2001 (11) TMI 1064 - SC - Indian Laws

Arbitral award largely upheld; arbitrator rightly rejected unpleaded counterclaim, second reference allowed for post-final bill claims; interest reduced to 6%

The SC upheld the arbitral award largely, holding the arbitrator rightly declined an unpleaded/unproved counter-claim or set-off and that a second ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the arbitrator committed error by failing to consider a counter-claim or set-off not pleaded or proved before the arbitrator. 2. Whether a second reference to arbitration was barred by Order 2 Rule 2 CPC where additional claims arose after preparation of the final bill. 3. Whether the arbitrator had power to award interest despite an agreement clause (Clause 23) allegedly prohibiting payment of interest on delayed payments, when that proviso was not raised before the arbitrator or lower courts. 4. Whether the award should be set aside or modified for error apparent on the face of the record, misconduct by the arbitrator, or on grounds available under the Arbitration Act; and if not, whether the Court may exercise its power to modify the rate of interest awarded. ISSUE-WISE DETAILED ANALYSIS Issue 1: Failure to consider counter-claim or set-off not pleaded/proved Legal framework: An arbitrator is required to decide issues that are properly before him, i.e., those pleaded and proved in the reference; unpleaded claims or set-offs, raised belatedly after the reference, are generally not to be considered. Precedent Treatment: The judgment follows the established principle that absence of pleading and proof of a counter-claim or set-off in the written statement/pleadings precludes its consideration by the arbitrator; no novel precedent was overruled or distinguished. Interpretation and reasoning: The Court noted that no set-off or counter-claim had been pleaded or proved by the appellant in the written statement before the arbitrator; the alleged basis (Accountant General's objection) was not placed on record during arbitration and the attempt to raise it after four years of reference was inappropriate. The High Court correctly observed that no legal basis was shown requiring the arbitrator to entertain such an after-thought claim. Ratio vs. Obiter: Ratio - an arbitrator need not consider counter-claims or set-offs that were not pleaded or proved before him and are raised only belatedly after the reference. Obiter - none additional on this point. Conclusion: The arbitrator did not err in declining to consider the unpleaded counter-claim; this ground does not warrant setting aside the award. Issue 2: Maintainability of second reference under Order 2 Rule 2 CPC Legal framework: Order 2 Rule 2 CPC governs the bar on subsequent suits/references where matters could have been included in prior pleadings; applicability depends on timing and nature of additional claims. Precedent Treatment: The Court accepted the arbitrator's and lower courts' approach that subsequent disputes arising after preparation of the final bill can form the basis of a fresh reference; no existing authority was overruled. Interpretation and reasoning: The dispute concerning subsequent claims arose only after the first reference - i.e., after preparation of the final bill. The Court agreed with the Additional District Judge and High Court that Order 2 Rule 2 CPC did not bar the second reference in these circumstances. The contention that the second reference was barred was not pressed before the High Court but was also found to lack merit on substance. Ratio vs. Obiter: Ratio - when additional claims arise post-final bill and post-first reference, Order 2 Rule 2 CPC does not necessarily bar a subsequent reference; each case depends on timing and substance. Obiter - procedural lapse in raising the point before the High Court. Conclusion: The second reference was maintainable; this ground fails to invalidate the award. Issue 3: Power to award interest despite contractual clause allegedly prohibiting interest (Clause 23) Legal framework: Courts/arbitrators interpret contract clauses on interest in light of evidence and submissions; relief by way of interest depends on whether the party raised the contractual bar before the adjudicator and on evidence interpreting the clause. Precedent Treatment: The respondent relied on a prior decision of this Court holding a similar clause did not prohibit interest; however, the present Court did not decide that issue on its merits because the point was not raised at the arbitration or lower courts. Interpretation and reasoning: The appellant never contended before the arbitrator, District Court, or High Court that Clause 23 prohibited payment of interest; nor was evidence led to interpret the clause. The parties and arbitrator proceeded on the understanding that there was no bar on granting interest. Because the issue was not raised at any stage, the Court declined to rule on the substantive interpretation of Clause 23. The Court emphasized the limited scope for setting aside an award - confined to statutory grounds under the Arbitration Act and established case law - and found no error apparent on the face of the record or misconduct by the arbitrator on this point. Ratio vs. Obiter: Ratio - failure to raise a contractual bar to interest before the arbitrator or in subsequent proceedings precludes challenging an award on that ground; scope to interfere is limited to statutory/arbitral grounds. Obiter - reference to an earlier decision interpreting a similar clause was noted but expressly not decided here. Conclusion: The arbitrator's award of interest was not vitiated by Clause 23 in these proceedings because the prohibition was not pleaded or proved; the Court declined to decide the substantive interpretation of Clause 23. Issue 4: Scope for setting aside/modifying award; judicial modification of rate of interest Legal framework: Courts may set aside an arbitral award only on grounds available under the Arbitration Act (e.g., arbitral misconduct, jurisdictional error, patent illegality where applicable); however, courts retain power to modify awards in appropriate cases, including adjustment of interest, subject to legal limits. Precedent Treatment: The Court applied settled standards limiting interference with awards and, while not setting aside the award, exercised its discretionary power to modify the rate of interest having regard to dispute circumstances and overall equities. Interpretation and reasoning: Finding the award to be reasoned and not suffering from error apparent on face of record or arbitrator misconduct, the Court nevertheless considered the dispute and overall circumstances and reduced the interest rate awarded by the arbitrator (and reduced on appeal) to a uniform rate of 6% per annum for specified claim periods. The modification was a judicial adjustment of relief rather than a nullification of the award; parties were directed to bear their own costs. A separate application by the claimant to enhance interest was therefore rendered unsustainable and dismissed. Ratio vs. Obiter: Ratio - where an arbitral award is otherwise valid and not vitiated by statutory grounds, a Court may modify the quantum of interest awarded if equitable and legally justified; interference to adjust interest does not require setting aside the award. Obiter - the exact parameters for such modification are case-specific and were not exhaustively reformulated. Conclusion: The award was not set aside; the Court reduced the interest to 6% p.a. for the periods specified and disposed of related enhancement claims accordingly. The limited scope for interfering with awards under the Arbitration Act was reiterated.