Creative Contractors Ltd (CCL), a listed Company entered into a long-term contract with Mahati Interiors (MI), an architect firm run by Mahati. The contract was finalised on February 15, 2021. As per the terms of the agr

CS Professional · Arbitration, Mediation and Conciliation · PYQS · June 2024
Creative Contractors Ltd (CCL), a listed Company entered into a long-term contract with Mahati Interiors (MI), an architect firm run by Mahati. The contract was finalised on February 15, 2021. As per the terms of the agreement, Mahati was to provide designs as per the specifications by clients of the Company. Whatever may be the negotiations with the Client, the Company needs to pay ₹ 1 Lakh per design, subject to applicable taxes. The terms and conditions including the resolution of any disputed matters, to be settled by way of arbitration was clearly mentioned in the agreement and duly signed off by the parties and witnesses. On an average, annual payout as per the assignments from time to time was in the range of ₹ 60 to ₹ 80 Lakh. Disputes arose on reductions in payouts due to rejection of certain designs by the clients of the Company, for which Mahati protested for non-receipt of an amount of ₹ 50 Lakh. Seemingly, the matter was required to be settled through arbitration. The arbitration clause of the agreement indicated that in case of any dispute, the matter can be settled through arbitration, on appointment of one to three Arbitrators as may be mutually agreed. Mahati, did not have much of administrative support and was busy preparing designs for clients. In this process, she had misplaced the copy of agreement with the Company. She was also not willing to pay Arbitrator fee, more than ₹ 25,000, irrespective of the number of sittings or the time taken for completing arbitration proceedings, in other words, she wanted to make only one time payment. A two-member arbitral tribunal was constituted, having been chosen by the Company and Mahati respectively. While petitioning before the Arbitral Tribunal, Mahati quantified her claim of ₹ 50 Lakh together with interest thereon @ 16% per annum and damages of ₹ 50,000, though there was no clause on interest in the agreement. The Company wanted to change the Arbitrator, if permissible. Mahati was having a second thought if she could approach the Civil Court to claim the unpaid fee and damages, although there was an arbitration clause. The parties were not sure of the contract terms and were relying on communication exchange, work orders and certain oral evidences. The Company noticed after two hearings, that one of the arbitrators suffers from competence and wants to find grounds for challenging his appointment. Further, they wish to ascertain the competence of the Tribunal in passing any interim measures. However, both the parties are aware that the Arbitration Tribunal proceedings are not bound by the rules and procedures in terms of Civil Procedure Code, 1908 and Indian Evidence Act, 1872, but bit unsure as to the procedures to be agreed and suggestions to be made in this behalf. For proper conduct of proceedings, the Company suggested that the suitable place is their meeting room at the registered office for which Mahati agreed. They agreed to get the proceedings conducted on the basis of documents and evidences and to avoid any oral evidences or arguments as far as possible. Both the parties agreed with the Tribunal to appoint experts, as and when necessary. The arbitration proceedings were continuing for the last one and half year and there is less expectation of its completion within next twelve months. Parties desire to know the consequences for such inordinate delay. Unfortunately, during the pendency of arbitration proceedings, Mahati met with a fatal accident and passed away. She was survived by her husband and two minor children. In the background of the above facts, answer the following: (a) Can the Arbitral Tribunal reduce the rate of interest as claimed by Mahati? With reference to a settled case law, indicate what should the Arbitral Tribunal consider, in absence of specific rate of interest agreed between the parties to the agreement.

Answer & Explanation:

Under the Arbitration and Conciliation Act, 1996, the Arbitral Tribunal has the discretion to determine the rate of interest to be awarded, even if it differs from the rate claimed by the claimant. This discretion is provided to ensure that the interest awarded is fair and just, taking into account the specifics of the case and the conduct of the parties. Relevant Provisions: Section 31(7)(a): Allows the Tribunal to award interest at such rate as it deems reasonable for the period from the date of the cause of action until the date of the award, unless otherwise agreed by the parties. Section 31(7)(b): States that if the award does not mention the rate of interest, the awarded sum will carry interest at 18% per annum from the date of the award until payment. Considerations for Interest Rate in Absence of Agreement: When the parties have not specified an interest rate in their agreement, the Tribunal should consider the following factors to determine a reasonable rate of interest: Prevailing Commercial Interest Rates: The Tribunal should take into account the current commercial interest rates that are applicable during the period in question. Nature of the Transaction: The specific nature and context of the transaction or contract involved may influence the appropriate rate of interest. Conduct of the Parties: The behavior and actions of the parties throughout the duration of the contract and arbitration may be relevant. This includes considerations of any undue delays or bad faith actions by either party. Equity and Fairness: The Tribunal should strive to achieve an equitable outcome that does not unjustly enrich or unduly penalize either party. Case Law In M/s Hyder Consulting (UK) Ltd. v. Governor, State of Orissa (2015) 2 SCC 189 , the Supreme Court of India clarified the Tribunal's power to award interest. It was held that the Arbitral Tribunal has broad discretion under Section 31(7) of the Act to award interest and can decide on the rate of interest that it considers just and reasonable, in the absence of any specific agreement between the parties on the rate. Conclusion Yes, the Arbitral Tribunal can reduce the rate of interest claimed by the claimant if it deems a lower rate to be reasonable and just under the circumstances of the case. In the absence of a specific rate agreed between the parties, the Tribunal should consider prevailing commercial interest rates, the nature of the transaction, the conduct of the parties, and the principles of equity and fairness.

Topics: Arbitral Award

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