Source: Supreme Court 

Why in News?

A bench of Justice Pankaj Mithal and Justice PS Narsimha held that it is the duty of the Arbitral Tribunal and the Court alike without exception to examine the contract for it is the basis of the legal relationship.          

• The Supreme Court held this in the case of Pam Developments Private Limited v. State of West Bengal & Anr.   

What is the Background of Pam Developments Private Limited v. State of  West Bengal & Anr. Case? 

• The respondent (State of West Bengal), invited tenders for building roads and the tender of Appellant was accepted. 
• There was a delay in work but it got completed. 
• The Appellant raised a bill amounting to Rs. 77,85,290 and seven other claims under different heads. 
• The respondent denied liability and hence the matter was referred to arbitration. 
• The Arbitrator gave an award on 30th January 2018. The AWard provided that the respondents are liable to the tune of Rs. 1,37,25,252 along with interest. 
• This award was challenged in the Court under Section 34 of Arbitration and Conciliation Act, 1996 (A&C Act). 
• The challenge was allowed in part by the district judge who set aside the following claims: 
  • Claim no. 1: loss of business 
  • Claim no. 2: uneconomic utilisation of plant and machinery 
• Aggrieved by the decision of District Court an appeal was filed under Section 37 of A&C Act against the order setting aside the above claims in the High Court. 
• The Respondent filed a cross appeal seeking setting aside of rest of the claims as well. 
• The High Court of Calcutta under Section 37 of A&C Act set aside certain claims and restored the other. 
•  The Supreme Court in this case primarily dealt with the relief given with respect to the following three claims: 
  • Claim no. 3: Loss caused due to idle labour, machinery etc. 
  • Claim no. 4: Interest on delayed payment of running account bills 
  • Claim no. 6: Claim related to interest 

What were the Court’s Observations? 

• With respect to Claim 3: 
  • The Supreme Court held that the High Court was correct when it came to the conclusion that awarding any amount towards idle machinery etc is prohibited under the ‘Special Terms and Conditions’ of the contract.  
  • Thus, with respect to this claim the Court held that the conclusion drawn by the High Court was correct. 
• With respect Claim 4: 
  • The Court held that there was nothing perverse in the finding of the arbitral Tribunal with respect to this claim. 
  • Hence, the High Court was wrong in interfering with the arbitral tribunal on this count. 
• With Respect Claim 6: 
  • The Court here discussed the law on the power of the Arbitrator to grant interest at different stages of the suit under Section 31 (7) of A&C Act. 
  •  The Court held that under the 1996 Act the power of the arbitrator to grant interest is governed by Section 31 (7) of A&C Act.: 
    • The first part provides the Arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise agreed by the parties. 
    • The second part provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest, from the date of the award to the date of payment. 
    • It was further held by the Court that the power of the Arbitrator to award pre-reference and pedente lite interest is not restricted when the agreement is silent on whether the interest can be awarded or does not contain a specific term that prohibits the same.  
• Hence, the Court held that the High Court was wrong in interfering with the the Arbitral award with respect to grant of pe-reference interest as the contract between the parties does not prohibit the same.   

What is Arbitral Tribunal?

• Section 2 (c) of the A&C Act provides that “arbitral tribunal” means an sole arbitrator or a panel of arbitrators. 
• An arbitrator is a neutral third party that acts as a judge in arbitration proceedings. 
• Appointment of Arbitrators 
  • As per Section 11 (1) of A&C Act a person of any nationality can be an arbitrator. 
  • The parties are free to agree on the procedure for appointing the arbitrator or arbitrators 
  • If the parties cannot reach an agreement in an arbitration with three arbitrators: 
    • Each party shall appoint one arbitrator 
    • The two appointed shall appoint the third arbitrator who shall act as presiding arbitrator 
  • If the appointment as above is not possible the appointment shall be made at the request of the party by the Supreme Court or the High Court or any person or institution designated by the Court. 
  • In an arbitration of sole arbitrator if the parties fail to agree on the arbitrator within 30 days the appointment shall be made upon the request of the party by the Supreme Court or by the High Court or any person or institution designated for this purpose.

What are the Duties of Arbitral Tribunal? 

• Arbitrator should be independent and impartial 
  • For this purpose Fifth Schedule in the Act is provided. 
  • The grounds stated in Fifth Schedule shall guide in determining the circumstances that give rise to justifiable doubt as to independence and impartiality. 
  •  Thus, if such circumstances exist the arbitrator shall not be impartial. 
• Arbitrator has a duty to disclose 
  • As per Section 12 of the Act it is the duty of the arbitrator to disclose any circumstance: 
    • That would give justifiable doubt as to impartiality 
    • Likely to affect his ability to devote sufficient time and to complete arbitration in 12 months. 
  • Also, Explanation 2 provides that the disclosure shall be done in the manner specified in Sixth Schedule. 
• Arbitrator has a duty to effectively resolve the dispute 
  • It shall be the duty of the arbitrator to resolve the dispute effectively and speedily. 
  • Section 29A of the Act provides that the award in matters other than international commercial arbitration shall be made within a period of twelve months from the date of completion of pleadings. 
  • The proviso in this Section provides that in case of International Commercial Arbitration an endeavor shall be made to dispose of the matter within 12 months. 
• Arbitrator has a duty to interpret or correct the award 
  • Section 33 of the Act provides that there can be correction and interpretation of award. 
  • Within 30 days from the receipt of the arbitral award  
    • A party may request the arbitral tribunal to correct any clerical or typographical error 
    • A party may request the arbitral tribunal to give specific interpretation of a specific point or part of award.

What is the Power of an Arbitrator with Respect to Contract? 

• Bharat Cookng Coal Limited v. LK Ahuja (2004) 
  • The Supreme Court in this case held that when an award made by the arbitrator is one can be said to be made by a reasonable person no interference is called for. 
  • However, if the arbitrator exceeds the terms of agreement or passes an award in absence of any evidence, which is apparent on the face of the record the same could be set aside. 
• Steel Authority of India Limited v. JC Budharaja, Government and Mining Contractor (1999) 
  • The Court held that the arbitrator derives it’s authority from the contract and he acts in manifest disregard of the contract the award given by the arbitrator would be an arbitrary one. 
  • The Court held that the arbitrators must be careful in giving the award and should limit themselves to contractual terms.  
  • The function of the arbitrator is to act within the limits of the contract. 
• Mc Dermott International Inc v. Burn Standadrd Co. Ltd. (2006) 
  • Interpretation of the contract is the matter for arbitrator to determine, even if it gives rise to a determination of question of law. 
  • The arbitrator can take into consideration the following while determining the contract clauses: 
    • Nature of the contract 
    • Nature of the Arbitration Agreement 
    • Scope of Arbitration Agreement 
    • Conduct of the parties.