Courts may severably modify arbitral awards to restrict impermissible interest to six percent per annum.

Pursuant to NIT No. 2 of 5/2001, respondent No. 1 was awarded mechanical dredging, desilting and allied work near Shalimar Bridge, Dal Lake, for a contractual value of ₹19,38,850, with completion stipulated within one month and a penalty of ₹1,000 per day for delay.

The appellants’ records showed that the work commenced in June 2001 and was completed or closed on 7 March 2002, whereas respondent No. 1 disputed the unilateral measurements and claimed payment for the work executed.

After pursuing writ proceedings and an intra-court appeal, respondent No. 1 instituted a civil suit for recovery.

During the suit, the appellants themselves sought reference of the dispute to arbitration under Clause 20 of PWD Form-25, and the respondent consented to the reference; the civil court accordingly appointed a sole arbitrator on 26 July 2011.

The arbitrator rejected the limitation objection, partly allowed the respondent’s claim, allowed the appellants’ counter-claim for ₹2,27,000 towards 227 days’ delay, and awarded a total amount of ₹30,01,527 with interest.

The appellants’ application under Section 34 of the J&K Arbitration and Conciliation Act, 1997 was dismissed by the learned Single Judge, leading to the present appeal under Section 37.

1. Whether the respondent’s claim was barred by limitation, or whether the period spent bona fide prosecuting the earlier writ proceedings and intra-court appeal was liable to be excluded under Section 14 of the J&K Limitation Act?

2. Whether the arbitral reference was invalid in the absence of a pre-existing arbitration agreement between the parties?

3. Whether the arbitral award was liable to be set aside because it was rendered beyond the four-month period mentioned in the referral order, without a formal extension of the arbitrator’s mandate?

4. Whether the arbitrator’s findings regarding completion of work, delay, the amount of work executed and the appellants’ counter-claim were perverse, patently illegal or contrary to public policy?

5. Whether the interest awarded at 12% per annum was contrary to the amended Section 31(7) of the J&K Arbitration and Conciliation Act, 1997, and whether the award could be modified to that extent?

Section 43 of the J&K Arbitration and Conciliation Act, 1997 makes the J&K Limitation Act applicable to arbitration proceedings as it applies to court proceedings; consequently, the exclusionary benefit under Section 14 of the Limitation Act is available where proceedings were prosecuted bona fide and with due diligence before a forum unable to entertain them.

The Court relied on Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department, (2008) 7 SCC 169, which held that Section 14 applies to proceedings under Section 34 where the statutory scheme does not expressly exclude it.

Under Section 89 CPC, parties may, by consent, create an arbitration agreement even in the absence of a pre-existing arbitration clause; once such consent-based reference is made, the Arbitration and Conciliation Act governs the proceedings, as explained in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24.

Judicial interference under Sections 34 and 37 is narrowly confined to statutory grounds, including patent illegality, violation of fundamental policy of law, perversity, or conflict with justice and morality; reappreciation of evidence or substitution of a possible alternative view is impermissible.

The Court applied Ssangyong Engineering & Construction Co. Ltd. v. NHAI and Associate Builders v. DDA, (2015) 3 SCC 49 on public policy and patent illegality, and Punjab State Civil Supplies Corporation Ltd. v. M/s Sanman Rice Mills, 2024 INSC 742 on the restricted scope of appellate review under Section 37.

Amended Section 31(7) restricted pre-award interest to a rate not exceeding 6% per annum.

Relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., 2025 INSC 605, the Court held that a severable invalid component of an arbitral award could be modified without disturbing the valid remainder.

The Court held that the limitation objection could not succeed because respondent No. 1 had pursued the earlier writ petition and intra-court appeal bona fide and with due diligence, and was therefore entitled to exclusion of that period under Section 14; moreover, the appellants themselves had sought the arbitral reference and could not approbate and reprobate by subsequently challenging the commencement or competence of the arbitration.

The absence of a pre-existing arbitration clause was immaterial because the appellants invoked arbitration during the civil suit and the respondent expressly consented, thereby creating a binding arbitration agreement under Section 89 CPC.

The challenge based on the four-month period was rejected because, when the reference and award were made, the 1997 Act contained no provision prescribing a mandatory time limit for delivery of the award; Section 29-A was introduced only with effect from 1 October 2018.

On merits, the arbitrator’s reliance on the appellants’ records, the finding that the work was completed rather than abandoned, and the deduction of ₹2,27,000 for 227 days’ delay were evidentiary findings not shown to be perverse or patently illegal.

The restricted quantities awarded for excavation and stone removal further demonstrated that the arbitrator had assessed the evidence rather than mechanically accepting the claim.

However, the award of 12% interest for part of the pre-award period contravened amended Section 31(7); that invalid component was severable and was accordingly reduced to 6% per annum, while the remaining findings and monetary components were preserved.

The challenges based on limitation, absence of an arbitration agreement, expiry of the arbitrator’s mandate, abandonment or incomplete execution of the work, and alleged perversity or conflict with public policy were rejected.

The arbitral award and the learned Single Judge’s judgment were modified only with respect to interest.

The net principal amount remained ₹12,12,739, with ₹8,48,917 calculated as simple interest at 6% per annum from 1 April 2002 to 30 November 2013, and ₹2,12,229 awarded as compensation for loss of business, making the total payable amount ₹22,73,885.

Post-award interest was also reduced to 6% per annum from 30 November 2013 until payment.

The appellants were directed to release the modified award amount to respondent No. 1 after identity verification, with any balance deposit to be returned to the appellants; there was no order as to costs.