Arbitrator Cannot Grant Pendente Lite Interest If Contract Contains A Specific Clause Expressly Barring Payment Of Interest: Supreme Court

The Supreme Court observed that an arbitrator cannot grant pendente lite interest if the contract contains a specific clause which expressly bars payment of interest.

Such a contractual clause will not be a violation of Section 28 of the Indian Contract Act, 1872, the bench of Justices S. Abdul Nazeer and Krishna Murari observed. The court said that the Arbitration and Conciliation Act, 1996, categorically restricts the power of an arbitrator to award pre­reference and pendente lite interest when the parties themselves have agreed to the contrary.

In this case, the contract between the parties contained a Clause which read as follows: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor. However, the arbitrator awarded pendente lite and future interest at the rate of 10% p.a. to the claimant on the award amount from the date of filing of the claim petition i.e. 02.12.2011 till the date of realization of the award amount. This award was challenged by the other party under Section 34 of the 1996 Act before the Delhi High Court on the ground that the Arbitrator being creature of the arbitration agreement travelled beyond the terms of the contract in awarding pendente lite interest on the award amount as the same was expressly barred in terms of the contract. The High Court set aside the award to the extent of award of pendente lite interest.

Referring to Section 31(7)(a) of the 1996 Act which deals with the payment of interest, the court observed.

The law relating to award of pendente lite interest by Arbitrator under the 1996 Act is no longer res integra. The provisions of the 1996 Act give paramount importance to the contract entered into between the  parties and categorically restricts the power of an arbitrator to award pre­reference and pendente lite interest when the parties themselves have agreed to the contrary.

11. It is clear from the above provision that if the contract prohibits pre­reference and pendente lite interest, the arbitrator cannot award interest for the said period. In the present case, clause barring interest is very clear and categorical. It uses the expression "any moneys due to the contractor" by the employer which includes the amount awarded by the arbitrator.

The appellant had relied on two judgments Ambica Construction v. Union of India and Raveechee and Company v. Union of India in support of his contentions. The court noticed that both these cases dealt the situation Arbitration Act 1940 which has no application to the facts of the present case.

Another issue raised was whether Clause 17 of the Contract is ultra vires in terms of Section 28 of the Indian Contract Act, 1872.

According to Section 28, a contract is void to the extent it restricts absolutely a party from enforcing his rights by usual proceedings in ordinary courts or if it limits the time within which he may enforce his rights. Exception I to this section contains a rule that a contract by which two or more persons agree that any dispute which has arisen or which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not illegal.

Taking note of these provisions, the court observed as follows:

20. Exception I to Section 28 saves contracts where the right to move the Court for appropriate relief is restricted but where the parties have agreed to resolve their dispute through arbitration. Thus, a lawful agreement to refer the matter to arbitration can be made a condition precedent before going to courts and it does not violate Section 28. No cause of action then accrues until the Arbitrator has made the award and the only amount awarded in such arbitration is recoverable in respect of the dispute so referred. Section 31(7)(a) of the 1996 Act which allows parties to waive any claim to interest including pendente lite and the power of the Arbitrator to grant interest is subject to the agreement of the parties.

There is an express statutory permission for the parties to contract out of receiving interest 

21. It is pertinent to note that interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter. Section 2 (a) of the Interest Act defines a "Court" which includes both a Tribunal and an Arbitrator. In turn, Section 3 allows a "Court" to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is "barred by virtue of an express agreement".

22. Thus, when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest. We are of the considered opinion that Clause 17 of the contract is not ultra vires in terms of Section 28 of the Indian Contract Act, 1872.

The court, therefore, upheld the Delhi High Court judgment and dismissed the appeal.

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