Contractual Clause barring the payment of interest restricts an Arbitrator from awarding pre-award interest under Section 31 of the Arbitration Act, 1996: Justice S. A. Nazeer

An appeal was filed against the order of the Division Bench of the Delhi High Court dated September 19, 2017, in front of a two-judge bench of Justice S. A. Nazeer and Justice Krishna Murari of the Supreme Court in the case of Garg Builders v. Bharat Heavy Electricals Limited (2021) C.A. 6216/ 2021, wherein the respondent allegedly floated a tender for the construction of a boundary wall. The appellant had submitted its bid for the said project, wherein the bid was accepted by the respondent whilst issuing a Letter Of Intent (LOI) to the appellant on September 09, 2008; consequently, the appellant and the respondent entered into a contract on October 24, 2008.

The parties to the contract filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court owing to the disputes between the parties with respect to the aforementioned contract. The court appointed Hon’ble M. A. Khan as the sole arbitrator  to adjudicate the said dispute. The appellant claimed various amounts under different heads, including pre-reference interest, pendente lite interest (interest “awaiting litigation” that accrues to the base amount while the pendency of the arbitration proceeding under Section 31, Sub-Section 7 of the Arbitration and Conciliation Act, 1996, wherein the arbitral tribunal may include to the award, an interest rate, to be applied on either the entire or part of the arbitral award for either the whole or part of the period between the cause of action and the granting of the arbitral award) and future interest (any interest that may be applied conditional to the occurrence of an event; it may be unconditional as well) at the rate of 24% on the value of the award.

The arbitrator awarded pendente lite and future interest at the rate of 10% per annum to the appellant on the award amount for a period between the date of filing of the claim petition (December 02, 2011) and the date of granting the arbitration award. The respondent challenged the aforementioned award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court on grounds that the sole arbitrator travelled beyond the scope of the contract between the respondent and the appellant whilst awarding the aforementioned interests to the appellant. It is worth noting that Clause 17 of the appellant and respondent barred the payment of any interest by the respondent (Bharat Heavy Electricals Limited) on any money due to the appellant (Garg Builders), including on Earnest Money Deposit and Security Deposit. It is worth mentioning that Section 31, Sub-Section 7 of the act applies if and only if an agreement does not exist between the parties barring the payment of any interest on the arbitration award under the said section. The Delhi High Court held that the power of the arbitral tribunal to award any pre-award interest (including pre-reference interest and pendente lite interest) is contingent on the parties not agreeing to the contrary; however, the court held that the parties agreed against the award of any interest in Clause 17 of the contract between them; consequently, the court set aside the pendente lite interest awarded to the appellant by the sole arbitrator. The counsel for the appellant, Mr. Sanjay Bansal, contended that the aforementioned Clause 17 does not bar the payment of interest for the pendente lite period; additionally, the counsel contended that Clause 17 violates Section 28 of the Indian Contract Act, 1872.

The counsel for the respondent, Mr. Pallav Kumar, contended that the power of the arbitrator to award pre-reference and pendente lite interest is restricted by an agreed, specific clause in the contract between the parties to bar the payment of any interest; additionally, the counsel contended that Section 31, Sub-Section 7 places paramount importance on the said contract. Mr. Sanjay Bansal contended that Clause 17 of the contracts violates the rights of the appellant under Section 3 of the Interest Act, 1978 (Power of the court to allow interest); therefore, the counsel held that said clause is void under Section 28 of the Indian Contract Act, 1872 since the clause restricts the appellant to enforce its rights under Section 3, Sub-Section 1 of the Interest Act, 1978. Mr. Pallav Kumar contended that Section 3 of the Interest Act allows the payment of interest in respect of any proceedings for recovery of any debt or damages or any proceedings in which a claim for interest in respect of any debt or damages already paid; additionally, he added that Section 3, Sub-Section 3, Clause A of the same act bars the application of Section 3, Sub-Section 1 in relation to any debt or damages upon which payment of interest is barred by an express agreement between the parties in question. In a nutshell, the respondent held that the aforementioned interest awarded by the arbitral tribunal was not in relation to any debt or damages and hence, the application of Section 3, Sub-Section 1 of the Interest Act is not sustained; subsequently, the respondent held that the Sub-Section 3, Clause A upholds the sanctity of the contract between the appellant and the respondent (which bars the payment of any interest to the appellant by the respondent) and hence, there is no violation of rights of the appellant under the said act.

The bench held that if the contract between the parties prohibits pre-reference and pendente lite interest in clear and categorical terms (Clause 17: “any moneys due to the contractor), then the arbitrator cannot award interest for the said period; this stand of the Supreme Court was iterated in the cases of Sayeed Ahmed and Company v. The State of Uttar Pradesh & Ors. (2009) 12 SCC 26 and Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited (2015) 5 SCC 718. Justice S. A. Nazeer  in the case of Sri Chittaranjan Maity v. Union of India (2017) 9 SCC 611 held that if a contract between the parties prohibits the award of interest for the pre-award period, then the arbitrator cannot award any interest for the said period.

The bench held that when there is express statutory permission for the parties to contract out of receiving interest and if the parties have agreed for the same in free consent, then the matter is not open for the arbitrator to grant pendente lite interest. The bench held that Clause 17 of the contract does not violate Section 28 of the Indian Contract Act, 1872.

The bench quashed the appeal by the appellant.

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