When Parties Agree For No Interest Payable Till Arbitral Award Is Made, Arbitrator Bound By This Agreement: Delhi High Court

Brief Facts:

The Petitioner challenged an Arbitral Award, specifically contesting the portion wherein the Arbitrator granted interest on the Respondent's recovery claim against outstanding bills. The underlying arbitral proceedings originated from a contract agreement, in which Rites Ltd. (the Petitioner) acted as the constituted attorney of Respondent No. 2, Delhi University, assigning Ahluwalia Contract (India) Ltd. (Respondent) the construction task of hostels and flats in the North Campus of the University.

Respondent, as the claimant in the arbitration, asserted that it submitted its final bill of Rs. 7,84,66,808/-. Although Petitioner certified the bill for a net payable amount of Rs. 2,48,27,105/-, Respondent received only Rs. 1,02,90,000/-. Due to the partial and delayed payment, Respondent sought recovery of the remaining principal amount and interest for delayed payment, both on the unpaid and paid amounts. The impugned Award favored Respondent, granting claims along with post-award interest and costs. While there was no dispute regarding claim No.1, Petitioner contended that claim No.3 should not have been awarded due to a specific contractual prohibition.

The Petitioner pointed out two clauses in the contract to argue that the claim for interest fell outside the contract's provisions. It emphasized that these clauses were explicitly presented to the Arbitrator and were included in the written submissions filed by the Petitioner. It asserted that the Arbitrator failed to consider this submission.

In contrast, Mr. Dhruv Rohatagi, representing Respondent, contended that interest was awarded as compensation for delayed payment. He asserted that the Arbitrator found no justification for the delay in the payment of Rs. 1.52 crores and, consequently, compensated Respondent for the delay.

Observations by the High Court:

The High Court referred the decision of the Supreme Court in Garg Builders v. BHEL (2022) 11 SCC 697, where SC dealt with a contractual provision excluding payment of interest on certain amounts due to the contractor. The Arbitrator in that case awarded interest, but the decision was set aside by the High Court and subsequently upheld by the Supreme Court. The Supreme Court emphasized the paramount importance given to the contractual terms under the Arbitration and Conciliation Act, 1996. Section 31(7)(a) of the Act explicitly states that unless otherwise agreed by the parties, an Arbitral Tribunal may include interest in the award for the period between the cause of action and the date of the award.

The High Court further analyzed the provisions of the Interest Act, 1978, which allows parties to waive their claim to interest through an express agreement. It held that when there is such an express contractual provision, the arbitrator cannot grant interest. It noted that Clause 17 of the contract specifically barred the payment of interest on any moneys due to the contractor. It held that such a clause was not ultra vires under Section 28 of the Contract Act, 1872.

Therefore, the High Court held that when parties agree that no interest shall be payable, the Arbitral Tribunal is bound by that agreement. Further, Clause 9 explicitly stated that the contractor would not be entitled to compensation or claims for interest in case of delayed payment, while Clause 25(9) further restricted the arbitrator's power to grant interest for the pre-reference or pendente-lite period on any payable amount.

Consequently, the High Court held that the Arbitrator exceeded their powers by awarding interest in the case. The High Court set aside the Award on claim No. 3, clarifying that the grant of post-award interest was not challenged or set aside.

Case Title: Rites Ltd Vs Ahuwalia Contract (India) Ltd. & Anr.

Citation: 2024 LiveLaw (Del) 295

Case Number: O.M.P. (COMM) 56/2019 & I.A. 15760/2019.

Advocate for the Petitioner: Mr. Udit Seth, Advocate.

Advocate for the Respondent: Mr. Dhruv Rohatagi, Advocate for R-1. Ms. Aakanksha Kaul and Mr. Aman Sahani, Advocates for Delhi University.

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