Case Note & Summary
The appellant, M/s Skoda Auto Volkswagen India Private Limited, an automobile manufacturer, appointed the respondent, M/s Commercial Auto Products Private Limited, as a dealer on 19-10-2005. The respondent committed defaults under the dealership agreement, leading to termination by the appellant. The respondent invoked the arbitration clause, and the Bombay High Court appointed an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The arbitrator partly allowed the respondent's claim, awarding Rs.12,80,480/- with interest at 18% per annum from 31-03-2012. The appellant challenged the award under Section 34 of the Act before the Commercial Court and District Judge, Aurangabad, which dismissed the application. The appellant then appealed under Section 37 of the Act, but only challenged the interest component of 18% per annum, arguing that in the absence of any contractual stipulation regarding interest, Section 31(7)(b) of the Act mandates that the rate of interest shall be 2% higher than the current rate of interest, which would be 9% per annum. The appellant relied on several Supreme Court decisions, including Oriental Structural Engineers Private Limited v. State of Kerala, MSK Projects India (JV) Limited v. State of Rajasthan, State of Rajasthan v. Ferro Concrete Construction Private Limited, Kranti Associates Private Limited v. Masood Ahmed Khan, and Dyna Technologies Private Limited v. Crompton Greaves Limited. The respondent argued that the award of interest was within the arbitrator's discretion and that the appellant had not challenged the principal amount or other findings. The High Court analyzed Section 31(7)(b) and the cited precedents, noting that the arbitrator had not recorded any contractual stipulation for interest. The court held that in the absence of such stipulation, the statutory provision applies, and the interest rate should be 2% higher than the current rate of interest, which was 9% per annum. The court allowed the appeal in part, modifying the award to reduce the interest rate from 18% to 9% per annum, while confirming the rest of the award.
Headnote
A) Arbitration - Interest on Award - Section 31(7)(b) Arbitration and Conciliation Act, 1996 - In absence of contractual stipulation, pendente lite and future interest shall be at 2% higher than current rate of interest - Arbitrator awarded 18% interest which was contrary to statutory provision - Held that interest must be reduced to 9% per annum (Paras 6-10).
Issue of Consideration
Whether the arbitrator could award interest at 18% per annum in the absence of any contractual stipulation regarding interest, and whether such award is contrary to Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
Final Decision
The appeal is allowed in part. The impugned judgment and order and the arbitral award are modified to the extent that the respondent shall be entitled to interest at the rate of 9% per annum instead of 18% per annum. The rest of the award is confirmed.
Law Points
- Interest on arbitral award
- Section 31(7)(b) Arbitration and Conciliation Act
- 1996
- Pendente lite interest
- Future interest
- Rate of interest in absence of contract
Case Details
2022 LawText (BOM) (12) 28
Commercial Arbitration Appeal No. 3 of 2022
Mangesh S. Patil, Abhay S. Waghwase
Mr. S.V. Adwant (for appellant), Mr. A.N. Sabnis with Mr. Satyajit R. Vakil (for respondent)
M/s Skoda Auto Volkswagen India Private Limited (Formerly Skoda Auto India Private Limited)
M/s Commercial Auto Products Private Limited
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Nature of Litigation
Commercial Arbitration Appeal under Section 37 of the Arbitration and Conciliation Act, 1996 challenging the dismissal of an application under Section 34 against an arbitral award.
Remedy Sought
The appellant sought reduction of the interest rate awarded by the arbitrator from 18% per annum to 9% per annum.
Filing Reason
The appellant challenged the arbitral award and the order under Section 34 only to the extent of the interest awarded at 18% per annum, contending it was contrary to Section 31(7)(b) of the Act.
Previous Decisions
The arbitrator partly allowed the respondent's claim and awarded Rs.12,80,480/- with interest at 18% per annum from 31-03-2012. The Commercial Court and District Judge, Aurangabad dismissed the appellant's application under Section 34.
Issues
Whether the arbitrator's award of interest at 18% per annum is contrary to Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 in the absence of a contractual stipulation regarding interest.
Submissions/Arguments
Appellant argued that in the absence of any stipulation in the contract regarding payment of interest, Section 31(7)(b) of the Act of 1996 would regulate the aspect, and since it refers to rate of interest payable at 2% higher than the current rate of interest, the respondent was entitled to pendente lite and future interest only at 9% per annum, not 18%.
Respondent argued that the award of interest was within the arbitrator's discretion and the appellant had not challenged the principal amount or other findings.
Ratio Decidendi
In the absence of any stipulation in the contract regarding interest, the arbitrator is bound by Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, which mandates that the rate of interest shall be 2% higher than the current rate of interest. The arbitrator cannot award a higher rate of interest arbitrarily.
Judgment Excerpts
He would, therefore, submit that in the absence of such stipulation in the contract regarding payment of interest, the provision of section 31(7)(b) of the Act of 1996 would regulate the aspect and since it refers to rate of interest to be payable @ 2% higher than the current rate of interest, the respondent was entitled to the pendente lite and future interest only @ 9% per annum and not 18% per annum.
In the absence of any stipulation in the contract, the arbitrator was bound by the statutory provision contained in section 31(7)(b) of the Act of 1996.
Procedural History
The respondent invoked arbitration and the High Court appointed an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The arbitrator partly allowed the claim, awarding Rs.12,80,480/- with interest at 18% per annum. The appellant challenged the award under Section 34 before the Commercial Court and District Judge, Aurangabad, which dismissed the application. The appellant then filed this appeal under Section 37.
Acts & Sections
- Arbitration and Conciliation Act, 1996: Section 31(7)(b), Section 34, Section 37, Section 11(6)
