Arbitration Award Interest Reduced: Supreme Court Modifies High Court Ruling

The case of Post Graduate Institute of Medical Education and Research Chandigarh vs. M/S Kalsi Construction Company revolves around the issue of interest rates on arbitration awards. The Supreme Court, in its judgment on September 2, 2019, upheld the arbitration award but reduced the interest rate from 18% to 10%, citing fairness and equity.

Background of the Case

The respondent, M/S Kalsi Construction Company, was awarded a contract for the construction of the Advanced Pediatrics Centre at the Post Graduate Institute of Medical Education and Research, Chandigarh. A dispute arose regarding the completion of the work, leading to arbitration.

The Arbitrator, in an award dated December 31, 1999, granted the respondent an amount of Rs. 1.17 crore against its claim of Rs. 10.63 crore. Additionally, interest at the rate of 18% per annum was awarded.

The appellant-institution challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, but the challenge was dismissed. The High Court of Punjab and Haryana, in an appeal under Section 37, upheld the Arbitrator’s decision, including the interest rate.

Legal Issues and Arguments

Arguments by the Appellant (PGIMER, Chandigarh):

• The interest rate of 18% was excessive and should be reduced.
• The dispute involved public funds, and a lower interest rate would be more equitable.
• The institution was not pressing other grounds of appeal and was only seeking a modification of the interest rate.

Arguments by the Respondent (M/S Kalsi Construction Company):

• The arbitrator had the discretion to award interest under Section 31(7) of the Arbitration and Conciliation Act.
• The interest rate was justified since the award had remained unpaid since 1999.
• The respondent left the final decision on interest to the Supreme Court’s discretion but requested a reasonable rate.

Supreme Court’s Observations

The Supreme Court acknowledged the arbitrator’s power under Section 31(7) to award interest. However, it also considered the fact that the award was over two decades old.

The Court ruled:

“In the absence of an agreement to the contrary, the arbitral tribunal has the power to award interest. However, considering the facts that the award was passed in 1999 and remains unpaid, we find it appropriate to exercise our discretion under Article 142 of the Constitution of India.”

The Court reduced the interest rate from 18% per annum to 10% per annum simple interest, stating:

“Considering that this involves a government institution and public funds, and keeping in mind the respondent’s willingness to accept a reasonable rate, the interest awarded should be reduced to 10% per annum.”

Key Rulings and Conclusion

The Supreme Court allowed the appeal in part and ruled:

• The arbitration award was upheld.
• The interest rate was reduced from 18% to 10% per annum simple interest.
• The amount must be paid within 8 weeks; otherwise, the original 18% interest rate would apply.
• The judgment was passed under the discretionary power of Article 142 of the Constitution.

This ruling clarifies that while arbitrators have the power to award interest, courts can intervene when the interest rate is deemed excessive, ensuring fairness in government contract disputes.

Petitioner Name: Post Graduate Institute of Medical Education and Research Chandigarh.
Respondent Name: M/S Kalsi Construction Company.
Judgment By: Justice R. Banumathi, Justice A.S. Bopanna.
Place Of Incident: Chandigarh.
Judgment Date: 02-09-2019.

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