M/s Larsen Air Conditioning and Refrigeration Company vs Union of India & Ors.
Background
A contractor's disputes with the Union of India over a government contract were referred to arbitration in 1997, and the arbitral tribunal in 1999 awarded the contractor 18% pendente lite and future compound interest on several claims, applying the pre-amended Arbitration and Conciliation Act, 1996. The Union's challenge to the award was dismissed by the District Court, but on appeal the Allahabad High Court reduced the interest rate from 18% compound to 9% simple, treating it as an "unjustifiably high" rate.
Decision Breakdown
The Supreme Court held that because the arbitration was conducted under the 1996 Act, Section 31(7)(b) fixed a statutory default interest rate of 18% per annum unless the award itself said otherwise, and this award did not. Courts reviewing awards under Sections 34 and 37 of the 1996 Act have a very narrow role: unlike the repealed 1940 Act, the 1996 Act gives courts no power at all to modify an award; they may only set it aside on limited grounds such as patent illegality going to the root of the matter or breach of natural justice. The High Court's reliance on precedents like Kalsi Construction was misplaced, since those cases had invoked the Supreme Court's special Article 142 power on exceptional facts, not a general power to revise interest rates. The Court restored the original 18% compound interest and directed payment within eight weeks.
Lesson Learnt
Once an arbitral tribunal has fixed an interest rate within its statutory powers, ordinary courts hearing a challenge to that award cannot simply substitute their own view of a "fairer" rate: their power under the 1996 Arbitration Act is limited to setting aside an award on specific legal grounds, not rewriting its terms.