In a significant legal decision, the Supreme Court of India recently ruled in the case of Shahi and Associates v. State of U.P. regarding the interest rate in an arbitration award. The appeal centered around the reduction of interest rate from 18% to 6% per annum, based on para 7-A of Section 24 of the U.P. Amendment Act. The Court’s judgement clarified the applicability of the Arbitration and Conciliation Act, 1996 to the proceedings between the parties, emphasizing that the provisions of the old Arbitration Act, 1940 do not govern the case.
Facts
- Appellant, a registered partnership firm, entered into an agreement in 1993 for work related to the Gola Pump House with the Superintendent Engineer, Drainage Division, District Gonda, U.P.
- Arbitration proceedings began on 27.10.1999 under the Arbitration and Conciliation Act, 1996, with Arora appointed as the sole Arbitrator on 12.10.1999.
- Appellant filed a claim petition on 11.09.1999 due to disputes over the rate of payment for additional work.
- The appellant has raised concerns about the reduction of interest in the appeal.
- The sole Arbitrator passed an award on 24.12.2001, awarding the appellant Rs. 17,86,339/-.
- Interest on the awarded sum was set at 18% p.a. from the date of the award till actual payment.
- The High Court observed the reduction of interest rate from 18% p.a. to 6% p.a. based on Section 24 of the U.P Amendment Act.
- The District Judge upheld the sum awarded but reduced the interest rate to 6% p.a.
- Both parties filed appeals against the judgment, leading to the High Court dismissing both appeals.
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Arguments
- M/s. Shahi and Associates filed an appeal against the final judgment of the High Court of Judicature at Allahabad.
- The High Court upheld the award of the Arbitrator but reduced the statutory interest to 6% p.a. from 18% p.a. based on para 7- A of Section 24 of the U.P. Amendment Act.
- The learned Additional Advocate General appearing for the respondent-State justified the impugned judgment.
- The arbitration proceedings were initiated under the Arbitration and Conciliation Act, 1996 on 27.10.1999.
- The provisions of the Arbitration Act, 1940 are not applicable to the proceedings between the parties.
- The U.P. Amendment Act introduced para 7-A to the First Schedule of the Arbitration Act, 1940.
- The State amendment did not impact the applicability of the Arbitration and Conciliation Act, 1996 to the arbitration proceedings.
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Analysis
- Para 7-A of Section 24 of the U.P. Amendment Act does not apply to the case.
- The Arbitration Act, 1940 has been repealed by Section 85 of the Act of 1996, along with its Schedule.
- Act of 1996 applies to all arbitral proceedings commenced after 22.08.1996.
- Exception in sub-section (2)(a) of Section 85 only allows application of the old Act of 1940 if all parties agree.
- Provisions of Arbitration Act, 1940 including para 7-A of Section 24 of U.P. Amendment Act do not apply to proceedings after Act of 1996 came into force.
- Arbitrator rightly awarded interest rate of 18% p.a. under Section 31(7)(b) of the Act of 1996.
- District Judge and the High Court incorrectly relied on the repealed provision and reduced the interest rate.
- Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 deals with the awarding of interest by the arbitral tribunal.
- If the parties do not agree otherwise, the arbitral tribunal has the authority to include interest in the sum awarded for payment of money.
- The interest rate deemed reasonable by the tribunal can be applied on the whole or any part of the money for the period between the cause of action and the date of the award.
- If the arbitral award is for the payment of money and no specific directions regarding interest rate are given, the amount shall carry interest at 18% per annum from the date of the award to the date of payment.
- Section 85 of the Act repeals the provisions of the Arbitration Act, 1940, including State amendments like Para 7-A of Section 24 of the U.P. Amendment Act.
- The provisions of the Arbitration Act, 1940 have no application to proceedings initiated after the enforcement of the 1996 Act.
- Section 31(7)(b) of the 1996 Act, prior to amendment by Act 3 of 2016, empowers the arbitrator to award pre-award and post-award interest.
- The default interest rate of 18% per annum applies unless otherwise directed by the arbitrator.
- The rate of interest granted by the Arbitrator aligns with Section 31(7)(b) of the Act of 1996.
- The High Court and the District Judge were not justified in reducing the rate of interest by applying the U.P. Amendment Act.
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Decision
- The appeal has been successfully allowed.
- No costs are ordered.
- Interest awarded by the Arbitrator as per Section 31(7)(b) of the Act of 1996 is reinstated.
- The judgments of the High Court of Judicature at Allahabad dated 05.12.2007 in F.A.F.O Nos.3728 and 947 all of 2007 and the order of the District Judge, Gorakhpur in Misc. Case No.5 of 2002 dated 28.10.2006 are set aside only concerning the reduction of the interest rate.
Case Title: M/S SHAHI AND ASSOCIATES Vs. STATE OF U.P. .
Case Number: C.A. No.-003559-003559 / 2010
