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Between the Lines | Supreme Court: An arbitrator cannot grant pendente-lite interest under Arbitration and Conciliation Act, 1996 when expressly barred by the parties November 22, 2021
Published in: Between The Lines
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The Hon’ble Supreme Court (“SC”) has in its judgement dated October 4, 2021, in the matter of M/s Garg Builders v. M/s. Bharat Heavy Electricals Limited (Civil Appeal No. 6216 of 2021), held that an arbitrator cannot grant pendente-lite interest as per the Arbitration and Conciliation Act, 1996(“1996 Act”) when barred by the parties (“Judgement”).
Facts
Bharat Heavy Electricals Limited (“Respondent”) floated a tender for construction of boundary wall at its 2×750 MW Pragati III Combined Cycle Power at Bawana, Delhi (“Project”). M/s. Garg Builders (“Appellant”) submitted its bid for the Project which was accepted by the Respondent. Pursuant to this, Respondent issued a letter of intent (“LOI”) dated September 9, 2008, to the Appellant and on October 24, 2008, the Respondent and the Appellant entered into a contract (“Agreement”) with respect to the Project. Clause 17 of the Agreement contained an interest barring clause which stated that “No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor” (“Clause 17”).
Subsequently, a dispute arose between the Respondent and the Appellant with respect to the Agreement and, after appointment of a sole arbitrator (“Arbitrator”), the arbitration proceedings were initiated between the parties under the 1996 Act. The Appellant, during the arbitration proceedings, apart from claiming various amounts under different heads, inter alia, claimed pre-reference, pendente lite (interest that accrues to the base amount while the pendency of the suit during the arbitration proceeding) and future interest at the rate of 24% on the value of the award. The Arbitrator, after hearing the contentions of both the parties, concluded that there is no prohibition in the Agreement and LOI about payment of interest for the pre-suit, pendente lite and future period and awarded pendente lite and future interest at the rate of 10% per annum to the Appellant on the award amount from the date of filing of the claim petition, that is, December 2, 2011, till the date of realization of the award amount (“Award”).
The Respondent challenged the Award under Section 34 (Application for setting aside arbitral awards) of the 1996 Act before the Delhi High Court (“DHC”) on various grounds, inter alia, on the ground that the Arbitrator, being creature of the arbitration agreement in the Agreement, travelled beyond the terms of the Agreement in awarding pendente lite interest on the Award amount as the same was expressly barred by Clause 17 of the Agreement. The DHC by its judgement and order dated March 10, 2017, set aside the Award to the extent of award of pendente lite interest by stating that the Arbitrator fell in error in holding that Clause 17 only prescribed pre-reference interest and not pendente lite interest (“Impugned Order”). Upon challenge, the division bench of the DHC also upheld the Impugned Order. Consequently, the Appellant filed an appeal before the SC challenging the Impugned Order.
Issues
Arguments
Contentions raised by the Appellant:
The Appellant contended that the Arbitrator had taken a plausible view and Clause 17 of the Agreement does not bar the payment of interest for pendente lite period. This argument was advanced by citing the judgments of Ambica Construction v. Union of India [(2017) 14 SCC 323] (“Ambica Constructions Case”) and Raveechee and company v. Union of India [(2018) 7 SCC 664] (“Raveechee Case”), wherein it was held that the appellant was entitled for the payment of interest for the pendente lite period.
In addition, it was argued that Clause 17 of the Agreement, barring payment of interest to the contractor on any sum due to the contractor, is ultra vires and against the provisions of Section 28 (Agreements in restraint of legal proceeding void) of the Indian Contract Act, 1872 (“Contract Act”).
Contentions raised by the respondents:
The Respondent submitted that Section 31(7)(a) (Form and contents of arbitral award) of the 1996 Act gives paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary. It was further argued that if the contract itself contains a specific clause which expressly bars the payment of interest, then it is not open for the arbitrator to grant pendente lite interest.
The Respondent further contented that Ambica Constructions Case was not applicable to this matter because it was decided under the Arbitration Act, 1940 (“1940 Act”) whereas this dispute is in relation to the 1996 Act. In addition, the Respondent argued that Section 3 (Power of court to allow interest) of the Interest Act, 1978 (“Interest Act”) confers power on the court or arbitrator to allow interest in the proceedings for recovery of any debt or damages or in proceedings in which a claim for interest in respect of any debt or damages already paid. However, Section 3(3) of the Interest Act carves out an exception and recognizes the right of the parties to contract out of the payment of interest arising out of any debt or damages and sanctifies contracts which bar the payment of interest arising out of debt or damages. Therefore, Clause 17 of the Agreement was not violative of any of the provisions of the Contract Act.
Observations of the Supreme Court
The SC observed that the law relating to award of pendente lite interest by an arbitrator under the 1996 Act is something which has been examined before by courts. The provisions of the 1996 Act give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary. Section 31(7)(a) of the 1996 Act, which deals with the payment of interest, states that if the contract prohibits pre-reference and pendente lite interest, an arbitrator cannot award interest for the said period.
The SC, while analysing Clause 17 of the Agreement, stated that, the said clause barring interest was very clear and categorical and used the expression “any moneys due to the contractor” by the employer, which includes the amount awarded by the Arbitrator. It further stated that, in Sayeed Ahmed and Company v. State of Uttar Pradesh and Others [3 (2009) 12 SCC 26] and various other judicial pronouncements, it has held that as per Section 31(7)(a) of the 1996 Act, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award. It further stated that both Ambica Constructions Case and Raveechee Case had no application to this case as these cases were decided under the 1940 Act whereas this case was in relation to the 1996 Act. Consequently, the SC came to the conclusion that if the contract contains a specific clause which expressly bars payment of interest, then it is not open for an arbitrator to grant pendente lite interest.
With respect to the second issue, the SC examined Section 28 of the Contract Act and observed that exception I to this section contains a rule that a contract by which two or more persons agree that any dispute which has arisen or which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not illegal. This exception saves contracts where the right to move the court for appropriate relief is restricted but where the parties have agreed to resolve their dispute through arbitration. Thus, a lawful agreement to refer the matter to arbitration can be made a condition precedent before going to courts and it does not violate Section 28 of the Contract Act. It further stated that no cause of action then accrues until the arbitrator has made the award and the only amount awarded in such arbitration is recoverable in respect of the dispute so referred. Section 31(7)(a) of the 1996 Act which allows parties to waive any claim to interest including pendente lite, and the power of the arbitrator to grant interest, is subject to the agreement of the parties.
The SC further stated that interest payments are governed in general by the Interest Act in addition to the specific statutes that govern an impugned matter. Section 2(a) (Definitions) of the Interest Act defines a “Court” which includes both a tribunal and an arbitrator. In turn, Section 3 (Power of court to allow interest) allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3(3) of the Interest Act explicitly allow the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) of the Interest Act states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”. Thus, when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the arbitrator to grant pendent lite interest.
Decision of the Supreme Court
Dismissing the case, the SC arrived at the conclusion that the DHC was justified in rejecting the claim of the Appellant seeking pendente lite interest on the award amount and Clause 17 of the Agreement is not ultra vires in terms of Section 28 of the Contract Act.
VA View:
The SC, in this Judgement, has rightly upheld the principle that an arbitrator is a creature of contract, and it cannot go beyond the four corners of contract. The issue of an arbitrator’s power to grant pendente lite interest was not clearly settled as the SC, at different instances, such as in the judgement of Raveechee Case and Chittaranjan Maity v. Union of India [(2017) 9 SCC 611], used different approaches to resolve the said issue. However, this Judgement rightly clarifies the said issue.
The Judgement clearly states that in case there is an express clause barring interest payment, the arbitrator does not have the power to grant pendente lite interest on the award. This is further clarified by another recent judgement of Punjab State Civil Supplies Corporation Limited v. Ganpati Rice Mills [LL 2021 SC 591] dated October 20, 2021, wherein the SC held that, unless otherwise agreed, the arbitrator has substantial discretion to award interest on arbitration award. In light of both these judgements, the parties, while drafting an agreement may consider mentioning about the power of arbitrator to grant pendente lite interest explicitly, to avoid any uncertainty and confusion at a later stage.
For more information please write to Mr. Bomi Daruwala at [email protected]
