M/S LARSEN AIR CONDITIONING AND REFRIGATION COMPANY v. UNION OF INDIA AND ORS.

**[2023] 11 S.C.R. 86 : 2023 INSC 708** ## **CASE DETAILS** M/S LARSEN AIR CONDITIONING AND REFRIGRATION COMPANY v. UNION OF INDIA AND ORS. (Civil Appeal No. 3798 of 2023) AUGUST 11, 2023 ## **[S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]** ## **HEADNOTES** **Issue for consideration :** Whether the High Court erred in modifying the arbitral award to the extent of reducing the interest, from compound interest of 18% to 9% simple interest per annum. ## **Arbitration and Conciliation Act, 1996 – s.31 – Modifi cation of interest by the High Court – Propriety of:** **Held :** In the instant case, given that the arbitration commenced in 1997, i.e., after the Act of 1996 came into force on 22.08.1996, the arbitrator, and the award passed by them, would be subject to this statute – Under the enactment, i.e. s.31(7), the statutory rate of interest itself is contemplated at 18% p.a. – This is in the event the award does not contain any direction towards the rate of interest – Therefore, there is little to no reason, for the High Court to have interfered with the arbitrator’s fi nding on interest accrued and payable – Unlike in the case of the old Act, the court is powerless to modify the award and can only set aside partially, or wholly, an award on a fi nding that the conditions spelt out u/s. 34 of the 1996 Act have been established. [Para 13] ## **Arbitration and Conciliation Act, 1996 – s.34 – Jurisdiction under:** **Held :** The limited and extremely circumscribed jurisdiction of the court u/s. 34 of the Act, permits the court to interfere with an award, sans the grounds of patent illegality, i.e., that “illegality must go to the root of the matter and cannot be of a trivial nature”; and that the tribunal “must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the 86 M/S LARSEN AIR CONDITIONING AND REFRIGRATION 87 COMPANY v. UNION OF INDIA award can be set aside on this ground”– The other ground would be denial of natural justice. [Para 15] ## **Arbitration and Conciliation Act, 1996 – s.37 – Scope of Appellate Court to review fi ndings:** **Held :** In appeal, s.37 of the Act grants narrower scope to the appellate court to review the fi ndings in an award, if it has been upheld, or substantially upheld u/s. 34 – It is important to notice that the old Act contained a provision which enabled the court to modify an award – However, that power has been consciously omitted by Parliament, while enacting the Act of 1996 – This means that the Parliamentary intent was to exclude power to modify an award, in any manner, to the court. [Para 15] ## **LIST OF CITATIONS AND OTHER REFERENCES** _K. Marappan v. Superintending Engineer TBPHLC Circle Anantapur_ [2019] 5 SCR 152; _M/s Raveechee & Co. v. Union of India_ [2018] 5 SCR 138; _Ambica Construction v. Union of India_ (2017) 14 SCC 323; _Shahi v. State of UP & Ors._ [2019] 11 SCR 640; _Secretary, Irrigation Department, State of Orissa v. G.C. Roy_ [1991] Supp. 3 SCR 417; _Municipal Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd. & Ors._ [2018] 14 SCR 1143; _Oriental Structural Engineers Pvt. Ltd. v. State of Kerala_ [2021] 4 SCR 137; _Post Graduate Institute of Medical Education and Research, Chandigarh v. Kalsi Construction Company_ (2019) 8 SCC 726; _Associate Builders v. Delhi Development Authority_ [2014] 13 SCR 895; _Ssangyong Engineering Construction Co. Ltd v. National Highways Authority of India (NHAI)_ [2019] 7 SCR 522; _Delhi Airport Metro Express Pvt. Ltd. v Delhi Metro Rail Corporation Ltd_ [2021] 5 SCR 984; _National Highways Authority of India v M. Hakeem_ [2021] 5 SCR 368 – referred to. ## **OTHER CASE DETAILS INCLUDING IMPUGNED ORDER AND APPEARANCES** CIVIL APPELLATE JURISDICTION : Civil Appeal No.3798 of 2023. From the Judgment and Order dated 17.07.2019 of the High Court of Judicature at Allahabad in FAFO No.1227 of 2003. 88 SUPREME COURT REPORTS [2023] 11 S.C.R. ## **Appearances:** R.K. Singh, Mrs. Neeraj Singh, Kumar Gaurav, Ajay Chaudhary, Praveen Pathak, Aman Rastogi, Sanjay Rastogi, Advs. for the Appellant. Vikramjeet Banerjee, A.S.G., A K Kaul, Nachiketa Joshi, Bhuvan Mishra, Akshit Pradhan, Sachin Sharma, Siddhartha Sinha, Shivam Singhania, N. Chamwibo Zeliang, Suraj Mishra, Ms. Akansha, Arvind Kumar Sharma, Advs. for the Respondents. ## **JUDGMENT / ORDER OF THE SUPREME COURT** ## **JUDGMENT** ## **S. RAVINDRA BHAT, J.** 1. Aggrieved by the impugned judgment[1] of the Allahabad High Court, the appellant has approached this court with a simple question of law, as to whether the High Court erred in modifying the arbitral award to the extent of reducing the interest, from compound interest of 18% to 9% simple interest per annum. ## _**Facts**_ 2. The dispute between the appellant and Union of India (hereafter ‘respondent-state’) arose from a contract entered into pursuant to being awarded the tender. In the course of work, certain disputes arose. On 22.04.1997, the respondent-state referred the dispute to arbitration, and the proceedings closed on 24.10.1998. The tribunal published its award on 21.01.1999 and directing the fi rst four respondents to pay 18% _pendente lite_ and future compound interest on the award in respect of Claim Nos. 1-8. 3. The respondent-state challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter ‘the Act’). The district court[2] , dismissed the challenge on the ground that it could not sit in appeal over the award and since the respondent-state had failed to fi le any proof of the grounds alleged. Aggrieved, the respondent-state, preferred an appeal before the High Court in 2003. In the interim, the respondent-state deposited `10,00,000 in the District Court, Kanpur on 06.06.2003 against `1,82,878.11 due at the time. - 1 Judgment dated 17.07.2019 passed by Allahabad High Court in First Appeal from Order No. 1227/2003. - 2 Judgment dated 06.03.2003 passed by the District Judge, Kanpur Nagar in Misc. Case No. 64/70 of 1999. 89 M/S LARSEN AIR CONDITIONING AND REFRIGRATION COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.] 4. Partly allowing the appeal, the High Court disapproved the reasoning in the award on Claim No. 6; it held that the sum of `3 lakhs awarded towards compensation for loss caused due to non-issue of tender document and paralysing business could not have been granted. The High Court held that it could not be said that the proceedings (in the present case) were under the Arbitration Act, 1940, and therefore, the rate of interest granted should not be 18%. The High Court referred to this court’s judgments in _K. Marappan v. Superintending Engineer TBPHLC Circle Anantapur[3] , M/s Raveechee & Co. v. Union of India[4] and Ambica Construction v. Union of India[5]_ while deciding this question of pendente lite interest; it was held that the bar to award interest on the amounts payable under the contract would not be suffi cient to deny the payment of interest pendente lite. The High Court proceeded to reduce the rate of interest from 18% (as ordered by the arbitrator), to 9% per annum. The remaining amount was directed to be deposited by the appellants as expeditiously as possible, with the interest accrued, not later than 12 weeks from the date of the judgment. On other grounds, it was held that there was no scope for interference in the arbitral award. ## _**Contentions of parties**_ 5. The ground pressed by the appellant in the present proceedings, relates to the modifi cation of the rate of interest (relating to award in Claim No. 9), and the scope of this appeal is limited to this question. 6. Mrs. Neeraj Singh, counsel appearing on behalf of the appellant, submitted that their claim was in fact for 24% _pendente lite_ interest, and the arbitrator had already reduced it to the 18% granted. Pointing to pre-amended Section 31(7)(b) of the 1996 Act, it was contended that the High Court erred in reducing the ‘statutory interest rate’; this provision prescribed that in the event the Arbitrator did not give any specifi c directions as regards rate of interest on amount awarded, such amount ‘ _shall_ ’ carry interest of 18% per annum. The Arbitrator had properly considered the matter and accordingly granted 18% past _pendente lite_ and future compound interest on 8 claims, which was affi rmed by the district court. Counsel also pointed out Clause 70 of the General Conditions of Contract (GCC), which stipulates that the award of the arbitrator shall be fi nal and binding on both parties. It was urged, therefore, that there was no justifi cation - 3 [2019] 5 SCR 152 - 4 [2018] 5 SCR 138 - 5 (2017) 14 SCC 323 90 SUPREME COURT REPORTS [2023] 11 S.C.R. for judicial interference so as to reduce the statutory interest rate from 18% to 9% per annum. Counsel drew attention to _Shahi v. State of UP & Ors._[6] wherein this court, in light of Section 31(7), upheld 18% per annum as rate of interest, as justifi able. 7. Further, reliance was placed on this court’s judgment in _Secretary, Irrigation Department, State of Orissa v. G.C. Roy_[7] to argue that when the agreement between the parties does not prohibit grant of interest and where the party claims interest in the dispute referred to an arbitrator, then the arbitrator does have the power to award interest _pendente lite_ . 8. Mr. Vikramjit Banerjee, Additional Solicitor General (ASG), appearing on behalf of the Respondent-state, argued that the impugned judgment had taken a holistic view of the matter, and rightfully reduced the interest from 18% compound interest to 9% simple interest, in addition to disallowing Claim No. 6 of ` 3,00,000 awarded by the arbitrator for non-issuance of tender. The High Court, it was urged, had considered all the aspects of the Indian Contract Act, 1872 and the Arbitration and Conciliation Act, 1996 before deciding to reduce the interest to a more reasonable rate. 9. It was asserted that even the counsel for the appellants at the time, before the High Court, had agreed that the statutory rate of interest should be 1 or 2% higher or lower than the bank rate, which in the last decade has been about 7-8%. As a result, 18% compound rate of interest was completely unjustifi ed, and warranted revision. 10. The ASG relied on several judgments of this court: _Municipal Corporation of Greater Mumbai and Anr v. Pratibha Industries Ltd. & Ors._[8] to stress on the scope of the inherent powers of the High Court as a constitutional court; _Oriental Structural Engineers Pvt. Ltd. v. State of Kerala_[9] wherein the contract did not stipulate a rate of interest, and 18% awarded by the tribunal was held to be excessive and therefore, reduced to 8% simple interest by this court; and similarly _Post Graduate Institute of Medical Education and Research, Chandigarh v. Kalsi Construction Company_[10] wherein this court reduced the rate of interest from 18% awarded - 6 [2019] 11 SCR 640 7 [1991] Supp. 3 SCR 417 - 8 [2018] 14 SCR 1143 - 9 [2021] 4 SCR 137 - 10 (2019) 8 SCC 726 ## M/S LARSEN AIR CONDITIONING AND REFRIGRATION 91 COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.] by the tribunal, to 9% simple interest, despite 18% having been the agreed upon rate of interest, given that the award was passed roughly 20 years prior. ## _**Analysis and conclusion**_ 11. Section 31(7)(b) of the 1996 Act, was amended by Act 3 of 2016, w.e.f. 23.10.2015. The pre-amended provision, empowers the arbitrator to award both pre-award and post-award interest, and specifi es that the awarded sum would carry an interest of 18% per annum, unless provided otherwise, from the date of award till the date of payment. The pre-amended section, as it stood on the date of award by the arbitrator (21.01.1999), read as follows: ## _**“31. Form and contents of arbitral award**_ […] _(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made._ _(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.”_ (emphasis provided) 12. This court in Shahi & Associates (supra), which was relied upon by the appellants, dealt with a similar situation as the present factual matrix, and is squarely applicable: _“11. Section 31(7)(b) of the 1996 Act clearly mandates that, in the event the arbitrator does not give any specifi c directions as regards the rate of interest on the amount awarded, such amount “shall” carry interest @ 18% p.a. from the date of award till the date of payment. Since the Arbitration Act, 1940 has been repealed by way of Section 85 of the 1996 Act, the Schedule to the Arbitration Act, including the State amendment, also stands repealed. The only_ 92 SUPREME COURT REPORTS [2023] 11 S.C.R. _exception is provided in sub-section (2)(a) of Section 85 where a proceeding which had commenced when the Arbitration Act of 1940 was in force and continued even after coming into force of the 1996 Act, and all parties thereto agreed for application of the old Act of 1940. Therefore, the provisions of Arbitration Act, 1940 including the State amendment, namely, para 7-A inserted by Section 24 of the U.P. Amendment Act will have no application to the proceedings commenced after coming into force of the 1996 Act._ _12. In the instant case, though the agreement was earlier to the date of coming into force of the 1996 Act, the proceedings admittedly commenced on 27-10-1999 and were conducted in accordance with the 1996 Act. If that be so, para 7-A inserted by Section 24 of the U.P. Amendment Act has no application to the case at hand. Since the rate of interest granted by the arbitrator is in accordance with Section 31(7)(b) of the 1996 Act, the High Court and the District Judge were not justifi ed in reducing the rate of interest by following the U.P. Amendment Act.”_ 13. In the present case, given that the arbitration commenced in 1997, i.e., after the Act of 1996 came into force on 22.08.1996, the arbitrator, and the award passed by them, would be subject to this statute. Under the enactment, i.e. Section 31(7), the statutory rate of interest itself is contemplated at 18% per annum. Of course, this is in the event the award does not contain any direction towards the rate of interest. Therefore, there is little to no reason, for the High Court to have interfered with the arbitrator’s fi nding on interest accrued and payable. Unlike in the case of the old Act, the court is powerless to modify the award and can only set aside partially, or wholly, an award on a fi nding that the conditions spelt out under Section 34 of the 1996 Act have been established. The scope of interference by the court, is well defi ned and delineated [refer to _Associate Builders v. Delhi Development Authority[11] , Ssangyong Engineering Construction Co. Ltd v. National Highways Authority of India (NHAI)[12] and Delhi Airport Metro Express Pvt. Ltd. v Delhi Metro Rail Corporation Ltd[13]_ ]. > 11 [2014] 13 SCR 895 > 12 [2019] 7 SCR 522 > 13 [2021] 5 SCR 984 93 M/S LARSEN AIR CONDITIONING AND REFRIGRATION COMPANY v. UNION OF INDIA [S. RAVINDRA BHAT, J.] 14. The reliance on _Kalsi Construction Company_ (supra) by the respondent-state, is inapt, given that this court had exercised its Article 142 jurisdiction in light of three pertinent factors – the award had been passed 20 years prior, related to construction of a Paediatrics Centre in a medical institute, and that the parties in that case had left the matter to the discretion of the court. Similarly, in _Oriental Structural Engineers_ (supra) this court held that since the contract stipulated interest entitlement on delayed payments, but contained no mention of the rate of interest applicable – the Tribunal ought to have applied the principles laid down in _G.C. Roy_ (supra), and therefore, in exercise of Article 142, this court reduced the rate of interest awarded by the tribunal on the sum left unpaid. The judgment in _Municipal Corporation of Greater Mumbai_ (supra) no doubt discusses the inherent powers of the High Court as a superior court of record, but relates specifi cally to the jurisdiction to recall its own orders, and off ers little assistance in the present dispute. 15. The limited and extremely circumscribed jurisdiction of the court under Section 34 of the Act, permits the court to interfere with an award, sans the grounds of patent illegality, i.e., that _“illegality must go to the root of the matter and cannot be of a trivial nature”; and that the tribunal “must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground”_ [ref: _Associate Builders_ (supra)]. The other ground would be denial of natural justice. In appeal, Section 37 of the Act grants narrower scope to the appellate court to review the fi ndings in an award, if it has been upheld, or substantially upheld under Section 34. It is important to notice that the old Act contained a provision[14] which enabled the court to modify an award. However, that power has been consciously _omitted_ by Parliament, while enacting the Act of 1996. This means that the Parliamentary intent was to exclude power to modify an award, _in any manner_ , to the court. > 14 **“15. Power of court to modify award** > _— The court may by order modify or correct an award_ > _— (a) where it appears that a part of the award is upon a matter not referred to arbitration and such part can be separated from the other part and does not aff ect the decision on the matter referred; or_ > _(b) where the award is imperfect in form, or contains any obvious error which can be amended without aff ecting such decision; or_ > _(c) where the award contains a clerical mistake or an error arising from an accidental slip or omission.”_ 94 SUPREME COURT REPORTS [2023] 11 S.C.R. This position has been iterated decisively by this court in Project Director, National Highways No. 45E and 220 National Highways Authority of India v M. Hakeem[15] : _“42. It can therefore be said that this question has now been settled fi nally by at least 3 decisions [McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181] , [Kinnari Mullick v. Ghanshyam Das Damani, (2018) 11 SCC 328 : (2018) 5 SCC (Civ) 106] , [Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies (P) Ltd., (2021) 7 SCC 657] of this Court. Even otherwise, to state that the judicial trend appears to favour an interpretation that would read into Section 34 a power to modify, revise or vary the award would be to ignore the previous law contained in the 1940 Act; as also to ignore the fact that the 1996 Act was enacted based on the Uncitral Model Law on International Commercial Arbitration, 1985 which, as has been pointed out in Redfern and Hunter on International Arbitration, makes it clear that, given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the “limited remedy” under Section 34 is coterminous with the “limited right”, namely, either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the Arbitration Act, 1996.”_ 16. In view of the foregoing discussion, the impugned judgment warrants interference and is hereby set aside to the extent of modifi cation of rate of interest for past, _pendente lite_ and future interest. The 18% per annum rate of interest, as awarded by the arbitrator on 21.01.1999 (in Claim No. 9) is reinstated. The respondent-state is hereby directed to accordingly pay the dues within 8 weeks from the date of this judgment. 17. The present appeal, and pending application(s) if any, stand disposed of in the above terms, with no order as to costs. **Headnotes prepared by: Ankit Gyan** **Appeal disposed of.** 15 [2021] 5 SCR 368