The Hon'ble Supreme Court in its recent decision in Garg Builders v. Bharat Heavy Electricals1 held that an arbitrator under the Arbitration and Conciliation Act, 1996 (Arbitration Act) was not empowered to award pendente lite interest when the parties had agreed to not have any interests awarded in their contract. In this article, we navigate through the facts and findings in the aforementioned case.
The respondent had floated a tender for construction of boundary wall at its premises in Bawana, Delhi (Project). The appellant submitted its bid for the Project which was accepted by the respondent. The parties entered into a contract in 2009 which, inter alia, contained the interest barring clause. The clause provided that no interest shall be payable by the respondent on, inter alia, any moneys due to the contractor. Disputes arose amongst the parties with respect to the aforesaid contract and subsequently the appellant filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) before the High Court of Delhi (High Court). The High Court appointed the sole arbitrator to adjudicate upon the disputes. The appellant in the claim petition, apart from claiming various amounts, claimed pre-reference, pendente lite and future interest at the rate of 24% (twenty four percent) per annum on the value of the award. The arbitrator upon hearing both parties concluded that there is no prohibition in the contract on payment of interest for pre-reference period, pendente lite and future period. Therefore, the arbitrator awarded pendente lite and future interest at the rate of 10% (ten percent) per annum to the appellant on the award amount from the date of filing the claim petition to the date of realization of the award amount.
Aggrieved by the award rendered by the arbitrator, the respondent challenged the award under Section 34 of the Arbitration Act before the High Court on various grounds, inter alia, on the ground that the arbitrator being a 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. Accordingly, the High Court held that the arbitrator fell in error in allowing pendente lite interest. Later, the Division Bench of the High Court upheld the judgment of the Single Judge in the impugned order and the matter reached the Hon'ble Supreme Court.
Contentions of the appellant
The appellant contended that the arbitrator had taken a plausible view in terms of the interest barring clause of the contract and held that the same did not bar payment of interest for pendente lite period. This argument was advanced in view of judgment of the Hon'ble Supreme Court in Ambica Construction v. Union of India.2 The appellant also relied on another judgment of the Apex Court in Raveechee and Company v. Union of India.3 The appellant then argued that the interest barring clause was ultra vires and against the provisions of Section 28 of the Indian Contract Act, 1872 (Contract Act).
Contentions of the respondent
The respondent highlighted the importance of the contract entered into between the parties and how it categorically restricted the power of the arbitrator to grant any pre-reference, and pendente lite interest. The respondent argued that if the contract itself contained a specific clause which expressly barred the payment of interest, then it was not open for the arbitrator to grant pendente lite interest. It was further argued by the respondent that the decision in Ambica Construction (supra) did not apply to instant matter since it was decided under the erstwhile Arbitration Act, 1940. It was further argued by the respondent that the Interest Act, 1978 (Interest Act) in Section 3(3) creates an exception recognizing the right of the parties to contract out of payment of interest arising on account of debt, or damages. The respondent submitted that Section 3(3) of the Interest Act sanctified contracts that barred the payment of interest arising out of debt, or damages. Thus, the respondent argued that the contract was not violative of any provisions of the Section 28 of the Contract Act.
The Hon'ble Supreme Court, at the outset, observed that the law relating to the award of pendente lite interest by the arbitrator under the Arbitration Act was no longer res integra. The provisions of the Arbitration Act gave paramount importance to the contract entered into between the parties and categorically restricted the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary. The Apex Court held that it was clear from Section 31(7) of the Arbitration Act that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period. In the present case, the interest barring clause was very clear and categorical. It used the expression "any moneys due to the contract" by the employer which includes the amounts awarded by the arbitrator.
The Hon'ble Supreme Court referred to its decision in Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors.4 which held that a provision was made under Section 31(7)(a) of the Arbitration Act in relation to the power of an arbitrator to award interest. If the contract barred payment of interest, the arbitrator was not empowered to award any interest. The Apex Court also referred to a set of similar rulings to hold that the arbitrator cannot award interest between the date on which the cause of action arose to the date of award if the parties agreed in the contract to not have any interests awarded.5
The Apex Court observed that the decision in Raveechee and Company (supra) relied upon by the appellant was under the erstwhile Arbitration Act, 1940 and had no application to the facts of the present case. Having regard to the above findings, the Hon'ble Supreme Court was of the view that the High Court was justified in rejecting the claim of the appellant seeking pendente lite interest on the award amount.
On whether the contract was ultra vires of Section 28 of the Contract Act, it was held that Exception I to Section 28 contained a rule which exempted agreements to refer all disputes to arbitration. The Apex Court observed that in view of the exception contained in Section 28 of the Contract Act, a lawful agreement was signed amongst the parties to refer their disputes to arbitration. Further, as per Section 31(7)(a) of the Arbitration Act, the parties were empowered to waive a claim to pendente lite interest. Section 2(a) of the Interest Act which defines "Court" covers within its ambit both an arbitral tribunal and an arbitrator. Further, Section 3(3) of the Interest Act specifically provides that the Interest Act will not apply to situations where the payment of interest is barred by virtue of an express agreement.
Thus, in view of the express statutory permission for the parties to contract out of receiving interest, and the parties having agreed to exercise this option with free consent, it was not open for the arbitrator to grant pendente lite interest. Hence, the interest barring clause was held not to be ultra vires of Section 28 of the Contract Act. In result, the Apex Court held that the appeal failed and accordingly dismissed the matter
It is now a well-established principle under the Indian arbitration regime that an arbitrator being a creature of the contract can only act within the four walls of the contract. The Hon'ble Supreme Court in another decision passed recently in PSA Sical Terminal Pvt. Ltd. v. Board of Trustees of V.O. Chidambranar Trust Tuticorin and Ors.6 observed that if an arbitrator travelled beyond the contract, he would be acting without jurisdiction. The rationale behind limiting the powers of the arbitrator to act within the terms of the contract lies in the goal of upholding party autonomy. Thus, in the instant case, when the parties had expressly excluded the scope of payment of interests, the Apex Court rightly held that the arbitrator could not have awarded any pendente lite interest in the matter.
1. Garg Builders v. Bharat Heavy Electricals Ltd., Civil Appeal No. 6212 of 2021.
2. Ambica Construction v. Union of India, 2017 14 SCC 323.
3. Raveechee and Company v. Union of India,
4. Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors., 2009 12 SCC 26.
5. Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors., 2010 8 SCC 767; Bharat Heavy Electricals Ltd. v. Globe Hi-Fabs Ltd., 2015 5 SCC 718; and Sri Chittaranjan Maity v. Union of India, 2017 9 SCC 611.
6. PSA Sical Terminal Pvt. Ltd. v. Board of Trustees of V.O. Chidambranar Trust Tuticorin and Ors., 2021 SCC OnLine 508.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.