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Clause Barring Payment Of Interest Not Hit By Section 28 Contract Act : Supreme Court

LIVELAW NEWS NETWORK
6 Oct 2021 7:58 AM GMT
Clause Barring Payment Of Interest Not Hit By Section 28 Contract Act : Supreme Court
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The Supreme Court has held that a clause in an agreement barring payment of interest on amounts security deposit, earnest money deposit or any other amount will not be hit by Section 28 of the Contract Act. According to Section 28 of the Indian Contract Act, a contract is void to the extent it restricts absolutely a party from enforcing his rights by usual proceedings in ordinary courts or if...

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The Supreme Court has held that a clause in an agreement barring payment of interest on amounts security deposit, earnest money deposit or any other amount will not be hit by Section 28 of the Contract Act.

According to Section 28 of the Indian Contract Act, 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.

The case(Garg Builders Vs Bharat Heavy Electricals Limited LL 2021 SC 535) before the Supreme Court was related to the right of a party to seek pendente lite interest in an arbitration proceeding when the agreement had a clause barring the agreement.

An argument was raised that the clause barring interest was violative of Section 28 of the Contract Act. Answering this issue, the Court noted that the payment of interest is governed by the Interest Act, 1978. 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".

In this backdrop, the Court held that the clause in question was not violative of Section 28.

A bench comprising Justices S Abdul Nazeer and Krishna Murari observed in the judgment 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.

 

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".

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



Case name and Citation: Garg Builders Vs Bharat Heavy Electricals Limited LL 2021 SC 535

Case no. and date: CA 6216 OF 2021 | 4 October 2021

Coram: Justices S. Abdul Nazeer and Krishna Murari

Counsel: Adv Sanjay Bansal for appellant, Adv Pallav Kumar for respondent

Click here to Read/Download Judgment

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