Interest Cannot Be Awarded By Arbitrator When Awarding Of Interest Is Prohibited In Contract: Madhya Pradesh High Court

Brief Facts

This petition has been filed to challenge the award to the limited extent that interest on the refund of security deposit and earnest money has unfairly been awarded.

In this case, no one appeared on behalf of the respondents despite multiple opportunities being given therefore the court proceeded ex parte.

It is the case of the petitioner that Clause 3 of the General Conditions of Contract specifically stipulates that no interest would be payable on the earnest money and security deposit or amount payable to the contractor under the contract.

A contract was executed between the petitioners and the respondent for electrification in Raisen. The work had to be completed within 4 months but could not be completed within that period. Dispute having arisen between the parties, the matter was referred to Arbitration. The Arbitral Tribunal passed an award and directed payment of 8% interest on the amount from the date of reference to the date of passing the award.

Observations:

The court noted that the tribunal had framed a specific question whether the respondent were entitled to the payment of interest on security deposit and earnest money. The tribunal also admitted that although there was no clause in the contract to award the payment of interest on the said amount despite the tribunal directed the payment of interest. The tribunal held that while interpreting the clause in question held that it did not prohibit the tribunal from awarding the interest.

“In Kamatchi Amman Constructions vs. Divisional Railway Manager (2010) the Supreme Court while interpreting an identical clause in the contract subject matter of that petition specifically has held that Section 31(7) of the Arbitration and Conciliation Act, 1996 by using the words "unless otherwise agreed by the parties" categorically clarified that the arbitrator is bound by the terms of the contract in so far as award of interest from date of cause of action to date of award is concerned.”

“The Supreme Court held that where the party has agreed that no interest shall be payable Arbitral Tribunal cannot award interest between the date when the cause of action arose to the date of award.” the court observed.

It further observed that said judgement of the Supreme Court in Sree Kamatchi Amman Constructions (Supra) has been further followed by the Supreme Court in Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation (2022) wherein the Supreme Court has specifically held that if Section 31(7) (a) of the Arbitration and Conciliation Act, 1996 is given a plain and literal meaning the legislative intent would be clear that discretion with regard to grant of interest would be available to the Arbitral Tribunal only when there is no agreement to the contrary between the parties.

While applying the above ratio to the facts of the present, the court observed that “since the contract between the parties specifically prohibits grant of interest on the earnest money and security deposit, the Arbitral Tribunal did not have the discretion to grant interest even post the filing of the reference till payment. The case of the petitioners is squarely covered by the judgments of the Supreme Court in Sree Kamatchi Amman Constructions (Supra) and Delhi Airport Metro Express Private Limited (Supra).”

Accordingly, the impugned award to this extent was set aside.

Case Title: M.P. AUDYUOGIK KENDRA VIKAS NIGAM LTD AND OTHERS Versus MR. ASHOK KUMAR JAIN

Case Number: ARBITRATION REVISION No. 10 of 2019

Judgment Date: 2/12/2024

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