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Supreme Court of India has on October 3, 2017, in the case of Sri Chittaranjan Maity v. Union of India, dealt with the issue of the stage at which the arbitrability of a dispute can be decided. Referring to section 37(1) of the Arbitration and Conciliation Act, 1996 (Act), Court also held that an arbitrator cannot grant interest for the period between the date of cause of action and date of award, if the parties by agreement had agreed that interest shall not be payable.
The bench constituting of Justices J. Chalemeshwar and S. Abdul Nazeer was dealing with two appeals filed against a division bench judgment of the Calcutta High Court which had set aside the order of single judge refusing to set aside the award under section 34 of the Act.
The Bench has held that the Division Bench was not justified in considering the arbitrability of the disputes for the first time when the same were not raised before the Arbitrator. It has observed:,
It is also necessary to observe that intervention of the court is envisaged only in few circumstances like fraud or bias by the Arbitrators, violation of natural justice. The court cannot correct the errors of the Arbitrators.
Appellant and the Respondent had entered into an agreement for the execution of work. After disputes arose between the parties regarding execution of work as per the Agreement, Appellant filed an application under section 11(6) of the Act seeking appointment of an arbitrator. The Arbitral Tribunal appointed by the Chief Justice of the High Court passed an award in favour of the Appellant and granted him pre-award and pendente lite interest from the date of dispute till the realization of the award amount.
The Respondent’s challenge to the award under section 34 of the Act before the Single Judge of the Calcutta High Court failed. Aggrieved by this, the Respondent approached the Division Bench with an appeal under section 37 of the Act contending, for the first time, that the Arbitral Tribunal could not have adjudicated the dispute before it. Respondent claimed that the Appellant had issued a ‘No Claims Certificate’ to the Respondent and hence had forfeited his right for any claim from the Respondent. The Division Bench set aside the order of the Single Judge and also the award, and directed holding of fresh reference by the Arbitral Tribunal. The Appellant challenged the Division bench order contending that the question as to whether there was any arbitral dispute or not, could not have been entertained by the Division Bench for the first time.
Can arbitrability of the disputes be adjudicated upon for the first time in an appeal?
Supreme Court observed that the Respondent had at the stage of appeal before the Division Bench, raised a fresh plea regarding issuance of ‘No Claim Certificate’ which left the parties bereft of any ‘live dispute’.
Bench referred to its judgment in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 where it had held that the issue of live claim/ dispute, if raised in any application under section 11 of the Act, the Chief Justice/ his designate may decide them, if necessary, by taking evidence. Alternatively, he may leave those issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice or his designate chooses to examine the issue and decides it, the Arbitral Tribunal cannot re-examine the same issue.
National Insurance Co. Ltd. had also referred to SBP & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618, wherein a seven judges bench of the Supreme Court had observed that one of the preliminary matters which may be determined by the court while adjudicating upon an application under section 11(6) of the Act is whether there subsists any live claim/dispute which is capable of being arbitrated upon.
The Bench referred to Mcdermott International Inc. v. Burn Standard Co. Ltd. and Ors., (2006) 11 SCC 181, which holds that the party questioning the jurisdiction of the arbitrator has an obligation to raise the said question before the arbitrator and that the Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness.
The Bench concluded:
“Therefore, the Division Bench was not justified while considering the arbitrability of the disputes for the first time, particularly, when the respondent has not urged the issue relating to ‘No Claims Certificate’ before the Chief Justice, Arbitral Tribunal or before the learned Single Judge.”
Whether the Arbitral Tribunal was justified in awarding interest on the delayed payments?
The Bench next dealt with the second issue concerning the interest on the delayed payments. Bench referred to section 31(7)(a) of the Act which deals with payment of interest in arbitral awards:
“31(7)(a) – Unless otherwise agreed by the parties, where and insofar 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.”
The Bench referred to Sayeed Ahmed and Company v. State of Uttar Pradesh and Ors, (2009) 12 SCC 26, wherein the Court had observed that unlike the 1940 Act, the 1996 Act contains section 31(7)(a) which relates to the power of an arbitrator to award interest. This provision specifies that if the agreement prohibits award of interest for the pre-award period (i.e. pre-reference and pendente lite period), the arbitrator cannot award interest for the said period. Bench found such a clause in the Agreement, which reads:
“16(2) – No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract, but government securities deposit in terms of sub-clause (1) of this clause will be repayable (with) interest accrued thereon.”
The Bench further relied upon Union of India v. Bright Power Projects (India) Private Limited, (2015) 9 SCC 695 and Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat and Ors., (2010) 8 SCC 767, for reaching to the conclusion that as the parties had agreed that the interest shall not be payable and hence the Arbitral Tribunal could not have awarded interest between the date on which the cause of action arose to the date of the award.
Supreme Court, thus, partly allowed the Appeals by setting aside the Order of the Division Bench quashing the award, but held that the Appellant was not entitled for any interest.
Read the complete judgment here.