Arbitration Award - Jurisdiction To Allow Any Claim Can Be Challenged If Question Of Fact Is Not Involved: Delhi High Court

The Bench of Justices Vibhu Bakhru and Amit Mahajan reiterated that a contractual clause, which bars payment of interest on Earnest Money Deposit, Security Deposit or on other amounts payable under the Contract, would also bar award of pendente lite interest by the arbitral tribunal.

The respondent- the Union of India, filed an application under Section 34 of the Arbitration & Conciliation Act, 1996 (A&C Act) before the Commercial Court, challenging the arbitral award passed in favour of the appellant- M/s. Manraj Enterprises.

The Commercial Court set aside the award to the extent it awarded pre-award interest and pendente lite interest in favour of the appellant. Against this, the appellant filed an appeal under Section 37(1)(c) of the A&C Act before the Delhi High Court.

The appellant M/s. Manraj Enterprises submitted before the High Court that the Northern Railway General Conditions of Contract 1989 (GCC-1989) was applicable to the contract between the parties. It added that the Clause 64.5 of the GCC, which proscribed the arbitral tribunal to award any pre-award interest, was introduced in the General Conditions of Contract 1999 (GCC-1999) and hence, the same was not applicable to the contract between the parties.

The appellant contended that since the respondent had failed to raise any ground before the Arbitral Tribunal that the contract between the parties proscribed the payment of interest, the Commercial Court had erred in setting aside the award of pre-award interest.

The appellant averred that Clause 16(2) of the GCC provides that no interest would be payable on earnest money, security deposit or on the amounts payable under the contract. However, it added that the said clause does not proscribe payment of interest on claims in the nature of damages.

The appellant argued that the claims raised by it, which were allowed by the Arbitral Tribunal, related to the reimbursement of expenditure and compensation for expenses. It added that such sums were not payable under the contract and therefore, they did not fall within the ambit of Clause 16(2) of the GCC, which barred the payment of interest.

The Court held that the claimant cannot support his claim on grounds that were not urged before the arbitral tribunal. However, the bench ruled that if a question with respect to the jurisdiction of an arbitral tribunal to award any claim is raised, which does not involve deciding any question of fact, the party challenging the arbitral award is not prohibited from raising such ground which was not raised before the arbitral tribunal.

While holding that Section 28(3) of the A&C Act requires an arbitral tribunal to take into consideration the terms of the contract while passing an award, the Court ruled that if the contract specifically prohibits award of interest, an arbitral award allowing the claim for interest would be amenable to challenge under Section 34 of the A&C Act.

Thus, the bench ruled that the Commercial Court had not erred in entertaining the plea that the award of pre-award interest by the arbitral tribunal was proscribed by the terms of the contract, even if the said ground was not raised before the Tribunal.

Dealing with the issue of whether Clause 64.5 of the GCC, which barred award of pre-award interest by the arbitral tribunal, was a part of the terms of the contract; the Court observed that the GCC-1989 was applicable to the contract executed between the parties. Further, the GCC that included Clause 64.5 was published for the first time in 1999.

The Court took into account that the arbitral award expressly provided that the GCC-1989 was applicable to the contract. Further, it noted that the respondent/ Union of India had not challenged the said finding nor had it claimed before the Court that the said GCC-1989 was revised so as to include Clause 64.5 and thus, the said Clause was a part of the terms of the contract.

"In the given circumstances, we are of the view that it would not be open for the respondent to now claim that the GCC, as revised in the year 1999, is applicable to the contract in question. As noted above, the finding of the Arbitral Tribunal that GCC-1989 was applicable to the contract was not a subject matter of challenge before the Court and admittedly GCC-1989 did not include Clause 64.5. Thus, the decision of the Court to set aside the award of pre-award interest on the ground that Clause 64.5 of GCC bars the same, cannot be sustained", the Court said.

Dealing with the challenge made by the appellant against the order passed by the Commercial Court, to the effect that the award of pendente lite interest by the Arbitral Tribunal was contrary to Clause 16(2) of the GCC, the Court perused the provisions of Clause 16(2) of the GCC.

The bench noted that Clause 16(2) barred interest on earnest money, security deposit or on the amounts payable to the contractor/appellant under the contract.

The Court referred to the decision of the Supreme Court in Garg Builders versus Bharat Heavy Electricals Ltd. (2021), where the Apex Court had ruled that a contractual clause, which bars payment of interest on Earnest Money Deposit, Security Deposit or other amounts due to the contractor, would also bar payment of pendente lite interest.

Further, the bench observed that the Supreme Court in Union of India versus Manraj Enterprises (2021) had ruled that Clause 16(3) of the GCC, which is identically worded as Clause 16(2) of the GCC, proscribes grant of any interest prior to the date of the award.

Thus, the Court upheld the decision of the Commercial Court to the extent it set aside the award of pendente lite interest in favour of the appellant.

Case Title: M/s. Manraj Enterprises versus Union of India

Citation: 2022 LiveLaw (Del) 1018

Dated: 11.10.2022 (Delhi High Court)

Counsel for the Appellant: Mr. Vivekanand, Adv.

Counsel for the Respondent: Mr. Ankit Raj and Mr. Kumaresh Singh, advocates.

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