Delhi HC: Arbitrator Must Assign Reasons for Interest Rates Awarded Under Section 31

Arbitral tribunals cannot arbitrarily fix interest rates without providing a discernible basis or reasoning, as such awards suffer from patent illegality and violate the statutory mandate for reasoned orders. The Delhi High Court has clarified that accepting the principal amount of an award does not estop a party from challenging the adequacy of the interest rate, reaffirming the court's power to sever and set aside specific portions of an award.

A Single Judge bench of Justice Avneesh Jhingan heard the challenge against an arbitral award where the petitioner, a non-banking financial company, contested the reduction of interest from the contractual rate to a lower rate without justification. The court examined whether the arbitrator's discretion under Arbitration and Conciliation Act, 1996 to award 'reasonable' interest allows for non-speaking determinations.

Key Takeaways

Mandatory Reasoned Awards

Arbitrators are legally bound to record the basis for determining the rate of interest, failing which the award becomes vulnerable under Section 31(3).

No Estoppel on Interest Challenges

Receiving the principal awarded sum or agreeing to a repayment schedule does not constitute a waiver of the right to challenge the interest rate in court.

Doctrine of Severability Applied

Courts exercising jurisdiction under Section 34 can set aside specific, severable parts of an award, such as interest, while preserving the rest of the findings.

Adherence to Statutory Benchmarks

For post-award interest, tribunals must determine the 'current rate of interest' as defined by the Interest Act, 1978 before exercising discretion.

Court Observations on Interest and Reasoned Awards

The Court noted that while Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 grants arbitrators discretion to award interest at a "reasonable" rate, this discretion is not absolute and must be backed by evidence or logic. The bench observed that in the present case, despite a contractual agreement for a 14% floating rate, the arbitrator awarded 10% simple interest without any recorded basis.

The Court, in its reasoning, observed: "The award of pendente lite interest being unsupported by any reasons or discernible basis for determination of the ROI is contrary to Section 31(7)(a) of the Act and falls foul of Section 31(3) of the Act... The granting of post-award interest is bereft of discernible basis, non-speaking, in violation of Section 31(3) of the Act, and suffers from patent illegality and is liable to be set aside."

Regarding the argument that the petitioner was estopped from challenging the rate after accepting payments, the court distinguished the ruling in Sporty Solutionz Pvt. Ltd. v. Badminton Association of India, noting that a demand for payment without an unequivocal abandonment of statutory remedies does not bar a challenge. The Court has following directions:

"The issue no. 3 is severable not intricately connected to the other claims adjudicated by the arbitrator. Consequently, the petition is allowed and the award to the extent of grant of interest is set aside."

Ratio

An arbitral award that grants interest without disclosing the basis or determining the prevailing market rates constitutes a patent illegality under Section 31(3) and Section 31(7) of the Arbitration and Conciliation Act, 1996. Furthermore, the power to set aside an award under Section 34 includes the inherent authority to sever and nullify only the invalid portions, such as an unreasoned interest component, without disturbing the entire award.

Background

The dispute originated from a loan agreement dated March 14, 2016, where the respondent availed a facility of Rs. 11.50 crores. Due to defaults, the petitioner invoked arbitration. The arbitrator eventually awarded approximately Rs. 9.98 crores but reduced the interest to 10% per annum for both pendente lite and post-award periods, deviating from the contractual 14% rate. The petitioner challenged this reduction under Section 34, arguing it was unreasoned. The respondents contended that by accepting the award amount in installments, the petitioner had 'blown hot and cold,' citing Rajasthan State Industrial Development and Investment Corporation and Anr. v. Diamond & Gem Development Corporation Limited & Anr. ( "(2013) 5 SCC 470": 2013 CaseBase(SC) 197). However, the High Court relied on Gayatri Balasamy v. ISG Novasoft Technologies Ltd. to affirm that the interest portion was severable and that the arbitrator’s failure to provide reasons for the specific rate choice necessitated judicial intervention.

Case Details:
Case No.: O.M.P. (COMM) 533/2023
Case Title: Religare Finvest Limited V. Atelier Automobiles Pvt. Ltd. & Ors.
Appearances:
For the Petitioner(s): Mr. Sanjeev Singh, Ms. Sandipa Bhattacharjee, Ms. Sneha Mondal & Mr. Kartik Sharma, Advs.
For the Respondent(s): Mr. Tarun Gupta & Mr. Hirday Virdi, Advs.

Source: 2026 CaseBase(DEL) 5692