[Vriddhi Galada and Aryan Arawalia are 3rd-year students at Hidayatullah National Law University, Raipur]
Arbitration is an ever-evolving field, continually shaped by judicial interpretation and legislative amendments to meet the demand of modern dispute resolution. The Arbitration and Conciliation Act, 1996 (“the Act”) was enacted with the objective of determining and limiting the scope of judicial intervention in arbitration proceedings and ensuring the finality of arbitral awards. Accordingly, section 5 of the Act restricts judicial interference to instances expressly provided for in the Act, while Section 34 of the Act authorizes the courts to set aside arbitral awards only on fulfilment of limited grounds expressly provided in the Act. These provisions do not expressly contemplate any power of modification of the awards by the courts, thereby upholding the legislative purport of the Act of party autonomy and minimal judicial interference.
Against this statutory backdrop, the Supreme Court’s decision in Gayatri Balasamy v. M/s ISG Novasoft Technologies Ltd. assumes particular significance. The Supreme Court held by a majority of 4:1 that the courts enjoy a limited power of modification under sections 34 and 37 of the Act, thereby empowering them to correct any clerical, computational or typographical errors which does not warrant a merit-based assessment. Embedded within this right, it was held that courts may also modify post-award interest levied by the arbitral tribunal, even in the absence of an express statutory authority to that effect. Significantly, India is one of the first countries to recognise such a power of modifying post-award interest. Although countries like the United States and the United Kingdom recognise the modification of arbitral awards, modification of post-award interest is not recognised.
This post critically analyses the three interrelated aspects by first exploring the statutory framework governing post-award interest, second, offering the judicial reasoning articulated in Gayatri Balasamy and, third, clarifying the ambiguities of such a reading through the existing interpretations of the statute.
The Legal Framework Governing Post-Award Interest
The imposition of interest on arbitral awards is rooted in the fundamentals of compensation and restitution. It operates on three major equitable fronts:
- indemnification of the successful party for the losses accruing on account of the delay in receiving the payment under the arbitral award;
- enhancement of the financial liability, thereby operating as a deterrence against default and/or delay of the payment by the losing party; and
- improvement of the compliance and administration of the arbitral award, minimising the duration of the dispute and preventing drawn-out proceedings.
The Model Law on International Commercial Arbitration, which the Act is premised upon, and predecessor of the Act, the Arbitration Act, 1940 (“the former Act”), both do not authorise the imposition of interest on awards. In contrast, the Act explicitly lays down the scheme pertaining to the imposition of interest on arbitral awards. Section 31 of the Act enumerates provisions pertaining to the “form and content of arbitral awards”, which largely mirrors the Model Law. However, unlike the Model Law, the Indian Parliament introduced section 31(7), prescribing both pre-award as well as post-award interests. Section 31(7)(a) governs pre-award interest, which spans from the date of the rise of the cause of action to the date of the pronouncement of the award, with the parties possessing the right to waive its application. Conversely, section 31(7)(b) governs post-award interest, which spans from the date of the issuance of the award to the date of payment. If not expressly determined by the arbitrator, the interest rate would be a default of 2% above the market rate for interest.
While parties preserve the autonomy to contract out of pre-award interest, the use of the expression “shall” in section 31(7)(b) underscores that post-award interest is a statutory right and precludes contractual omission. This paradigm was affirmed by the judiciary in R. P. Garg v. The Chief General Manager Telecom Department wherein the Supreme Court held that the arbitrators enjoyed the discretion to determine the rate of interest and the sum it would be paid up against, but not its entitlement.
As established, the Act explicitly confers upon the court with the power solely to set aside awards, albeit on limited grounds – post-award interest not being expressly included. However, courts have modified post-award interest without an explicit source or sanction. Additionally, the Supreme Court, by invoking its plenary powers under Article 142 of the Constitution, has also modified interest in the pursuit of complete justice in the matter. Therefore, there existed a divergence in judicial opinion about the validity of such a modification, which was finally resolved by the Court in Balasamy.
The Court’s Rationale in Balasamy
The Court in Balasamy, adopting a liberal interpretation, held that while section 34 stipulates the grounds to approach the court, it does not limit the nature of reliefs that may be granted, so long as such reliefs remain consistent with the Act’s statutory framework and fulcrum. Therefore, the power to modify an award, although a limited power, is inextricably included within the broader power to set aside the award. In the context of post-award interest, the majority allowed for its modification if the facts and circumstances justify the same. The interest may be increased or decreased but, in doing so, the courts cannot delve into the merits of the matter. The rationale for such a power was rooted in the practical considerations of time, cost, and efficiency. Notably, the Court confined the powers to modify interest to post-award interest alone, permitting either a remand to the arbitral tribunal or the setting aside of pre-award interest if the relevant grounds are established.
Dissecting the Contours of Section 34 and the Inclusion of Post-Award Interest
It is essential to note that the Court assumed the power to modify post-award interest under section 34, without expressly delineating the legal basis for such an interpretation. Section 34 of the Act confers upon courts the power to set aside arbitral awards on limited and exhaustive grounds. In McDermott International Inc. v. Burn Standard Co. Ltd., the Supreme Court recognised the mention of the word “only” prefixed before the grounds in the provision, affirming the aforementioned legislative intent.
The statutory grounds under section 34 make no reference to interest, let alone post-award interest, as a standalone or an enumerated head. Therefore, such a power of modification can be read into the already existing grounds mentioned under sub-sections (2)(a), (b) and 2A of section 34. However, an examination of the grounds reveals that such an interpretation would only be possible under section 34(2)(b)(ii), i.e., the public policy ground and section 34(2A), i.e., award being patently illegal. In the absence of any explicit legislative basis, the Court’s reasoning may hinge on either of the two possible interpretative routes:
The provision allows for the setting aside of awards for violating the public policy of India. It clarifies the scope of its violation to only include cases where the award is: (i) vitiated by fraud or corruption or is in violation of section 75 or section 81; (ii) in contravention with the fundamental policy of Indian law; or (iii) in conflict with the fundamental principles of morality or justice.
Under these parameters, the Supreme Court in OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited laid out the narrow scope of “in contravention with the fundamental policy of Indian law” by categorically highlighting that the mere violation of domestic law and policy does not make the award amenable to this provision. For a contravention to qualify as being against the fundamental policy of Indian law, the award must infringe the central principles that govern law, order, and justice in society. Similarly, the threshold for the violation of the basic principles of justice and morality was restricted to instances of infraction of the most rudimentary precepts of justice, ones which shock the conscience of the Court for the former and sexual morality for the latter.
Alternatively, such a power can be interpreted under section 34(2A), which concerns setting aside the award on grounds of prima facie patent illegality. As clarified by the Supreme Court, patent illegality was one that struck at the root of the award, and was not merely an incorrect application of law or re-evaluation of evidence. Establishing three broad heads, the Court in Associate Builders held that an award would be deemed patently illegal if it is inconsistent with the provisions of the Act, substantive and fundamental provisions of Indian laws, and terms of the contract between the parties.
The threshold for modifying post award interest, i.e., “when facts and circumstances justify it”, would hence depend upon where such power is being interpreted under. Therefore, when assessing whether the facts and circumstances validate the modification of post-award interest, due cognisance ought to be given to the relevant criteria established under sections 34(2)(b)(ii) or 34(2A). Non-fulfilment of such standards would effectively undermine any claim for such modification.
Conclusion
Balasamy is progressive in its approach of optimising dispute resolution by authorising courts to modify post-award interest. This stands in stark contrast to the strict interpretations adopted by courts in the US and the UK, which confine the power of modification to the grounds expressly stipulated in the statutes, post-award interest not being among them. While it achieves a balance between finality and accuracy, it prescribes a criterion susceptible to multiple interpretations. As set out in its legislative mandate, the Act intends to specifically enumerate and narrow the scope of judicial interference in arbitral proceedings. Such a subjective interpretation would run counter to the spirit of the Act, increasing the risk of uncertainty of judicial interventions and violating party autonomy. Accordingly, ascertaining the specific provision under which this power has been interpreted and identifying the conditions to be fulfilled under that head may provide clarity and objectivity to the conditions for invoking the powers of modification. However, to ensure the actual realisation of such powers of modification, the judiciary should clarify the source of such powers and cogently stipulate the guidelines for its employment. When exercised with clarity and restraint, such judicial powers can operate in harmony with the core objectives of arbitration as an effective and efficient dispute settlement mechanism.
– Vriddhi Galada & Aryan Arawalia
