Arbitral Tribunal Can Award Interest On Security Deposit If The Clause Prohibiting Such Interest Was Not Specifically Pleaded: Madras High Court
The Madras High Court has held that the arbitral tribunal can award interest despite there being a contractual prohibition if no pleading as to the prohibition was made by the aggrieved party. The bench of Justice Senthilkumar Ramamoorthy held that a party cannot rely on a Clause under GCC for challenging the arbitral award for awarding interest contrary to the said clause if it had...
The Madras High Court has held that the arbitral tribunal can award interest despite there being a contractual prohibition if no pleading as to the prohibition was made by the aggrieved party.
The bench of Justice Senthilkumar Ramamoorthy held that a party cannot rely on a Clause under GCC for challenging the arbitral award for awarding interest contrary to the said clause if it had not taken such an objection before the arbitral tribunal during the arbitral proceeding.
The Court held that in the adversarial system, adjudication is carried out on the basis of pleading and evidence and a party seeking to resist a claim on the basis of a contractual prohibition must specifically plead and bring on record the said document as evidence, failure to take such objection results in the waiver of objection.
It further held that a contract between the parties is not a statute of which the tribunal can take cognizance independently, therefore, it must be tendered in evidence for the tribunal to examine its content.
Facts
The parties entered into a contract dated 13.10.2005. Due to certain disputes, the agreement was terminated on 15.05.2007. Thereafter, the respondent issued the notice of arbitration dated 28.08.2007 which culminated in the arbitral award dated 20.04.2021.
By the arbitral award, the arbitrator allowed the claim of the petitioner for a refund of security deposit along with pendente lite interest at 12% p.a. along with other claims.
Challenge to the award
The petitioner raised a limited challenge to the extent that arbitrator had, contrary to the contract. allowed interest on the refund of security deposit. It raised the following objections:
- The parties were governed by General Conditions to Contract (GCC) and clause 64 of GCC specifically prohibits award of interest on security deposit, therefore, the award is contrary to the terms of the contract between the parties, thus, in teeth with Section 28(3) of the A&C Act.
- An objection to such effect can be taken for the first-time during Section 34 as well.
The respondent countered the above submissions on the following grounds:
- The petitioner in its counter-statement did not even comment on the respondent's claim for interest, let alone objecting to them.
- Any objection is to be specifically pleaded and every document on which reliance is placed it to be brought on record as evidence.
- Contractual clauses prohibiting the grant of interest cannot be relied upon at this juncture, in view of the judgment of the Hon'ble Supreme Court in Union of India v. Susaka Private Limited and others (Susaka), (2018) 2 SCC 182.
Analysis by the Court
The Court observed that although Clause 3(a) of the Letter of Award and Clauses 16 and 64 of GCC prohibited grant of interest, however, the petitioner had not taken any such objection in its pleadings. Moreover, GCC was never furnished as evidence before the arbitral tribunal.
It held that arbitrator has power to award interest on any part or whole of the sum of award under Section 31(7)(a) of the A&C Act and in absence of the pleading regarding a contractual prohibition on award of interest, the decision of the arbitral tribunal cannot be termed as patently illegal.
The Court held that under Section 28(3) of the Act, the arbitral tribunal is required to take into consideration the terms of the agreement between the parties, however, it is incumbent upon the parties to first bring the contract before the tribunal and in absence of the document being available on record, the tribunal cannot be held to be bound by such documents.
Next, the Court decided on the issue as to whether an objection based on contractual provision can be taken for the first-time during Section 34 stage, the Court held that unlike the jurisdictional challenges which can be taken for the first time under Section 34 of the Act, an objection premised on a contractual provision cannot be permitted to be raised for the first time before the Court to challenge the arbitral award.
The Court held that in the adversarial system, adjudication is carried out on the basis of pleading and evidence and a party seeking to resist a claim on the basis of a contractual prohibition must specifically plead and bring on record the said document as evidence, failure to take such objection results in waiver of objection.
Accordingly, the Court rejected the petition.
Case Title: The Union of India v. R.K. Constructions, Arb. O.P. (Com Div) No. 148 of 2022
Citation: 2022 LiveLaw (Mad) 445
Date: 13.10.2022
Counsel for the Petitioner: Mr.P.T.Ramkumar
Counsel for the Respondent: Mr.S.Amalaraj