Arbitrator Can Award Pendente Lite Interest If There Is No Bar Under Contract : Supreme Court

The Supreme Court recently reiterated that unless there is a specific bar under the contract, it is always open for the Arbitrator to award pendente lite interest in view of Section 31(7)(a) of the Arbitration and Conciliation Act 1996.

The Court also set aside orders passed by High Court, for having exceeded its jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996 by setting aside a well-reasoned Arbitral Award. It has been further held that the Arbitral Tribunal is open to award pendente lite interest unless there is a specific bar under the contract.

The Bench comprising of Justice M.R. Shah and Justice M.M. Sundresh, while adjudicating an appeal filed in Indian Railway Construction Company Limited v M/s National Buildings Construction Corporation Limited, has affirmed the Award wherein the Arbitral Tribunal, after finding out that the Agreement has been terminated under wrong clause, determined the correct clause for termination and justified the termination. The Bench has also affirmed the grant of pendente lite interest by the Arbitral Tribunal without there being an express provision in the Agreement.

BACKGROUND FACTS

In 1990, Indian Railway Construction Company Limited (“IRCON”) entered into an Agreement with M/s. National Buildings Construction Corporation Limited (“NBCC”) for construction of Railway Station cum Commercial Complex at Vashi, Navi Mumbai. The Clause 17.4 of the Agreement provided for termination of Agreement and forfeiture of security deposit, in case the work is not carried out by NBCC within stipulated timelines and given extensions. Further, Clause 60.1 empowered IRCON to rescind the Agreement in case the contractor (NBCC) abandons the contract.

NBCC failed to complete the construction work in time. Accordingly, IRCON terminated the Agreement on 21.02.1994 by invoking Clause 60.1 of the same and forfeited two security deposits of NBCC.

NBCC referred the dispute to arbitration. The Arbitral Tribunal passed an Award in 2011, rejecting NBCC’s claim for refund of two security deposits i.e. Claim No. 33 and 34. The Tribunal held that the termination was valid in view of Clause 17.4 of the Agreement and not Clause 60.1 as pleaded by IRCON. The Tribunal also considered the counter claim of IRCON and awarded 18% p.a. pendente lite interest on special advance given by IRCON to NBCC.

NBCC challenged the Award before the High Court and the Single Judge set aside the rejection of Claim No. 33 and 34 by the Arbitral Tribunal on 03.03.2017. The Single Judge concluded that once the Arbitral Tribunal found that the termination under Clause 60.1 was unjustified, it was not open for them to consider the termination under Clause 17.4, justifying forfeiture of the security deposits. The Single Judge further set aside the award of pendente lite interest on special advance, on the ground that the Agreement did not contain any clause for such interest.

Under appeal, on 14.08.2018 the Division Bench of the High Court affirmed the stand taken by Single Judge.

Aggrieved by the Order dated 14.08.2018, IRCON filed an appeal before the Supreme Court, contending that even if a wrong clause is mentioned in the Termination letter, the power to terminate the contract cannot be said to be illegal.

SUPREME COURT VERDICT

Substitution of correct clause of termination by Arbitral Tribunal

The Bench affirmed the determination done by Arbitral Tribunal with respect to the correct clause of termination and as to whether the Agreement could be rescinded by IRCON under Clause 60.1 or Clause 17.4. IRCON being satisfied that the NBCC would not be able to complete the work even with further extension, had rightly rescinded the Agreement and forfeited the security deposits. It was held that the Agreement could justifiably be terminated under both Clause 60.1 and Clause 17.4.

Further, the Arbitral Tribunal’s finding regarding rescinding of the contract under Clause 17.4 has not been set aside by either the Single Judge and Division Bench of the High Court. Therefore, the findings on Clause 17.4 attained finality.

A well-reasoned Award cannot be set aside u/s 34 of Arbitration Act

The Bench held as under:

“At the cost of repetition it is observed that the learned Arbitral Tribunal on appreciation of entire evidence on record, had specifically observed that the contractor failed to complete the work even within the stipulated extended period of time and even abandoned the work and therefore, the IRCON was justified in rescinding the contract. The said finding as observed hereinabove has attained finality……….We are of the opinion that the learned Single Judge, therefore, exceeded in its jurisdiction under Section 34 of the Arbitration Act quashing and setting aside the well­reasoned award passed by the learned Arbitral Tribunal on rejecting Claim Nos.33 and 34, which the Division Bench of the High Court has wrongly affirmed.”

The orders passed by Single Judge and Division Bench of High Court have been set aside by the Supreme Court, while observing that the Single Judge exceeded its jurisdiction under Section 34 of the Arbitration Act by setting aside a well-reasoned Award passed by Arbitral Tribunal.

Case Title: Indian Railway Construction Company Limited v M/s National Buildings Construction Corporation Limited

Citation: 2023 LiveLaw (SC) 210

Arbitration and Conciliation Act 1996- Section 34- Supreme Court sets aside the HC order which set aside an arbitral award- SC hold that HC  exceeded in its jurisdiction under Section 34 of the Arbitration Act quashing and setting aside the well-­reasoned award passed by the Arbitral Tribunal

Arbitration and Conciliation Act 1996- Section 31(7)- unless there is a specific bar under the contract, it is always open for the arbitrator / Arbitral Tribunal to award pendente lite interest - followed Raveechee and Company Vs. Union of India reported in (2018) 7 SCC 664-Para 7.5

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