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Executive Engineer (R and B) and Others vs Gokul Chandra Kanungo (Dead) through his LRs.

Civil Appeal · 2022 INSC 1043Decided 30 Sept 2022
Civil Appeal No. 8990 of 2017
B.R. Gavai · B.V. Nagarathna

Background

The respondent contractor was awarded a road construction contract in 1971, which was completed years late in 1977. After remaining silent for about 12 years, he issued a claim notice in 1989 and eventually filed a suit seeking reference to arbitration; further delays (about 10 more years) followed before an arbitrator was finally appointed in 2001. In 2004, the arbitrator awarded about Rs. 9.2 lakh on the merits of the claim, but also awarded interest at 18% per annum for the entire period since 1976 (including the years of the contractor's own inaction), amounting to nearly five times the principal award. The District Court and the Orissa High Court both upheld the award, prompting this appeal by the government engineering department.

Decision Breakdown

The Supreme Court held that under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, an arbitrator has discretion to award interest at a rate it "deems reasonable," but must exercise that discretion with application of mind, considering the parties' conduct and the facts of the case, which the arbitrator here failed to do. The Court found the contractor's own prolonged inaction (roughly 12 years of silence after project completion, and roughly 10 more years of delay before the arbitrator was appointed) disentitled him to interest for those specific periods, since a party cannot benefit from its own lapses. Exercising its power under Article 142 of the Constitution and relying on precedents (Rajendra Construction Co., Krishna Bhagya Jala Nigam, and McDermott International), the Court left the principal award of about Rs. 9.2 lakh undisturbed but reduced the interest rate for all remaining periods (pre-reference, pendente lite, and post-award) from 18% to 9% per annum, and excluded interest altogether for the periods of the contractor's own delay.

Lesson Learnt

An arbitrator's discretion to award interest is not unlimited. It must be exercised with reasons tied to the facts, and a claimant who delays pursuing his own claim for years cannot expect interest to run for those periods of his own inaction; courts (including the Supreme Court under Article 142) can and do moderate exorbitant interest awards to serve the interests of justice.

Official source (sci.gov.in)View Judgment (PDF)

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