Delhi High Court Issues Notice On Plea Challenging Provisions Of Arbitration Act, Interest Act & 'Interest Barring' Clauses In Govt Contracts

The Delhi High Court on Wednesday issued notice on a plea challenging the constitutional validity of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, Section 3 (a)(ii) of Interest Act, 1978 and 'interest barring' clauses engrafted in Contracts by Government Bodies and Public Sector Undertakings.

A division bench comprising of Chief Justice DN Patel and Justice Jyoti Singh sought response of the Centre and NTPC Limited, an Indian PSU engaged in the business of generating electricity and allied activities.

The plea filed by Patel Engineering Limited submits that the interest barring clauses are being abused by the Government Bodies, like NTPC Limited, to somehow avoid compensation to the contractors for which such bodies are themselves wholly responsible.

"These interest barring clauses are then misused by the Respondents to avoid payment of interest on fault adjudicated by Arbitral Tribunals, by relying upon Section 31(7)(a) of the A&C Act and Section 3 (a)(ii) of Interest Act. The combined effect of interest baring clauses and Section 31 (7)(a) of the A&C Act and Section 3 (a)(ii) of Interest Act, is thus in violation of Articles 14, 19(1)(g), 21 and 300A of the Constitution of India," the plea states.

Section 31(7)(a) of the Arbitration Act provides that unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

Section 3(a)(ii) of the Interest Act pertains to power of Court to allow interest.

The plea avers that the impugned provisions and the clauses impinge on the substantive right of the party to the award of interest by making it discretionary for the parties to incorporate or eliminate the award of interest by way of contract.

"The Petitioner submits that interest is compensatory in nature and is parasitic on the principal sum not having been paid in time. Granting power to avoid payment of interest / clauses that bar grant of interest, are unconstitutional. Hence, the Impugned Sections and the Impugned Clauses are manifestly arbitrary as it is unfair, unreasonable, discriminatory, not transparent, capricious, biased, with favouritism or nepotism and not in pursuit of promotion of healthy competition and equitable treatment," the plea adds.

The petitioner company states that such clauses give a carte blanche to a party to perpetually default and therefore, the party in such situations has no incentive to perform as it can keep defaulting without completely compensating the other party. According to the petitioner, this is opposed to public policy.

Stating that the interest by nature is compensatory, the petitioner argue that if parties to a contract were permitted to contract contrary to sec. 23 of the Indian Contract Act, it would be opposed to public policy of nation.

"It is public policy that a person must get compensation for breach of another and Impugned Sections enabling Impugned Clauses, is opposed to public policy, hence in violation of Articles 14, 19(1)(g) and 21 of the Constitution of India," it adds.

The plea according seeks direction for striking down the words "Unless otherwise agreed by the parties" in Section 31 (7)(a) of the Arbitration and Conciliation Act, 1996.

It also seeks direction to strike down Section 3 (a)(ii) of the Interest Act, 1978 which reads "(3) Nothing in this section,-- (a) shall apply in relation to-- (ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement".

The plea has been filed through Advocate Shruti Arora for Advocate Rishi Agrawala. The arguing counsels were Senior Advocates Sandeep Sethi and Dayan Krishnan.

Case Title: Patel Engineering Limited v. UOI & Anr.