assam State Electricity Board (the Board) argued that:

• Price Escalation: The arbitrator erred in awarding price escalation because Clause 2.3(a)(i) of the purchase order had fixed a ceiling of Rs 9,16,825 for price escalation, which had already been paid.
  
  The Board contended that the cap of Rs 9.16 lakhs was absolute and no further price escalation was permissible beyond it.
• Idling Charges: The arbitrator erred in allowing the claim for idling charges of labor and machinery because the arbitrator had also found that the claimant contributed to the delay in the completion of the project.
• Interest: No interest could be awarded prior to the date of the award, as the claim for damages gets quantified upon adjudication by the arbitrator.

Buildworth Pvt. Ltd. (the claimant) argued that:

• Price Escalation: Clause 2.3(a)(i) applied only for the specific period mentioned in the purchase order and not for the extended period of the contract.
  
  The claimant contended that the price escalation clause should not apply to the extended period of the contract.
• Idling Charges: The claimant was entitled to idling charges due to the Board’s delay in handing over the work front and that additional items of work were required to be carried out which did not form part of the original work.
• Interest: The arbitrator was correct in awarding interest for the pre-reference period, as there was no prohibition in the contract.

The innovativeness of the arguments was that the claimant argued that the price escalation clause should not apply to the extended period of the contract, which was not explicitly mentioned in the contract.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the arbitrator committed an error in awarding the claim for price escalation beyond the ceiling fixed in the contract.
2. Whether the arbitrator erred in allowing the claim for idling charges of labor and machinery, given that the claimant also contributed to the delay.
3. Whether the arbitrator had the jurisdiction to award interest for the period prior to the reference.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the contract terms, the conduct of the parties, and established legal principles regarding arbitration and interest. The Court emphasized that the price escalation clause was limited to the original contract period and that the arbitrator had the power to award interest for the pre-reference period. The Court also noted that the arbitrator had considered the contributory delay by the claimant in awarding idling charges.

The Court rejected the argument that interest could only be awarded after the quantification of damages, citing the Interest Act, 1978, which allows for interest from the date of a written notice claiming such interest. The Court also emphasized that the arbitrator had the power to award interest for the pre-reference period, as there was no prohibition in the contract.

The Supreme Court’s decision was unanimous, with all three judges concurring.

The Court quoted from the judgment:

“The arbitrator has taken the view that the provision for price escalation would not bind the claimant beyond the scheduled date of completion.”

“The arbitrator has power to grant interest on damages under Section 3(1)(b) of the Interest Act, 1978, from the date mentioned in this regard in a written notice claiming such interest.”

“The contract in the present case contains no bar or prohibition against the award of interest.”

Key Takeaways

• Arbitrators have the power to award price escalation for work done beyond the original contract period if the contract terms do not explicitly prohibit it.
• Arbitrators can award interest for the pre-reference period if there is no prohibition in the contract, provided a written notice claiming such interest has been given.
• Contributory delay by a claimant does not necessarily preclude them from receiving idling charges, provided the arbitrator takes this into account.

This judgment reinforces the powers of arbitrators to interpret contracts and award appropriate compensation, including price escalation and interest, in cases of delays and extended contract periods. It also clarifies the applicability of the Interest Act, 1978, in arbitration proceedings. The decision will likely influence future arbitration cases involving similar issues of price escalation and pre-reference interest.

Directions

The Supreme Court modified the rate of interest to 12% per annum from April 20, 1987, to December 31, 1997, and thereafter from the date of the trial court’s decree until payment or realization.

Specific Amendments Analysis

There is no discussion on any specific amendments in the judgment.

Development of Law

The ratio decidendi of this case is that an arbitrator has the power to award price escalation for work done beyond the original contract period if the contract terms do not explicitly prohibit it and can award interest for the pre-reference period if there is no prohibition in the contract, provided a written notice claiming such interest has been given. This decision clarifies the scope of an arbitrator’s powers under the Arbitration Act, 1940, and the applicability of the Interest Act, 1978, in arbitration proceedings. The Supreme Court has upheld the power of the arbitrator to award interest for the pre-reference period, thereby overruling the view taken by the High Court which had relied on Section 29 of the Arbitration Act, 1940.

Conclusion

The Supreme Court allowed the appeal filed by Buildworth Pvt. Ltd. and dismissed the appeal filed by the Assam State Electricity Board. The Court upheld the arbitrator’s award regarding price escalation and idling charges and modified the interest rate to 12% per annum. The judgment clarifies the powers of arbitrators to award price escalation and pre-reference interest, reinforcing the principle that contractual terms must be interpreted in light of the conduct of the parties and established legal principles.