Government Contracts, Arbitration And Clause Barring Grant Of Interest

Arbitrator's power to grant interest was statutorily recognized with enactment of Interest Act in the year 1978. Constitution Bench of Supreme Court in GC Roy^[5] and N C Budharaj^[6], which were decided under the Arbitration Act of 1940, affirmed power of an arbitrator to award pendent lite and pre-reference interest, provided the agreement between the parties did not bar such grant. Constitution Bench devised the mechanism of giving a restricted construction to the barring clause and advised reading of the entire agreement in order to conclude the express intent of ouster. Therefore, law that obtained under 1940 Act read in juxtaposition with Section 3(3) of the Interest Act, 1978, provided that power of court or arbitrator to award interest shall be hedged by agreement between parties imposing an express bar on grant of interest. In essence, what the law obtained then cumulatively was conferred singularly by Section 31(7)(a) of Arbitration & Conciliation Act, 1996 giving power and jurisdiction to the arbitrator to award pre-reference and pendent lite interest with a rider of 'unless otherwise agreed by the parties'. This is akin to what Interest Act, 1978 provided by qualifying the power of arbitrator to grant interest in a case where the debt or damages upon which payment of interest was barred by virtue of an express agreement. Extent, width and scope of 'unless otherwise agreed by the parties' has remained at the fulcrum of maze of a large number of decisions rendered by Supreme Court causing confusion of perspective and their application. Precisely for this reason, recent decision rendered by Supreme Court in Manraj Enterprises requires a critical address.

Port of Calcutta Vs Engineers-De-Space-Age^[7] considered the contractual clause where consideration of claim of interest made by the contractor to the Commissioner, or so to say, the Employer, was barred. Supreme Court held that the contractual bar shall be applicable to the parties to contract and shall not impinge upon the power of arbitrator to grant such interest. Relying upon GC Roy, Port of Calcutta applied the doctrine of strict construction of the barring clause. Strict construction rule was further applied in Saraswat Trading^[8] and relying upon Port of Calcutta, Supreme Court held that the clause does not bar power and jurisdiction of arbitrator to award interest. Port of Calcutta was followed subsequently by Supreme Court in various cases including Madnani Constructions Corporations (Pvt) Ltd Vs Union of India & Ors^[9], however, Sayeed Ahmed & Co Vs State of UP^[10] per Justice Raveendran, while dealing with 1996 Act situation found the ratio of Port of Calcutta that the arbitrator will have jurisdiction to award interest de hors the barring clause in contract, 'outlandish'. Kamatchi Amman^[11] further distinguished Port of Calcutta and followed Sayeed Ahmed to hold that the barring clause ousts jurisdiction of arbitrator to award pre-reference and pendent lite interest. Underlying philosophy behind Port of Calcutta of application of strict construction subsisted until Supreme Court, erroneously (as was later pointed out by Justice RF Nariman in Reliance Cellulose Case^[12]. Bright Power Projects (India)(P) Ltd^[13]); in Krafters Engg^[14] held that Port of Calcutta was over-ruled in Sayeed Ahmed case, also followed the line of decision of Sayeed Ahmed and held arbitrator's jurisdiction as barred. What is interesting to be noted that the concept of strict interpretation and over-all intent of the agreement, phraseology and terms used and their import, etc, did not find much of a course of approach or discussion in all these judgments. The relevant clauses were extracted and without examining the other clauses and phraseology used in the agreement in order to cull out the availability of express intent to oust, the court proceeded assuming any kind of bar on interest as an absolute bar on power and jurisdiction of arbitrator to grant pre-reference and pendent lite interest.

Issue attained momentum when apparent conflict between Port of Calcutta and Madnani Constructions on one hand and Sayeed Ahmed and Kamatchi Amman on the other landed for consideration before the larger bench in first Ambica Constructions case^[15]. Larger Bench upheld the view taken in Port of Calcutta but limited its application. It was held that (i) ouster clause is to be read strictly; (ii) ouster will depend on phraseology and over-all intent of the agreement; (iii) ouster is not to be readily inferred unless and until express bar is provided; (iv) clauses like 'no interest on payment to the contractor payable under contract' ipso facto will not bar arbitrator's jurisdiction to award pre-reference and pendent lite interest. Ironically, Port of Calcutta test, though found outlandish in Sayeed Ahmed by division bench, sustained scrutiny by the larger bench, though with a little less generality.

One vital takeaway point in first Ambica Construction Case that is often missed was that primary consideration for determination of ouster as absolute or limited was extent, width, scope and intent of the words and phraseology used in the agreement irrespective of applicability of 1940 Act or 1996 Act. Thus, first Ambica Construction case provided fundamental guiding principle for the courts to apply and determine the nature of barring clause. This can also be argued that all previous decisions which did not take into account the principles determined in first Ambica Construction Case deserve to be ignored. It can further be argued that all later decisions rendered without noticing first Ambica Construction Case and without applying the guiding principles determined therein can be said to be per incurium. Thus, 16^th March 2016 can be said to be watershed in development of law relating to interpretation to be given to clause of an agreement that seeks to bar grant of interest. Most of the judgments passed by Supreme Court subsequent to first Ambica Constructions Case followed the guidelines provided by the larger bench. Second Ambica Constructions case^[16] followed the first Ambica case and held that bar of interest on 'amounts payable to the contractor under the contract' contained in Clause 16.2 of the Special Conditions of Contract does not bar power and jurisdiction of arbitrator to award pendent lite interest. Four months later, following the guidelines given by larger bench in first Ambica Constructions case16 , Supreme Court in Pradeep Vinod Constructions3 examined the scope of clause 16.2 and held that the same was confined to earnest money and security deposit and the bar under clause 16.2 was a limited bar and not an absolute bar. Clause 16.2 is the same clause which was held to be absolute bar on power of arbitrator to award pre-reference and pendent lite interest in Kamatchi Amman and various other case decided previously. Later, in Reliance Cellulose14, guidelines of first Ambica Constructions was reiterated and it was held that the clause providing for 'delay in payment shall not make the Commissioner liable for interest', would not eclipse arbitrator's power to award pre-reference and pendent lite interest. In a way, Reliance Cellulose upholds the ratio of Port of Calcutta. Raveechee & Co^[17] considered both first and second Ambica Case and held that clause 16.3 (pari material to clause 16.2 cited above) was not a bar to arbitrator. Jaiprakash Associates^[18] also considered and decided the issue in light of guidelines of first Ambica Case.

However, few subsequent decisions also took discordant note and failed to notice and apply the guidelines of first Ambica Constructions case16. They are, Chittaranjan Maity^[19], Garg Builders^[20] and Manraj Enterprises2. These three decisions were rendered without noticing the governing principles evolved in first Ambica Case16 and were singularly guided by the factor of applicability of Act of 1940 and 1996.

Critical Note On Manraj Enterprises:

Looking at these case laws, it transpires that Manraj E­­nterprises2 has impliedly held Pradeep Vinod3 as a bad law, though both the decisions are rendered by co-ordinate benches of Supreme Court. As a result, view taken earlier that clause 16.2 is a limited bar confined to earnest money, security deposit and money diverted from the running bills of the contractor to the extent of 10% of total value of contract was turned upside down holding it to be absolute bar. Errors that seems to have crept in Manraj2 are broadly to be listed as : (i) it, having differed with the view taken by another coordinate bench, ought to have referred the matter to larger bench; (ii) it failed to take notice of the guiding principles of strict interpretation laid down by larger bench in first Ambica Constructions Case16 , i.e., no ready inference of ouster of jurisdiction and phraseology and intent gathered from the words used in the agreement; (iii) it relied upon the three judge bench decision in Bright Power15 of 2015 though larger bench of three judges in first16 and second17 Ambica Constructions case upturned the approach and the clause which was held to be barring jurisdiction of arbitrator in Bright Power15 was held to be otherwise in second Ambica Constructions17 and in Raveechee18. After larger bench decision in first Ambica Constructions case16, determination is based on approach to see if the clause ousts the jurisdiction much more than to merely see if the case is covered by 1940 Act or by 1996 one. Courts need to examine the scope and width of ouster clause giving it a strict interpretation and only when the ouster is express and unambiguous that the arbitrator could be denuded of its jurisdiction to award interest. Another salient point that emerges out from the judgment of Raveechee18 is that interest on unascertained damages are determined during trial and is not part of the contract, and therefore, pendent lite interest with regard to unascertained damages cannot be barred unless the agreement expressly bars arbitrator's power to award pendent lite interest.

Law of precedent is also settled that where the coordinate bench notices a previous coordinate bench decision and impliedly holds the same to be a bad law and does not refer the question to the larger bench, subsequent coordinate bench or the High Courts or lower courts hearing the matter have a liberty to rely upon either of the decision which it finds more befitting in accordance with law. Nonetheless, there is no gainsaying that Manraj Enterprises2 has rocked the consistency evolved post first Ambica Construction case and it would have cascading effect of mixed outcome from the courts below that get to apply the law on this point.

The Author is an Advocate-on-Record in the Supreme Court of India and views are personal.