Clause Excluding Interest on Security Deposit Not a Bar on Arbitrator to Award Pendente Lite Interest: SC [Read Judgment]

The Supreme Court has held that a clause in an agreement excluding interest on security deposit does not act as a bar on the arbitrator to award pendente lite interest. The judgment was rendered by a bench comprising Justice SA Bobde and Justice L Nageswara Rao in the case M/s Ravechee and Co v Union of India.

The sole issue before the Supreme Court was the legality of the grant of pre-award interest by the arbitrator. The appellant, M/s Ravechee and Co, was awarded a contract with respect to mining work for Western Railways. When disputes arose out of the contract, arbitration was resorted to. The arbitrator allowed the claim of the appellant and awarded interest on the claim for the period between the date of claim and the date of award. The award was challenged in the high court. The high court set aside the award in so far as it ordered pendente lite interest.

The contention of the respondents was that a term in the General Conditions of Contract (GCC), specifically Clause 16(3), excluded interest on security deposit.  Clause 16(3) read as follows:

“16(3): No interest will be payable upon the earnest money and the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of sub clause (1) of this clause will be payable with interest accrued thereon.”

 Therefore, it was contended that the contract barred the arbitrator from awarding interest on the premise that the power of arbitrator to award such interest was subject to the agreement between the parties.

However, the court did not accept that contention. The court held that Clause 16(3) cannot be construed as a bar on award of interest pendente lite, as it was only dealing with the arrest of interest on the security deposit.  The court noted that the claim of the appellant was for damages on account of ban on mining and that interest was awarded for damages ascertained.

“A claimant becomes entitled to interest not as compensation for any damage done but for being kept out of the money due to him. Obviously, in a case of unascertained damages such as this, the question of interest would arise upon the ascertainment of the damages in the course of the lis. Such damages could attract interest pendente lite for the period from the commencement of the arbitration to the award. Thus, the liability for interest pendente lite does not arise from any term of the contract, or during the terms of the contract, but in the course of determination by the Arbitrators of the losses or damages that are due to the claimant. Specifically, the liability to pay interest pendente lite arises because the claimant has been found entitled to the damages and has been kept out from those dues due to the pendency of the arbitration i.e. pendente lite,” observed the court.

In this regard, the court relied on a three-judge bench decision in Union of India v Ambica Construction, which had held that the power of the arbitrator to award pendent lite interest was subject to express bar in the agreement against interest. It was also held that that the bar to award interest on the amounts payable under the contract would not be sufficient to deny the payment of interest pendente lite.

Therefore, the judgment of the high court was set aside and the grant of interest was restored.

Author's note

There is another decision, also rendered by a two-judge bench, which has taken a contrary view on the same issue. That is the judgment in Sri Chittaranjan Maity v. Union of India by a division bench of Justice J Chelameswar and Justice Abdul Nazeer.  There, interpreting the exactly same clause in the GCC with respect to a work awarded by Railways excluding interest on deposit, the court held that claimant was not entitled to pendente lite interest. The court distinguished Ambica Cements (supra) stating that it was not clear from that judgment whether it pertained to the Arbitration Act of 1940 or 1996. The court went on to state that in the 1996 Act, there was a specific provision which made grant of pendente lite interest subject to agreement between parties, in the form of Section 31(7)(a); whereas such provision was absent in the 1940 Act.

The decision in Sri Chittaranjan Maity regarded the clause barring interest on security deposit as a bar on grant of pendente lite interest by arbitrator. However, the very same clause has been construed differently in Ravechee as not a bar on grant of such interest.  Sri Chittaranjan Maity is not seen cited or referred to in Ravechee decision.