Arbitrator’s Failure to Enforce Contractual Terms in Award Leads to Reversal by High Court
In a significant judgment, the Delhi High Court has overturned an arbitral award that dismissed a claim for interest despite the existence of a contractual stipulation for the same. The case, M/s Khubi Ram Rajiv Kumar & Co v. M/s Naveen Enterprises, involved a dispute over unpaid invoices and the application of interest as per terms printed on the invoices.
Presided over by Justice Chandrasekharan Sudha, the court found that the arbitrator had erred in failing to enforce the contractual terms agreed upon by the parties. The appellant, M/s Khubi Ram Rajiv Kumar & Co, a commission agency in the cloth and fabrics business, contended that the arbitrator's decision was contrary to Section 28(3) of the Arbitration and Conciliation Act, 1996, which mandates that the arbitral tribunal must take into account the terms of the contract and trade usages.
The dispute arose when M/s Khubi Ram Rajiv Kumar & Co sought recovery of outstanding payments along with interest from M/s Naveen Enterprises. Despite having an arbitration clause and a specific interest clause printed on the invoices, the arbitrator dismissed the claim for interest in its award dated March 31, 2014. The district court upheld this decision, leading to an appeal under Section 37(b) of the Arbitration and Conciliation Act.
The High Court, in its order dated December 20, 2025, emphasized the importance of enforcing the contractual terms, particularly the interest clause, which stipulated a rate of 1.75% per month. It highlighted that the failure to award interest despite an explicit contractual stipulation is contrary to public policy and statutory provisions under the Arbitration and Conciliation Act.
The judgment also referenced key Supreme Court rulings, including Foong v. Saw Pipes Ltd. and Interstate Construction v. National Projects Construction Corporation Ltd., reinforcing the arbitrator's duty to enforce contract terms and the power to award interest.
The court set aside both the arbitral award and the district court’s judgment to the extent they rejected the claim for interest. It directed that interest at 1.75% per month (21% per annum) be awarded from the date the amount became due until the date of the arbitral award, and thereafter at 18% per annum until realization.
This decision underscores the judiciary's role in ensuring that arbitration awards align with contractual obligations and statutory frameworks, thereby promoting fairness in commercial transactions.
Bottom Line:
Arbitration Award - Arbitrator obligated to enforce contractual terms - Failure to award interest despite explicit contractual stipulation is contrary to Section 28(3) of the Arbitration and Conciliation Act, 1996.
Statutory provision(s): Arbitration and Conciliation Act, 1996 - Sections 28(3), 31(7)(a), 34(2), 37(b)
M/s Khubi Ram Rajiv Kumar & Co v. M/s Naveen Enterprises, (Delhi) : Law Finder Doc Id # 2825550
