This case comment is a part of our Annual Arbitration Review of the year 2017.
Citation: (2017) 9 SCC 611
Court: Supreme Court of India
Coram: J. Chelameswar and S. Abdul Nazeer, JJ.
The following case discusses the stage at which the arbitrability of a dispute can be brought. The Court held that the Division Bench was not justified in hearing the challenge on arbitrability of the dispute in light of the failure of the Respondent to raise the plea at the first instance before the Single Judge in the High Court or the Arbitral Tribunal. Further the Court upheld the law under section 31(7)(a) of the Arbitration and Conciliation Act 1996 (“A&C Act”), which allows the Arbitral Tribunal to pass an award for interest of pre-award period and pendent lite. However, in this case the agreement itself prevented the appellant from demanding any excess interest on the amount to be paid under the contract.
- Whether the Division Bench was justified in considering the arbitrability of the dispute for the first time in the appeal?
- Whether the Arbitral Tribunal was justified in awarding interest on the delayed payments in favour of the appellant?
The Union of India (“Respondents”) had invited tender for laying railway line, roads, platforms etc. and Chittaranjan Maity’s (“Appellant”) tender was accepted vide Letter of Acceptance dated 17.6.1991. An Agreement was executed between the parties with General Conditions of the Contract (“GCC”). The Appellant abandoned work on 3.11.2003 and raised a claim before the Respondent. The Appellant eventually filed an application under Section 11(6) of the A&C Act for the appointment of Arbitrator before the High Court of Calcutta. Once the Arbitral Tribunal was constituted and an award was passed on 20.9.2006, the Respondent challenged the said award, however the application was dismissed by the Single Judge of the High Court. The Respondent then in an appeal before the Division Bench raised the contention that the appellant had also issued a ‘No Claims Certificate’ thereby forfeiting any right to claim from the Respondent. In light of this, the Division Bench set aside the order of the Single Judge and the award.
This case dealt with the matter of the stage at which arbitrability of a dispute can be decided or ought to be raised. In the present case, the issue of the ‘No Claims Certificate’ was only raised before the Division Bench. This point essentially left the parties and the Court to decide if the claim is a live claim. The Court noted that naturally under the Section 11(6) application, the issue of arbitrability could have been considered by the Chief Justice or be kept open to be decided by the Arbitral Tribunal, only as long as it had been raised before the Chief Justice. This conclusion was arrived at with reference to the Boghara Polyfab case, where the apex court had held that if the issue of a live claim had been raised in any application under Section 11, the Chief Justice may decide the same by taking evidence or leave the issue open to the Arbitral Tribunal. However, if the Chief justice chooses to examine the issue the Arbitral Tribunal cannot at a later stage re-examine it.
In the facts of this case, the Respondent had left the plea till the stage of appeal before the Division Bench, having failed to raise it before the Single Judge or the Arbitral Tribunal. The reasoning was clearly explained in Mcdermott International Inc. vs. Burn Standard Co. where firstly a question of the arbitrators’ jurisdiction ought to be raised before the Arbitrator. This is a preliminary issue to be decided by the arbitrator during the proceedings or soon after the initiation. The case also emphasised that the Court’s interference is warranted only in a few circumstances such as fraud, bias or violation of natural justice. Thus the Division Bench was not justified in hearing the challenge to the arbitrability of the dispute, especially for the first time.
The second issue is more easily answered with reference to section 31(7)(a), which specifically allows for an arbitration agreement to prohibit awards of interest for the pre-award period and pendent lite period. Section 16 of the GCC between the two parties contained a clause barring the payment of interest. While the Appellant attempted to cite Ambica Constructions wherein it was held that a mere bar to award interest would not be sufficient to deny payment on pendent lite interest, it was not accepted as it was unclear whether in that case, the Court had reasoned the same under the Arbitration Act, 1940 or under the A&C Act. The court decided that if the terms of agreement between the parties prohibit any claim for interest then the parties will be bound by their understanding as under the contract. The arbitral tribunal cannot in such cases pass an award for interests. Thus it becomes clear that the Appellants would not be entitled to any interest and the Arbitral Tribunal was barred from awarding the same in the first place.
The relevance of this case with respect to the first issue is to mostly reaffirm the position as stated in Boghara Polyfab and Mcdermott. However, in reference to the second issue on awarding interests, the court looked at the Ambica Construction case to point out a clear distinction between the legal position as per the 1940 Act and the 1996 Act. Unlike the 1940 Act, the 1996 Act clearly prohibits the arbitral tribunal from passing an award of interest in cases where the agreement itself prohibits an award of interest for the pre-award period.. The 1940 Act did not provide for such a prohibition, and the Ambica Construction case was in reference to the 1940 Act and hence cannot be applied to the instant case. The Court also points out the the dilution of the the difference between pre-reference period and the pendente lite interest in the 1996 Act. It only identifies two periods for interest i.e. pre-award and post-award, thus not accounting for interest during pendent lite. This decision of the court was based on the bare reading of the the text under Section 31(7)a of the 1996 Act, which allows the arbitral tribunal to pass an award of interests unless agreed otherwise in the contract.
[This case comment has been contributed by Parvathi Bakshi, a 4th year law student of Jindal Global Law School, Sonipat.]
 National Insurance Company Limited v. Boghara Polyfab Private Limited, (2009) 1 SCC 267
 Mcdermott International Inc. v. Burn Standard Co. Ltd. and Ors. (2006) 11 SCC 181
 M/s. Ambica Construction v. Union of India, (2017) 14 SCC 323