Arbitration: Golden Opportunity to Reconsider HPHUDA v RS Rana Lost

Posted by S. Badrinath on 5 October 2015 in Analysis

Followers of Indian arbitration and readers of this blog (here) would be well aware of the decision of the Supreme Court in HPHUDA v RS Rana (2012) where the court held that if the award amount (which is the subject of challenge under Section 34 of the Arbitration and Conciliation Act, 1996) or under Section 37 of the said Act) where the court held that deposit of the Award Amount in the court amounted to payment to the Respondent and hence, the party challenging the arbitral award was not obligated to pay post-award interest from the date of deposit in case if the challenge proceedings ultimately failed.

Recently, the Supreme Court had the occasion to consider a similar plea as made in HPHUDA in the case of Union of India v. MP Trading & Investment Rac. Corp. Ltd. (28.09.2015). In the course of challenge proceedings, the High Court directed the Award Debtor to deposit the award amount in court. On deposit of the same, the Award Holder applied to the court that the deposit be converted into fixed deposit. The Court passed directions as prayed for.

Before the Court, Union of India relied on HPHUDA and argued that once the amount was deposited and interest accrued on the fixed deposit, the Respondent was not entitled to any interest. The Court agreed in principle with Union of India and held that the Award Holder was entitled to interest as per award from the date of award till date of deposit and “shall be entitled only to the interest accrued on the principal amount in terms of the Fixed Deposit made as per the direction of the High Court.”

There was a subsidiary point that the Award Debtor did not deposit the entire amount in court, for which the Supreme Court held that the Award Holder would be entitled to interest as per the award for that amount.

In holding so, the Supreme Court has lost a golden opportunity to reconsider the law as held by the Supreme Court in HPHUDA case. HPHUDA was decided wrongly for the following reasons:

a) Allowing the Award Debtor to save on post-award interest by permitting him to deposit the Award Amount or a part thereof in the court would be unjust on the Award Holder as the latter would be denied the benefit of the Award Amount till the challenge is ultimately decided.

b) The court in HPHUDA created a legal fiction whereby deposit of the Award Amount in the court even without the amount reaching the Award Holder amounted to payment. This legal fiction is without backing of statute or precedent.

c) Since HPHUDA denies the Award Holder the fruits of the Award for the period of challenge, it is contrary to the objective of award of interest: to compensate the claimant for the unjustified retention of money. The Award Debtor may simply deposit the Award Amount in court and keep at the challenge thereby denying the benefit of the Award Amount to the Award Holder for several years.

d) Interest also acts as a negative incentive on the Award Debtor to challenge to the award unnecessarily or on flimsy grounds. Such a negative incentive will cease to exist if no interest is imposed on deposit till the challenge proceedings come to an end. This would provide fillip to unnecessary challenge to arbitral awards and would lead to results antagonistic to the concept of finality of arbitration, which is one of the chief characteristics of arbitration.

For the aforesaid reasons, HPHUDA needs to be reconsidered. The Supreme Court has lost a golden oppportunity in reconsidering the correctness of HPHUDA. For the aforesaid reasons, it should, if at all such an issue arises in future.

For critiques of HPHUDA, see here and here.

[There is a typographical error in the MP Trading Judgement- In the second para, it reads “Arbitration and Conciliation Act, 1956” when it should read as “1996”.]

First published here.

Original author: Badrinath Srinivasan

Comments

Anonymous 7 Oct 2015, 12:12

+0 -0

One quick question: If the Award Debtor deposits the money with the Court (instead of showing the amount as a liability on balance sheet), and if the Court directs that the money be kept as a term deposit on which interest accrues in favour of the litigant who ultimately succeeds in the appeal, how is there a monetary loss to either litigant?

Badrinath Srinivasan 7 Oct 2015, 13:22

+0 -0

Thanks for the comment. The question is relevant and requires clarification. The general rate of interest for FD in banks is around 7.00-8.00 %. A person who is otherwise entitled to more interest (such as the default interest rate provided by the 1996 Act- 18% or a higher interest rate as the Law Commission's Report suggests- note that the Law Commission report also provides for pendentelite interest to be included within ) would be denied of the higher amount as interest (difference between entitlement interest and FD interest). Although this amount might look small, in high stake cases or in cases where the challenge proceedings finally come to an end, the amount could be substantial. What was expected from the Supreme Court was a more nuanced approach in dealing with the issue. The Supreme Court seems to have given a peripheral treatment to it. Possibly, the courts were not properly assisted by counsel? If the counsels had made their submissions covering all arguments, did the court reject those? If so, on what grounds? Such a terse order.

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