Clause Prohibiting Payment Of Interest On Delayed Payments, Doesn’t Prohibit Arbitrator From Granting Interest Under S. 31(7) Of The Act: Delhi High Court

The Delhi High Court has ruled that a clause in a contract that prohibits payment of interest on delayed payments, does not prohibit the arbitrator from granting interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (A&C Act). The bench of Justice Manoj Kumar Ohri held that the said stipulation only puts a restriction on the contracting party to claim interest on delayed payments. Since interest is compensatory in nature, the arbitrator’s powers are not curtailed by such narrow clauses in the contract.

The bench concluded that the arbitrator is empowered under Section 31(7) of the A&C Act to grant interest for all the three periods namely, pre-reference, pendente-lite and post award periods, unless the contract prohibits the arbitrator from granting interest under Section 31(7).

The court further remarked that though, as per the settled position of law, the court is not required to judge the arbitral award under Section 34 of the A&C Act as if it were sitting in appeal; however, out of judicial habit, the courts tend to act like appellate courts and blur the distinction between two very distinct jurisdictions.

The appellant, M/s Mahesh Construction, was issued a work order under a tender floated by the respondent, Municipal Corporation of Delhi (MCD).

The dispute between the parties regarding non-payment of dues under the contract, was referred to arbitration. The Arbitral Tribunal allowed the claims of the appellant and awarded interest on the sums claimed for all the three periods namely, pre-reference, pendente-lite, and future (post award).

MCD challenged the arbitral award by filing an application under Section 34 of the A&C Act before the District Court. MCD claimed that the appellant-contractor had failed to fulfil his contractual obligations under the contract and thus, the bills were not cleared. MCD also challenged the interest awarded by the arbitrator.

The Trial Court did not concur with the findings of the Arbitral Tribunal. It held that the Contractor had failed to comply with the contract. It thus set aside the arbitral award.

Against this, the appellant, Mahesh Construction, filed an appeal under Section 37 of the A&C Act before the Delhi High Court.

The court remarked that as per the settled position of law, the court hearing objections under Section 34 of the A&C Act is not required to judge the arbitral award as if it were sitting in appeal. It added that, however, out of judicial habit, the courts tend to act like appellate courts and blur the distinction between two very distinct jurisdictions.

The bench concluded that the Trial Court exceeded its jurisdiction by supplanting the view formed by the Arbitral Tribunal with its own view, which is not permissible. It added that the view formed by the Arbitral Tribunal was a plausible view and did not appear to be manifestly perverse to call for interference.

“The Arbitral Tribunal was of the view that dumping of silt in the sites other than designated sites was not a breach of contract in view of specific instructions received from the field staff. MB (Measurement Book) was filed as evidence of silting work executed by the Contractor. Arbitral Tribunal relied upon this piece of evidence and was satisfied about its sufficiency. In Associate Builders v. Delhi Development Authority reported as (2015) 3 SCC 49, it has been laid down that Arbitral Tribunal is the master of both quality and quantity of evidence to reach a finding of fact. In view of this legal position, it was not proper for the Court below to discount evidentiary value of the MBs by calling it secondary evidence,” the court said.

The court remarked that, indisputably, an arbitral award which is based on no material or evidence at all, can be held to be vitiated by patent illegality. However, insufficiency of evidence or material cannot be a ground for setting aside an arbitral award.

Perusing the facts of the case, the court observed that there was evidence and material available on the record which substantiated the Contractor’s claim. “Apparently, the Court had embarked upon an exercise to re-evaluate the sufficiency of evidence in material produced and faulted the Arbitral Tribunal in incorrectly appreciating the sufficiency of the said material which is clearly outside the ambit of Section 34 of the Act,” the court ruled.

The bench further reckoned that the power of Arbitral Tribunal to award interest for all the three periods namely, pre-reference, pendente-lite and post award, is settled.

The court took note that the Supreme Court in Reliance Cellulose Products Ltd vs ONGC, (2018) 9 SCC 266, has held that interest is compensatory in nature and is parasitic on the principal amount.

In view of the decision in Reliance Cellulose (2018), the bench held that the arbitrator is empowered under Section 31(7) of the A&C Act to grant interest for all the three periods, unless the contract prohibits the arbitrator from granting interest under the said provision.

The court added: “A clause in a contract that prohibits payment of interest on delayed payments, does not restrict the “arbitrator” to grant interest since it does not prohibit the “arbitrator” from granting interest under Section 31(7) of the Act and is a restriction on the contracting party to claim interest on delayed payments. As stated above, since interest in compensatory in nature, the arbitrator’s powers are not curtailed by such narrow clauses in the contract.”

The bench thus concluded that the award of interest by the Arbitral Tribunal for pre-reference, pendente-lite and post award periods, was neither contrary to the terms of contract nor was it in breach of Section 31(7) of the A&C Act.

“Consequently, the impugned order is set aside and the award passed by the Arbitral Tribunal is upheld.”

The court thus allowed the appeal and set aside the Trial Court’s order.

Case Title: M/s Mahesh Construction vs Municipal Corporation of Delhi & Anr.

Citation: 2023 LiveLaw (Del) 459

Dated: 25.05.2023

Counsel for the Appellant: Mr. Prarthna Dogra

Counsel for the Respondent: Mr. Attin Shankar Rastogi and Ms. Anjali Kumari

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