Arbitral award set aside for relying on undisclosed lending rates and failing to reason the interest awarded.

NCC Ltd. was entrusted with part of the redevelopment work at Kidwai Nagar by NBCC and awarded two works to Manisha Kulkarni, sole proprietor of M/s Mani Engineers: plumbing works under Work Order dated 16 November 2015 and firefighting works under Work Order dated 1 April 2016.

A third Letter of Intent concerning plumbing work was issued but no work order followed and it was not part of the arbitral dispute.

Disputes arose regarding the progress, scope and payment for the works. The respondent invoked arbitration, and a sole arbitrator was appointed by the High Court on 15 September 2021.

The respondent claimed Rs.4,36,16,555, including amounts allegedly due for completed work, interest and costs.

The arbitrator found that certified work under the two operative work orders valued at Rs.3,89,46,103 had been completed. After accounting for payments received and certain deductions, the arbitrator awarded the respondent a principal sum of Rs.51,18,083, interest at 13.85% per annum from 1 April 2017 until the award, 14.85% per annum thereafter, and litigation costs of Rs.20,40,400.

NCC challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

Whether the arbitrator erred in deducting the gross value of work under the third LOI from the net payments received by the respondent, thereby producing a contradictory and excessive computation of the amount payable.

Whether the award was contradictory and insufficiently reasoned in allowing only Rs.11,53,615 towards TDS and WCT despite quantifying the completed work at Rs.3,89,46,103.

Whether the award of post-award interest at 14.85% per annum, based on lending rates rather than the highest applicable deposit rate, violated Section 31(7)(b) of the Arbitration and Conciliation Act read with Section 2(b) of the Interest Act, 1978.

Whether the award of pre-reference and pendente lite interest at 13.85% per annum was unsupported by reasons and was based on material not disclosed to or confronted with NCC.

Whether the arbitrator failed to provide reasons for rejecting NCC’s counter-claim for amounts incurred in executing work at the respondent’s risk and cost, despite the respondent’s alleged admissions in its email dated 23 May 2017.

Whether the litigation costs of Rs.20,40,400 awarded to the respondent warranted interference under Section 31A of the Act.

Section 34 of the Arbitration and Conciliation Act permits judicial interference where an award suffers from patent illegality, perversity, violation of natural justice or failure to provide reasons.

Section 31(3) requires the arbitral tribunal to state reasons unless the parties agree otherwise.

Sections 18 and 24(3) require equal treatment, a full opportunity to present one’s case, and disclosure of documents or material relied upon by the tribunal.

Under Section 31(7)(a), the tribunal may award reasonable pre-award interest; however, the rate must have a reasoned basis.

Under Section 31(7)(b), post-award interest is linked to the “current rate of interest,” which Section 2(b) of the Interest Act, 1978 defines by reference to the highest maximum rate payable on specified deposits by scheduled banks, rather than lending rates.

The Court relied on Megh Varan Sharma v. State of U.P., MANU/SC/1260/2014, for the deposit-rate principle, and Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, for the proposition that reliance on material obtained behind the parties’ backs violates Sections 18 and 24(3) and may constitute patent illegality.

Section 31A confers discretion on the tribunal regarding costs, subject to the statutory considerations.

The Court held that the arbitrator’s calculation was mathematically erroneous because Rs.38,81,575, being the gross value attributable to the third LOI, was deducted from Rs.3,17,92,510, which represented net payments.

Since the net payment already reflected statutory deductions such as TDS and WCT, deducting the gross figure conferred a double benefit on the respondent.

The Court further found the award internally contradictory in allowing TDS and WCT deductions of only Rs.11,53,615, which corresponded to a work value of Rs.2,30,72,280, despite determining the completed work value at Rs.3,89,46,103; no reasons supported the selected figure.

The award of post-award interest at 14.85% was legally unsustainable because the arbitrator relied on lending rates instead of the deposit rates contemplated by Section 31(7)(b) read with Section 2(b) of the Interest Act.

The pre-reference and pendente lite rate of 13.85% was also invalidated because the award did not explain why that rate constituted a reasonable rate under Section 31(7)(a), and the lending-rate material relied upon had not been disclosed to NCC, violating Sections 18 and 24(3).

The arbitrator additionally failed to address the respondent’s alleged admissions concerning deductions for work executed at its risk and cost under the contractual completion clause.

This omission, coupled with the absence of reasons for rejecting NCC’s counter-claim, violated Section 31(3).

However, the Court found no sufficient ground to interfere with the litigation costs, which fell within the arbitrator’s discretion under Section 31A.

It held that the award contained patent computational errors and contradictions, improperly determined TDS/WCT deductions, awarded post-award interest contrary to Section 31(7)(b) read with Section 2(b) of the Interest Act, granted pre-reference and pendente lite interest without adequate reasons, relied on undisclosed material, and failed to consider material admissions relevant to NCC’s risk-and-cost counter-claim.

Accordingly, the arbitral award dated 26 July 2023 was held to suffer from patent illegality, breach of natural justice and violation of Sections 18, 24(3), 31(3) and 31(7) of the Arbitration and Conciliation Act, and was set aside.

The Section 34 petition was allowed and the pending application was disposed of.

The Court declined to interfere with the award of litigation costs of Rs.20,40,400.