Absence of reasons for denying interest or adjudicating specific claims constitutes patent illegality in arbitral awards.

The Petitioner, a garment wholesaler, purchased a "Standard Fire and Special Perils Floater Insurance Policy" for ₹30 Crores from the Respondent

On April 25, 2017, a fire destroyed the Petitioner's godown

A Surveyor assessed the loss at ₹20,65,27,032 on July 9, 2018

However, the Respondent delayed settlement for 20 months and eventually offered only ₹65,86,125

The Petitioner invoked arbitration, and the Sole Arbitrator awarded the Surveyor-assessed sum of ₹20.65 Crores but granted interest only from the date of filing the statement of claim (post-reference)

The Petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, on four grounds: denial of pre-reference interest, "double deduction" under the policy, undervaluation of stock at 9% of MRP, and failure to adjudicate a claim for taxes

1. Whether the Arbitrator's denial of pre-reference interest without providing specific reasons constitutes patent illegality

2. Whether the Arbitrator failed to adjudicate the specific challenge against a 5% deduction for "error/omission/dead stock" by misconstruing it as a standard "excess clause" deduction

3. Whether the valuation of old stock at 9% of MRP based on the Surveyor's report was perverse or disregarded vital evidence like the Audit Report

4. Whether the Arbitrator's failure to decide the claim for taxes and statutory duties (Claim No. 5) violates Section 31(3) of the Act

The court applied Section 31(3) of the Arbitration Act, which mandates that an arbitral award must state the reasons upon which it is based

It relied on Associate Builders v. DDA, holding that a contravention of Section 31(3) constitutes "patent illegality" under Section 34(2A)

Regarding interest, the court noted Section 31(7), which grants arbitrators discretion to award interest for the pre-award period unless otherwise agreed

Furthermore, the court referred to the IRDAI Regulations, 2017, which require insurers to settle claims within 30 days of the Survey Report

Regarding Surveyor reports, it applied the principle that such reports are statutory documents under Section 64UM of the Insurance Act, 1938, and should be given due importance unless there is contrary evidence of arbitrariness

The court found that the Arbitrator acknowledged "inordinate delay" by the insurer but denied pre-reference interest without any reasoning, which violated the mandatory requirements of Section 31(3) and necessitated setting aside that portion of the award

On the issue of "double deduction," the court observed that the Petitioner had only challenged an extra-contractual 5% deduction for "dead stock," yet the Arbitrator erroneously defended the undisputed 5% "excess clause" deduction; this failure to address the actual dispute was deemed perverse

Regarding the 9% valuation of old stock, the court upheld the Arbitrator’s finding, noting the Surveyor had physically verified the stock and internal records, whereas the Petitioner’s Audit Report was for financial closing and not specific to insurance loss assessment

Finally, the court held that the Arbitrator’s total silence on the claim for taxes (Claim No. 5), despite it being part of the framed issues, was a fatal omission of the duty to adjudicate each claim

The Court upheld the Arbitrator's finding on stock valuation (Issue No. 4)

The Petitioner was granted liberty to seek fresh arbitration on the set-aside issues in accordance with the law