The Delhi High Court has reaffirmed that an arbitral award lacking reasoned justification for denying interest and costs is not merely flawed - it is in conflict with the public policy of India. This judgment reinforces the statutory and constitutional imperative that arbitral decisions must be transparent, intelligible, and grounded in logical analysis to preserve the integrity of alternative dispute resolution.
Background & Facts
The Dispute
The petitioner, Gorkha Security Services, was contracted by the Directorate of Health Services to provide security personnel across Delhi dispensaries. Despite contractual obligations to adjust wages in line with government notifications, the Respondent withheld enhanced minimum wage payments from February 2011 to October 2014. The Petitioner bore the financial burden of paying higher wages to its staff, while submitting bills at the lower, unrevised rates.
Procedural History
- 2010: Contract awarded to Petitioner for two years, extendable till March 2015
- 2015: Petitioner issued legal notices demanding payment of outstanding bills and enhanced wages
- 2015: Petitioner invoked arbitration clause under NIT terms
- 2016: Delhi High Court appointed Arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996
- 2017: Arbitral Tribunal issued award allowing Claims 1, 2, and 3, but disallowing Claim 4 (interest and costs)
- 2017: Petitioner filed Section 34 petition challenging only the rejection of Claim 4
Relief Sought
The Petitioner sought to set aside the portion of the arbitral award rejecting its claim for interest on delayed payments and arbitration costs, arguing that the Arbitrator provided no intelligible reasoning for this denial, thereby violating Section 31(3) of the Act and the public policy of India.
The Legal Issue
The central question was whether an arbitral award that fails to provide any intelligible reasoning for denying interest and costs constitutes a violation of Section 31(3) of the Arbitration and Conciliation Act, 1996, and thereby conflicts with the public policy of India under Section 34(2)(b)(ii).
Arguments Presented
For the Petitioner
The Petitioner relied on Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. and its own prior decision in Gorkha Security Services v. Govt. of NCT of Delhi, arguing that the Arbitrator’s single-line observation - “information gap on both sides” - was legally insufficient and rendered the award unintelligible. It contended that Section 31(3) mandates reasoned awards, and failure to explain denial of interest and costs undermines natural justice and statutory compliance.
For the Respondent
The Respondent relied on Kunal Food Products Pvt. Ltd. v. Delhi Development Authority, asserting that courts must not interfere with arbitral findings absent perversity or arbitrariness. It argued that the Arbitrator had considered all evidence and that the denial of interest was a permissible exercise of discretion, even if the reasoning was terse.
The Court's Analysis
The Court undertook a rigorous examination of Section 31(3) and Section 34(2)(b)(ii), emphasizing that the requirement of a reasoned award is not a technicality but a foundational pillar of arbitral justice. It cited Dyna Technologies and OPG Power Generation v. Enexio Power Cooling Solutions to categorize arbitral awards into three classes: (1) no or unintelligible reasons, (2) improper reasoning, and (3) inadequate reasoning.
The Court held that the Arbitrator’s reasoning in paragraph 58 - “there has been information gap on both sides so as to obtain sufficient clarity... therefore, there is no clear case of payment of interest” - fell squarely into Category 1. The phrase “information gap” was not defined, linked to any contractual provision, or connected to the factual matrix of delayed payments or breach. No analysis was provided on whether the contract permitted interest, whether statutory interest applied, or whether the Respondent’s conduct warranted cost imposition.
"The reasoning, such as it is, thus stops short of analysis and begins and ends in assertion, leaving this Court to speculate as to the basis of the decision."
The Court further held that such a failure is not merely an inadequacy but a statutory violation under Section 31(3), which cannot be cured by implied reasoning. It emphasized that the absence of reasoning deprives the parties of meaningful review and violates the most basic notions of justice, thereby triggering the public policy exception under Section 34(2)(b)(ii).
The Court also affirmed the doctrine of severability under Gayatri Balasamy v. ISG Novasoft Technologies Limited, holding that the denial of interest and costs was a discrete, severable issue unrelated to the adjudication of wage claims or security deposit refunds. The remaining portions of the award were intact and enforceable.
The Verdict
The Petitioner succeeded. The Delhi High Court set aside the portion of the arbitral award rejecting Claim No. 4 (interest and costs) on the ground that it was unintelligible and in conflict with the public policy of India. The matter was remanded to the Arbitral Tribunal for fresh consideration of Claim No. 4 in accordance with law.
What This Means For Similar Cases
Reasoned Awards Are Non-Negotiable
- Practitioners must now insist on detailed reasoning in arbitral awards, especially on claims involving interest, costs, or damages
- A single-line dismissal without linking facts to legal principles will now be grounds for setting aside under Section 34
- Arbitrators must explicitly address contractual clauses, statutory entitlements, and party conduct when denying relief
Severability Is the Rule, Not the Exception
- Courts will now routinely examine whether challenged portions of an award are legally and factually separable
- Parties should seek partial setting aside rather than full annulment where only one claim is defective
- Remand under Section 34(4) is the preferred remedy over outright invalidation, preserving the award’s valid portions
Burden of Justification Shifts to the Arbitrator
- The onus is now on the Arbitrator to articulate why a claim for interest or costs was denied
- Silence or vague references to "information gaps" or "mutual fault" are insufficient
- Parties may file applications under Section 34(4) to request remand if the award is unintelligible but not perverse
