India: SC: Arbitrator Cannot Award Pendente Lite Interest When Specific Provision In Contract Bars Payment Of Interest

Last Updated: 10 October 2017
Article by Ajay Bhargava, Jeevan Ballav Panda and Shalini Sati Prasad

Most Read Contributor in India, August 2018

On 03 October 2017, the Supreme Court of India in the matter of Chittaranjan Maity v Union of India[1] has reaffirmed the position that under the provisions contained in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 ( 1996 Act) when parties had agreed under the terms of the agreement that pendente lite interest shall not be payable, the Arbitrator cannot award interest between the date on which the cause of action arose till the date of the award.

Background

The Supreme Court granted leave to appeal to the Appellant challenging the legality and correctness of the judgment and order dated 29 September 2011 passed by the Division Bench of the Calcutta High Court. The Division Bench had set aside the judgment and order of the Single Bench dated 27 January 2009.

The matter involved two interesting propositions of law namely:

  • Whether the Division Bench was justified in considering the arbitrability of the dispute raised by the Respondent for the first time in the appeal on the basis of a "No Claims Certificate" issued by the Appellant to the Respondent; and
  • Whether the Arbitral Tribunal was justified in awarding interest on the delayed payments in favour of the Appellant in view of specific clause in the agreement prohibiting award of pre-award interest.

In the present case, the Appellant's tender in response to the invitation of the Respondent for execution of balance of earth work for formation of banks for laying railway line, roads, platforms and miscellaneous work in connection with the new goods terminal yard of South‑Eastern Railway at Sankrail in Howrah District was accepted. An agreement was entered into by and between the Appellant and the Respondent on 22 August 1991 wherein the General Conditions of the Contract (GCC) were incorporated and the parties were bound by the terms and conditions thereof. Disputes and differences arose between the parties regarding execution of work and its purported abandonment. The Appellant raised his claim before the Respondent by his letter dated 30 October 1996 and by a subsequent letter dated 22 June 1998, the Appellant demanded reference of the dispute to arbitration. Ultimately, the Appellant filed an application under Section 11(6) of the 1996 Act for appointment of an arbitrator before the Calcutta High Court. Accordingly, by an Order dated 6 December 2001 the General Manager, South-Eastern Railway was directed to appoint Arbitrators from their panel within four weeks from the date of Order. Pursuant to the Order, the Arbitral Tribunal was constituted which adjudicated the disputes and claims raised by the parties.

The Arbitral Tribunal passed an award on 20 September 2006 in favour of the Appellant. The Respondent moved an application under Section 34 of the 1996 Act for setting aside the award. The Single Bench of the Calcutta High Court by judgment and order dated 27 January 2009 dismissed the application which was again challenged by the Respondent before the Division Bench.

In the appeal before the Division Bench it was for the first time contended by the Respondent that the Appellant had issued a "No Claims Certificate" to the Respondent, thereby forfeiting his right for any claim from the Respondent in regard to which the dispute could not be adjudicated by the Arbitral Tribunal. In other words, it was contended that there was no arbitrable claim to be adjudicated upon and as such, the claim itself was not maintainable.

As regards award of interest it was contended that in view of Clause 16(2) of the GCC, no interest could have been awarded to the Appellant. Clause 16(2) of the GCC read as follows:

"16(2) – No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract, but government securities deposit in terms of sub-clause (1) of this clause will be repayable (with) interest accrued thereon."

The Division Bench by its judgment and order dated 29 September 2011 reversed and set-aside the judgment and order of the Single Bench by allowing the appeal of the Respondent.

Being aggrieved and dissatisfied with the order dated 29 September 2011, the Appellant preferred Special Leave Petitions before the Supreme Court primarily on the ground that

  • The plea that the claim is not a live and arbitrable claim was not urged in the proceedings under Section 11(6) of the 1996 Act or before the Arbitral Tribunal or before the Single Bench hearing the application under Section 34 of the 1996 Act;
  • The issue as to whether the claim is a live claim or not, if raised, can be kept open in the proceedings under Section 11(6) of the 1996 Act to be decided by the Arbitral Tribunal[2];
  • The party questioning the jurisdiction of the Arbitrator has an obligation to raise the said question before the Arbitrator[3];
  • The scope of intervention of the Court is limited to cases of fraud or bias by the arbitrators, violation of natural justice, etc;
  • As the issue relating to "No Claims Certificate" was never urged until the matter came before the Division Bench, the same was not available to the Respondent;
  • The clause barring the award of interest on the amounts payable under the contract would not be sufficient to deny payment on pendente lite interest as per the decision of the Supreme Court in M/s Ambica Construction v Union of India[4].

Judgment

The Supreme Court partly allowed the Appeal and decided the issue of arbitrability of the claim in light of the issuance of the "No Claims Certificate" in favour of the Appellant whereas on the issue of award of interest relied upon the specific agreement between the parties prohibiting award of pendente lite interest to hold that the Appellant was not entitled to any interest up to the date of the award.

On the issue of "No Claims Certificate" the Supreme Court accepted the position of law laid down in National Insurance (Supra) and Mcdermott International Inc (Supra) to hold that the Division Bench was not justified while considering the arbitrability of the disputes for the first time, particularly, when the Respondent had not urged the issue relating to "No Claims Certificate" before the Chief Justice of the Calcutta High Court, the Arbitral Tribunal or before the Single Judge.

On the issue of awarding of pendente lite interest, the Supreme Court compared the position of law as prevailing under the Arbitration Act, 1940 ( 1940 Act) with the provision contained in Section 31(7)(a) of the 1996 Act. The Supreme Court noted that a specific provision has been created under the 1996 Act whereby if the agreement prohibits award of interest for the pre-award period (i.e. pre-reference and pendente lite period), the Arbitrator cannot award interest for the said period. The specific bar contained in Clause 16(2) of the GCC was also considered.

The Supreme Court distinguished the applicability of the judgment of M/s. Ambica Construction (Supra) due to lack of clarity as to whether the same was decided under the 1940 Act or under the 1996 Act as it relied upon the Constitution Bench judgment of the Supreme Court in Secretary, Irrigation Department, Government of Orissa and Others v GC Roy[5], which was with reference to the 1940 Act. The 1940 Act did not contain any provision relating to the power of the Arbitrator to award interest[6].

Now under the 1996 Act in view of specific provision contained in Section 31(7)(a) of the 1996 Act, award of interest has been made subject to any agreement to the contrary between the parties. In the present case, Clause 16(2) of the GCC expressly barring award of interest would therefore prevail over the power of the Arbitrator to award interest. Hence, it was held that the Appellant was not entitled to any pendente lite interest.

Comment

The Arbitration Act 1940 did not prohibit the Arbitrator from awarding interest for the pre‑reference, pendente lite or post-award period. On the contrary the 1996 Act under the provisions contained in Section 31(7)(a) of the 1996 Act specifically provides that "unless otherwise agreed by the parties", in case of a monetary award, the Arbitral Tribunal may include in the sum for which the Award is made interest, at such rates as its deem reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the Award is made.

Therefore, what is significant to note under the 1996 Act is that, if the Agreement bars payment of interest, the Arbitrator cannot award interest from the date of cause of action till the date of award. Moreover the difference between pre-reference period and the pendente lite interest has disappeared in so far as the award of interest by the Arbitrator is concerned. The said provision recognises only two periods, i.e. pre-award and post-award period.

In the past, the Supreme Court in the cases of Sree Kamatchi Amman Constructions v Divisional Railway Manager (Works), Palghat and Ors.[7] (while dealing with an identical case wherein Clause 16 of the GCC of the Railways had required interpretation) and Union of India v Bright Power Projects (India) Private Limited[8] (while dealing with similar provision prohibiting award of interest) by referring to and interpreting the provisions of Section 31(7)(a) of the 1996 Act, held that where parties had agreed that interest shall not be payable, the Arbitral Tribunal could not award interest for the pendente lite period.

The judgment of the Supreme Court in the present case while relying on Sree Kamatchi (Supra) and Bright Power (Supra) reaffirmed the aforesaid position by emphasizing that in view of the specific provision in the contract prohibiting award of interest, the Appellant was not entitled to any interest on the amount awarded by the Arbitral Tribunal till the date of award.

It is to be noted that clauses/ provisions in standard contracts, particularly those of Government entities (like the Railways) and Public Sector Undertakings (PSUs) typically contain a prohibition on the awarding of pendente lite interest. Execution of work for various Government entities is highly sought after and is also viewed as an opportunity to build experience to participate in future tenders and meet techno-commercial eligibility criteria. Hence, due to the very nature of the contract, private parties have very little opportunity to negotiate its terms.

In the process, private contracting parties have no choice but to agree to the seemingly unilateral and unreasonable contractual terms. The 2015 Amendment to the 1996 Act which has made the arbitration process time-bound definitely brings in some respite to private parties, however, these clauses do limit the arbitral tribunal's discretion to the prejudice of the successful Claimant and to the advantage of the party in breach. In fact, at times the standard contracts end up having conflicting clauses like – the terms of payment entitling the private party to claim interest at stipulated rates in case of failure to remit payment within a specific period from the date of raising of invoice or a clause which expressly bars the awarding of pendente lite interest.

It is interesting to note that in none of the above cases of the Supreme Court dealt with a situation where there are two conflicting clauses in the contract, one permitting the party to claim interest on delayed payments after expiry of certain time period from the date of raising of invoices and the other prohibiting award of pendente lite interest. It would be interesting to note the approach the Supreme Court would take in such a situation to interpret and construe the phrase "unless otherwise agreed by the parties" contained in Section 31(7)(a) of the 1996 Act in such a situation when there is lack of clarity as to whether there is express prohibition in award of pendente lite interest.

In our view, the conflicting provision cannot be construed as a bar on the payment of interest by agreement of the parties and the Arbitral Tribunal in such a case should resort to the general rules/ principles of interpretation and construction of contracts to gather the actual intention of the parties while entering into the contract. In such cases, various aids in interpretation depending on the applicability may be used in construction of the contract to ensure that justice is done and the party in breach does not take advantage of its own wrong by delaying and depriving legitimate payments and the interest accrued thereupon.

Footnotes

[1]Civil Appeal Nos. 15545 – 15546 of 2017 arising out of SLP (C) Nos. 39038 – 39039 of 2012.

[2]As per the law laid down by the Supreme Court in National Insurance Company Limited v Boghara Polyfab Private Limited (2009) 1 SCC 267

[3]As per the law laid down by the Supreme Court in Mcdermott International Inc v Burn Standard Co Ltd & Ors (2006) 11 SCC 181

[4](2017) SCC OnLine SC 678

[5](1992) 1 SCC 508.

[6]As per the law laid down in Sayeed Ahmed and Company v State of Uttar Pradesh & Ors (2009) 12 SCC 26

[7](2010) 8 SCC 767.

[8](2015) 9 SCC 695.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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