Delhi High Court Partly Sets Aside Arbitral Award For Denying Pre-Reference Interest Without Reasons

The Delhi High Court has held that where an arbitrator, despite finding prolonged and unjustified delay by an insurer in settling a claim, fails to provide reasons as mandated under Section 31(3) of the Arbitration and Conciliation Act, 1996 for denying pre-reference interest, the award suffers from patent illegality and is liable to be set aside.

Partly setting aside an award in a dispute between Panchanan International Private Limited and the Oriental Insurance Company Limited, a Bench of Justice Mini Pushkarna observed, “Once the learned Arbitrator found the respondent responsible for prolonged and unjustified delay, denial of interest for pre-reference period required cogent reasons, which are entirely absent in the impugned Arbitral Award.”

The dispute arose from a fire at the warehouse of Panchanan International Private Limited in Delhi on April 25, 2017, under a Rs 30 crore Standard Fire and Special Perils Policy issued in May 2016. The company had obtained the policy to cover losses including fire incidents.

A surveyor assessed the loss at Rs 20.65 crore in July 2018, but the insurer, after nearly 20 months, offered only Rs 65.86 lakh as full and final settlement, leading the company to invoke arbitration.

By an award dated August 28, 2023, the sole arbitrator directed payment of ₹20.65 crore with 10% interest from October 16, 2021, but denied pre-reference interest without giving reasons.

Challenging the award under Section 34, the company argued that the arbitrator failed to grant pre-reference interest despite acknowledging delay, failed to adjudicate its challenge to an additional 5% deduction of Rs 1.37 crore towards errors and omission/dead stock, and wrongly accepted valuation of certain stock at 9% of MRP.

The insurer contended that grant of interest was discretionary.

The court held that while arbitral tribunals have discretion to award interest under Section 31(7), such discretion must be supported by reasons under Section 31(3). Noting that the arbitrator had found inordinate delay, including failure to settle the claim within 30 days under IRDAI regulations, the Court said the absence of reasons for denying pre-reference interest constitutes patent illegality.

“Absence of reasons violates Section 31(3) of the Arbitration Act and constitutes a recognized ground of patent illegality under Section 34(2A) of the Arbitration Act.”

On deductions, the court found that the arbitrator failed to adjudicate the company's challenge to the additional 5% deduction and instead dealt only with the contractual excess, rendering the finding perverse.

However, it upheld the surveyor-based valuation of stock, holding that such findings could not be interfered with under Section 34.

Accordingly, the court partly set aside the award to the extent of denial of pre-reference interest and the finding on additional deduction, granting liberty to the company to pursue fresh arbitration on these issues.

For Petitioner (Panchanan International Private Limited): Advocates Manish K. Jha, Rajat Joneja, Himanshu Mishra.

For Respondent (The Oriental Insurance Company Limited): Advocate Abhishek Gola.