Factual Background

SAIL executed a Charter Party (“CP”) with JOPL (an international entity) for delivery of coking coal. Separately, it had also entered into a Contract of Affreightment (COA) with JOPL for a period of 12 months, to deliver limestone. SAIL claimed that because JOPL failed to provide a vessel under the COA (a claim that was in itself disputed), JOPL was in breach of the COA. SAIL also claimed that they incurred additional expenses by having to make alternate arrangements for a shipment. SAIL withheld certain payments to JOPL as damages for the alleged breach, quantifying them as the additional expenses incurred i.e. as a set-off between the damages and payments owed. The issue however, was that the payments were withheld by SAIL under the separate CP. An arbitration was initiated by JOPL due to withholding of USD 515,739.88/- by SAIL. JOPL also sought for an additional interest of 12% per annum compounded with quarterly rests on that amount. The Arbitral Tribunal held in favour of JOPL and found that the CP was unconnected with the COA. Unhappy with the outcome, SAIL filed an application under Section 34 of the Arbitration and Conciliation Act 1996 (“Arbitration Act”) before the Delhi High Court for impugning the said award. The award was impugned on three fronts, that the Tribunal failed to appreciate SAIL’s claim of set off, that JOPL’s Statement of Defence was not supported by any affidavit of truth, and that the award of interest at the rate of 12% per annum compounded with quarterly rests, was disproportionate, unreasonable and hence against the ‘fundamental policy of the Indian law’.

The court’s decision

The Court rejected the contention laid down by SAIL regarding set off while observing that “whether set off could be claimed is a matter of discretion of the Court adjudicating the claim. SAIL could not claim it as a matter of right” (paragraph 20). The court also rejected the contention in respect of the non-inclusion of supporting documents with the Statement of Defence. The Court then delved into the question of “fundamental policy of Indian law” being an important consideration for impugning an award. At the outset, the Court emphasized that an award in an International Commercial Arbitration can be set aside only on the grounds set out in Section 34(2) of the Arbitration Act. The Court then observed that there were no grounds to show that the award was against the fundamental policy of the Indian law. While citing Renusagar Power Co, Ltd. v. General Electric Co. [1994 Supp (1) SCC 644] and Associate Builders v. Delhi Development Authority [(2015) 3 SCC 49] the court held that recovery of compound interest would not contravene the public policy of Indian law. It may also be worth noting that during the course of arguments, JOPL had submitted that it was willing to accept the awarded amount with 6% interest instead of 12% to put a rest to the disputes. The court adjourned the hearing for four weeks allowing SAIL to consider JOPL’s offer. The offer was rejected by SAIL. The court thereafter dismissed SAIL’s application and imposed costs quantifying at Rs. 50,000/- .

Aarna Comment

With this judgement, the Delhi High court reaffirmed the principle that the scope of interference with an arbitral award under Section 34 of the Arbitration Act is limited, by finding that recovery of compound interest by itself would not contravene ‘fundamental policy of Indian law’. The court however agreed that disregarding orders by the superior courts in India could be a contravention of the fundamental policy of Indian law as observed in Renusagar.