Case: M/S SHAHI AND ASSOCIATES Vs. STATE OF U.P

2. The appellant is a registered partnership firm engaged in civil construction projects for the government of Uttar Pradesh. The appellant entered into an agreement dated 08.07.1993 with the Superintendent Engineer, Drainage Division, District Gonda, U.P. for work related to the Gola Pump House. Owing to certain disputes that arose between the parties with respect to the rate of payment for additional work under the agreement, the appellant served a notice invoking arbitration on the respondents and filed the claim petition on 11.09.1999. Shri B.M. Arora was appointed as the sole Arbitrator on 12.10.1999 and the proceedings commenced on 27.10.1999 under the Arbitration and Conciliation Act, 1996 (for short the Act of 1996).The sole Arbitrator passed an award on 24.12.2001, whereby the appellant was awarded a sum of Rs. 17, 86, 339/-(seventeen lakhs eighty six thousand three hundred thirty nine). The Arbitrator further held that the interest on the sum awarded would be payable in accordance with Section 31(7)(b) of the Act of 1996, i.e. 18% p.a. from the date of the award till the date of actual payment. The operative portion of the awardto the above, the petitioner becomes entitled for receiving a total amount of Rs. 17,86,339.00 (Rs. Seventeen lac eighty six thousand three hundred thirty nine only) and the petitioner is hereby awarded thethe date of award to the actual date of payment an interest at the rate which is given in the provisions of section 31(7)(b) of the Arbitration and Conciliation Act, 1996 shall also be payable on Rs. 17,86,339.00 which is the amount of declared award. Both the parties would bear their own cost related with the arbitration.The respondents 1 and 2 being aggrieved by the aforesaid award filed civil miscellaneous case No. 5 of 2002 before the District Judge, Gorakpur, under Section 34 of the Act of 1996. The District Judge while upholding the sum awarded by the Arbitrator, reduced the rate of interest on the sum awarded from 18% p.a. to 6% p.a. by relying on para 7-A of Section 24 of the U.P. Amendment Act.Being aggrieved by the aforesaid judgment dated 28.10.2006, both the parties filed F.A. F.O. Nos. 3728 of 2007 and 947 of 2007 before the High Court. The High Court by way of impugned common final judgment and order has dismissed both the appeals. In the course of the order, the High Court has observed that the District Judge has correctly reduced the rate of interest from 18% p.a. to 6% p.a. in view of para 7-A of Section 24 of the U.P Amendment Act.

Court's reasoning:
11. Section 31(7)(b) of the Act of 1996 clearly mandates that, in the event the Arbitrator does not give any specific directions as regards the rate of interest on the amount awarded, such amount shall carry interest @ 18% p.a. from the date of award till the date of payment. Since the Arbitration Act, 1940 has been repealed by way of Section 85 of the Act of 1996, the Schedule to the Arbitration Act, including the State amendment, also stands repealed. The only exception is provided in sub-section (2)(a) of Section 85 where a proceeding which had commenced when the Arbitration Act of 1940 was in force and continued even after coming into force of the Act of 1996, and all parties thereto agreed for application of the old Act of 1940. Therefore, the provisions of Arbitration Act, 1940 including the State amendment namely para 7-A of Section 24 of U.P. Amendment Act will have no application to the proceedings commenced after coming into force of the Act of 1996.In the instant case, though the agreement was earlier to the date of coming into force of the Act of 1996, the proceedings admittedly commenced on 27.10.1999 and were conducted in accordance with the Act of 1996. If that be so, para 7-A of Section 24 of the U.P. Amendment Act has no application to the case at hand. Since the rate of interest granted by the Arbitrator is in accordance with Section 31(7)(b) of the Act of 1996, the High Court and the District Judge were not justified in reducing the rate of interest by following the U.P. Amendment Act.The Act of 1996 has come into force with effect from 22.08.1996. Section 85 of the Act of 1996 expressly repeals the provisions of the Arbitration Act, 1940. Thus, the Act of 1996 would be applicable to all arbitral proceedings which have commenced on or after the said Act came into force. Para 7-A of Section 24 of the U.P. Amendment Act was an amendment to the First Schedule of Arbitration Act, 1940. This amendment was introduced by the U.P. Act No. 57 of 1976. The provisions of the Arbitration Act, 1940 including the State amendment will have no application to the proceedings commenced after coming into force of the Act of 1996.