Pre-award interest allowed without reasons is arbitrary, and a court may set aside part of an award
Justice Sudesh Bansal decided three arbitration appeals from 2007 and 2015 together, severing two claims and the 18 per cent interest while sustaining the rest of the award.
An arbitrator who awards interest for the pre-award period must say why, and so must the court that reduces it, the Rajasthan High Court has held while deciding three appeals under Section 37 of the Arbitration and Conciliation Act, 1996 arising out of two awards against the Central Public Works Department. Justice Sudesh Bansal, sitting at the Jaipur Bench, found that both the arbitrator and the Additional District Judge had acted arbitrarily in allowing pre-award interest without assigning justified reasons, and set that part of the award aside. He also held that the arbitrator and the Additional District Judge had failed the other way on post-award interest, confining it to four claims when the statute left it to their discretion over the whole decree. The government has three months to pay, interest-free, or 6 per cent simple interest runs from the date of the award.
A contract finished in 1986 and an arbitrator appointed in 2001
Three appeals were heard together with the consent of counsel, because the parties were common and the challenges to the awards identical. S.B. Civil Miscellaneous Appeal No. 129 of 2007 was filed by the Union of India, the non-claimant, against an award of 30 April 2003. S.B. Civil Miscellaneous Appeal No. 911 of 2015 was filed by the contractor and No. 1320 of 2015 by the Union, both arising out of an award of 15 November 2004.
The disputes are older than the appeals. In the first matter the cause of action arose after the contractual work was completed on 30 September 1986, when the contractor's final bills went unpaid. In the second it arose when the government rescinded the contract on 23 April 1988. On applications under Section 20 of the old Arbitration Act, 1940, and under directions of the District Judge, Jaipur, the government appointed a sole arbitrator under Clause 25 of the contract. He resigned. Others were appointed and they resigned too. Finally, on 26 February 2001, the District Judge appointed a retired Chief Engineer as sole arbitrator, who entered on the reference and began proceedings on 8 March 2001.
The awards followed in 2003 and 2004. Objections under Section 34 against the first were dismissed on 15 December 2005 and a review dismissed on 20 September 2006. Objections against the second were partly allowed on 7 February 2015, with the rate of interest reduced, which is why both sides appealed that one.
A jurisdictional attack raised in 2017, and the 2002 order that answered it
In January 2017 the Union applied to add a ground to both memos of appeal, and it was a root-and-branch one: that the sole arbitrator had been appointed by the District Judge, whereas the power of appointment under Section 11 of the 1996 Act lay with the Chief Justice of the High Court. On that footing, it was argued, the appointment was void ab initio and both awards were without jurisdiction. The amendment was allowed, and Justice Bansal took the objection first.
It failed on the record. The sequence showed that after the government's appointee resigned and successive replacements resigned, the Union did not choose to appoint a new arbitrator, and so waived its right to appoint one. More decisively, the question had already been decided. By an order of 1 February 2002 the High Court, dismissing four revision petitions, had observed that on that factual scenario it had become necessary for the District Judge to appoint an independent sole arbitrator, and that there was no illegality or jurisdictional error in his doing so. A copy of that order was placed on record by the claimant. Having attained finality and binding both parties, it disposed of the point, which the judgment holds to be misconceived.
Which Act governed, and how far a Section 37 court may go
A second threshold question was whether the awards fell under the 1940 Act or the 1996 Act, given that the references began under the old statute. The answer turned on commencement: the arbitrator who passed both awards commenced proceedings on 8 March 2001, after the 1996 Act came into force on 22 August 1996. Neither party contended that the proceedings had been conducted otherwise than under the procedure of the 1996 Act. The new Act therefore governed.
On the width of its own jurisdiction the judgment takes its law from Jan De Nul Dredging India Private Limited vs Tuticorin Port Trust, (2026) 3 SCC 186, which gathers the earlier authorities. Jurisdiction under Section 37 is akin to that under Section 34, so interference in appeal cannot go beyond the grounds on which an award may be challenged under Section 34; courts under both provisions do not act as a normal court and ought not to interfere on the mere possibility of an alternative view. As that judgment puts it, “the scope of interference of the court with the arbitral matters is virtually prohibited”, if not absolutely barred. Appellate power under Section 37 is exercisable only to find whether the Section 34 court acted within its limits, exceeded them, or failed to exercise the power conferred; the appellate court has no authority to consider the dispute on merits, cannot sit as an ordinary court of appeal and cannot reappraise evidence to record a contrary finding. An award cannot be touched unless it is contrary to a substantive provision of law, a provision of the Act, or the terms of the agreement.
Severing the invalid part of an award
Since the judgment ends by modifying an award rather than upholding or setting it aside whole, it rests that course on the Constitution Bench decision in Gayatri Balasamy vs ISG Novasoft Technologies Ltd., (2025) 7 SCC 1. The majority there held that the power conferred by the proviso to Section 34(2)(a)(iv) is clarificatory, and that the authority to sever the invalid portion of an award from the valid portion, while staying within the narrow confines of Section 34, is inherent in the court's jurisdiction when setting an award aside.
The reasoning is the maxim omne majus continet in se minus — “the greater power includes the lesser”. The authority to set aside an award necessarily includes the power to set it aside in part rather than in its entirety, and it would be incongruous to read the power as all-or-nothing, since that would nullify valid determinations unnecessarily. The caveat the Constitution Bench added is that not every award can be severed; partial setting aside may not be feasible where the valid and invalid portions are legally and practically inseparable.
Pre-award and post-award interest are different questions
The interest analysis is the operative heart of the judgment, and it cuts both ways.
The Union argued that Clause 29 of the contract barred interest for the pre-award period. Justice Bansal rejected that reading: Clause 29 does not place an absolute embargo on awarding interest. The arbitrator had allowed interest at 18 per cent against Claim Nos. 1, 4, 14 and 21 with effect from 24 October 1988 until payment, a span covering both the pre-award and post-award periods.
Where the award failed was in its silence. Even where the contract prescribes no rate, it is for the arbitral tribunal to assign justified reasons for awarding 18 per cent simple interest, and none were assigned for the pre-award period on Claims 1 and 4. Claim No. 1 concerned excavation for a 60-foot setback where the original layout showed 40 feet; Claim No. 4 was the amount found payable for work done; Claim No. 14 overlapped with Claim No. 26, and since no interest was awarded on the decreed Claim No. 26, allowing it on Claim No. 14 was not justified. The Additional District Judge, reducing the rate from 18 to 10 per cent for the pre-award period, had equally recorded no reasons.
Pre-award interest is governed by Section 31(7)(a) and is an independent part of an award. Both the arbitrator and the Additional District Judge, the judgment holds, acted arbitrarily in allowing it without justified reason, and the award of it was unreasonable and unwarranted in circumstances where the contract work was not completed by the claimant, whatever the cause, leaving the government to bear the cost of completing the rest.
Post-award interest is a different matter, falling under Section 31(7)(b) and well within the tribunal's discretion. Here the judgment finds the failure was one of under-exercise. Citing Larsen & Toubro, it notes the twofold legislative intent behind the provision: “to compensate the successful party for delayed realization of the award”, and to ensure prompt compliance by the judgment-debtor. Both the tribunal and the Additional District Judge, it holds, failed to exercise that discretion and jurisdiction by confining post-award interest to Claims 1, 4, 14 and 21 instead of allowing it at a reasonable rate on the entire decree.
The counter claim survives untouched
The Union also argued that its counter claim had been rejected without application of mind and without considering its documents and evidence. The judgment finds otherwise on a perusal of the award: the arbitrator had appreciated the letters the government sent the contractor, and after detailed appreciation held the government guilty of delay and laches on various counts, declaring its rescission of the contract illegal and unjustified. Those fact findings were not against the terms of the contract, not in conflict with the public policy of India, not patently illegal and not contrary to natural justice. Interference by the Additional District Judge under Section 34 on that score was not warranted, and he had acted within jurisdiction in dismissing the objections to the rejection of the counter claim.
Justice Bansal recorded that he had been guided by the propositions of law in the judgments cited by both sides, which he had considered and followed without discussing each independently, to avoid prolixity.
Order
Appeal No. 129 of 2007 was disposed of without interference with the award of 30 April 2003 or the orders of 15 December 2005 and 20 September 2006. The principal sum under that award having already been paid, the interest of Rs 19,95,776 lying in a fixed deposit goes to the claimant with accrued interest as full and final payment, the deposit to be disbursed either by breaking it mid-term or on maturity at the claimant's option. That award stands finally executed and no further interest is payable under it.
Appeals Nos. 911 and 1320 of 2015 were disposed of by modifying the award of 15 November 2004. It stands partially set aside so far as it allowed Claim No. 21 for Rs 3,88,000, Claim No. 22 for Rs 2,21,640, and interest at 18 per cent per annum. The remaining decreed claims are sustained. If the decreed amount is paid or deposited within three months, no interest is payable; if not, the government pays 6 per cent simple interest from the date of the award until full payment on the decreed claims, being Claim Nos. 1, 4 and 20, 14 and 26, 24 and 32, totalling Rs 22,04,109. The order of 7 February 2015 stands modified accordingly and the stay order of 25 May 2015 is vacated. Pending applications were disposed of and the record directed to be sent back.