Case Note & Summary
The Union of India filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award dated 29 March 2017, as corrected on 19 April 2017 and 1 May 2017, insofar as it pertained to Claim No. 13 (interest on delayed payment of running account bills) and Claim No. 20 (compensation for loss of profit on unexecuted work). The respondent, Richa Constructions, a partnership firm, had entered into a contract with the petitioner for construction work. The arbitral tribunal awarded simple interest at 12% per annum on delayed payment of running account bills, computing the amount at Rs. 3,30,250/-, and also awarded compensation for loss of profit on unexecuted work at 10% of the value of unexecuted work. The petitioner argued that the award of interest was contrary to Clause 64 of the General Conditions of Contracts, which did not provide for any interest on delayed payments, and that the compensation for loss of profit was not justified. The court examined the terms of the contract and the reasoning of the arbitral tribunal. It held that the tribunal's finding that 7 days was a reasonable period for payment was not perverse, and the award of simple interest at 12% was within the tribunal's discretion. However, the court found that the tribunal had awarded interest on interest (compound interest) which was not claimed and was contrary to the contract, and therefore set aside that part of the award. Regarding Claim No. 20, the court held that the tribunal's finding that the respondent was entitled to compensation for loss of profit was not patently illegal, but the rate of 10% was excessive and reduced it to 7.5% as per the contract. The court partially allowed the petition, modifying the award accordingly.
Headnote
A) Arbitration - Interest on Delayed Payment of Running Account Bills - Clause 64 of General Conditions of Contracts - The arbitral tribunal awarded simple interest at 12% per annum on delayed payment of running account bills, considering 7 days as reasonable period for payment. The court held that the tribunal's finding that 7 days is a reasonable period is not perverse or contrary to the contract, and the award of interest at 12% is within the tribunal's discretion. However, the court set aside the award of interest on interest (compound interest) as it was not claimed and was contrary to the contract. (Paras 4-10) B) Arbitration - Compensation for Loss of Profit on Unexecuted Work - Section 34 of Arbitration and Conciliation Act, 1996 - The arbitral tribunal awarded compensation for loss of profit on unexecuted work at 10% of the value of unexecuted work. The court held that the tribunal's finding that the respondent was entitled to such compensation is not patently illegal, but the rate of 10% was excessive and reduced it to 7.5% as per the contract. (Paras 11-15) C) Arbitration - Section 34 of Arbitration and Conciliation Act, 1996 - Public Policy - The court reiterated that an arbitral award can be set aside under Section 34 only if it is contrary to the fundamental policy of Indian law, or is patently illegal, or is opposed to public policy. The court found that the award of interest on interest was patently illegal and set it aside. (Paras 16-18)
Issue of Consideration
Whether the arbitral tribunal's award of interest on delayed payment of running account bills and compensation for loss of profit on unexecuted work is contrary to the terms of the contract and/or patently illegal under Section 34 of the Arbitration and Conciliation Act, 1996.
Final Decision
The court partially allowed the petition. It set aside the award of interest on interest (compound interest) under Claim No. 13 as it was not claimed and was contrary to the contract. It reduced the compensation for loss of profit under Claim No. 20 from 10% to 7.5% of the value of unexecuted work. The rest of the award was upheld.
Law Points
- Interest on delayed payment of running account bills
- Compensation for loss of profit on unexecuted work
- Section 34 of Arbitration and Conciliation Act
- 1996
- Public policy
- Reasonable compensation
- Clause 64 of General Conditions of Contracts
