Between the Lines | Supreme Court: Arbitral Tribunal cannot award interest when the parties to the contract have agreed that it is not payable December 15, 2021
Published in: Between The Lines
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The Supreme Court (“SC”) has in its judgment dated November 18, 2021, in the matter of Union of India v. Manraj Enterprises [Civil Appeal No. 6592 OF 2021] (“Judgement”) held that the arbitrator in the arbitration proceedings, has no power to award interest, contrary to the terms of the agreement/contract between the parties.
A contract was entered into between the Union of India (“Appellant”) and Manraj Enterprises (“Respondent”) with regards to three work contracts. A dispute arose between the parties and both the parties went into arbitration for the resolution of the dispute. The learned sole arbitrator by award dated January 17, 2011, awarded an amount of INR 78,81,553.08. The arbitrator also awarded pendente lite and future interest at the rate of 12% and 18% respectively on the entire awarded amount, except for the earnest money deposit and security deposit.
The Appellant had filed an appeal with the Delhi High Court (“DHC”) under Section 34 (Application for setting aside arbitral award) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) challenging the award pertaining to pre-suit, pendente lite and future interest awarded on the balance due payment, from the due date of payment. The DHC, subsequently, had by order dated April 12, 2021, upheld the award of interest by the sole arbitrator. Aggrieved, the Appellant had filed the instant appeal before the SC.
Whether the contractor is entitled to any interest pendente lite on the amounts payable to the contractor other than upon the earnest money or the security deposit.
Contentions raised by the Appellant:
The Appellant vehemently submitted that as per the General Conditions of Contract (“GCC”), governing the contract between the parties, there was a bar against payment of interest. It was submitted that as agreed between the parties and as per Clause 16(2) of the GCC, no interest shall be payable upon the earnest money or the security deposit or the amounts payable to the contractor under the contract. The Appellant urged that under Section 31(7)(a) of the 1996 Act, unless otherwise agreed between the parties, the arbitral tribunal may include in the sum for which the award is made, interest, at such rate as it deems reasonable, on the whole or any part of the money. It was submitted that if there is an expression “agreed between the parties” governing the contract that no interest shall be payable, parties are bound by such an agreement and no interest either pendente lite or future interest on the amount due and payable under the contract shall be awarded.
The Appellant further contended that in the present case, Clause 16(2) of the GCC governing the contract between the parties specifically bars payment of interest, not only on the earnest money or security deposit, but also upon any amounts payable to the contractor under the contract. It was urged that since the parties are governed by the contract and the arbitrator and the arbitration proceedings are creatures of the contract, they cannot traverse beyond what has been contemplated in the contract between the parties. The Appellant further relied on Union of India v. Bright Power Projects (India) (P) Ltd [(2015) 9 SCC 695] (“Bright Power Projects”), wherein it was held that in view of the specific contract between the parties and the bar for awarding the interest, the payment of interest was not permissible even on earnest money deposit or security deposit or amounts payable to the contractor under the contract. It was further submitted that the expression “amounts payable to the contractor under the contract” is wide enough to cover every payment of amount payable under the contract.
The Appellant argued that the SC, while analysing the expression “money due under the contract” in Garg Builders v. Bharat Heavy Electricals Limited, 2021 [SCC OnLine SC 855], held that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period. Therefore, where the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest. The Appellant further argued that the phrase “amounts payable to the contractor under the contract” cannot be read with “earnest money deposit” or “security deposit” by applying the principle of ejusdem generis (of the same kind). It was further urged that the earnest money deposit and security deposit are the amounts which are payable by the contractor whereas the amount awarded by the arbitrator or any other amounts payable under the contract could be under different circumstances and could be payable by either party.
It was submitted that the expression “amounts payable to the contractor under the contract” has been employed to cover such other situations or circumstances. It was therefore submitted that it is not possible to apply the principle of ejusdem generis. Relying on the case of Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., [(2019) 17 SCC 786], it was contended that if the agreement between the parties specifically prohibits grant of interest, the arbitrator cannot award pendente lite interest in such cases.
The Appellant prayed to allow the present appeal and quash and set aside the judgments and orders passed by the DHC as well as the award passed by the learned arbitrator awarding the interest, pendente lite and future interest.
Contentions raised by the Respondents:
The Respondent submitted that if the entire Clause 16 of the GCC is read, it is evident that the said clause pertains specifically to earnest money and security deposits and the same can in no way be read in a manner to imply a bar on pendente lite interest or other amounts as contended on behalf of the Appellant.
The Respondent placed reliance on Secretary, Irrigation Department, State of Orissa v. G.C. Roy [(1992) 1 SCC 508], wherein it was held that when the agreement between the parties does not prohibit grant of interest and where the party claims interest and the dispute has been referred to an arbitrator, then the arbitrator does have the power to award interest pendente lite. The Respondent further relied on the case of Raveechee and Company v. Union of India [(2018) 7 SCC 664], wherein it was held that the power to grant interest pendente lite is inherent in an arbitrator who also exercises the power to do equity and unless the agreement expressly bars the arbitrator from awarding interest pendente lite, the arbitrator has all the powers to grant pendente lite interest. It was urged that in the present case, Clause 16 of the GCC does not bar an arbitrator to award interest pendente lite. It was submitted that the arbitrator is never a party to the agreement and therefore it does not bar the arbitrator from awarding pendente lite interest. It was further contended that the bar is on the parties from claiming interest on security deposits and earnest money and not on the arbitrator from awarding interest pendente lite on other amounts. It was submitted, therefore, that unless there is an express and specific bar against the arbitrator to award the pendente lite interest, the arbitrator is not precluded from awarding the interest on the amounts awarded.
The Respondent further submitted that in the present case, even the Appellant had claimed interest at the rate of 18% from the Respondent by way of counter-claim and the same has been recorded in the arbitral tribunal’s award dated January 17, 2011. It was submitted that the Appellant cannot now be permitted to say that no interest pendente lite is liable to be awarded by the learned arbitrator.
Observations of the Supreme Court
The SC observed that in the case of Bright Power Projects, while considering pari materia clause with Clause 16(2) of the GCC, a three Judge Bench of the SC had held that when the parties to the contract agree to the fact that interest would not be awarded on the amount payable to the contractor under the contract, they are bound by their understanding, and having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an arbitral tribunal. In the decision of Bright Power Projects, the SC also considered Section 31(7)(a) of the 1996 Act, and it was specifically held that Section 31(7) of the 1996 Act, by using the words “unless otherwise agreed by the parties” categorically specifies that the arbitrator is bound by the terms of the contract insofar as award of interest from the date of cause of action to date of the award is concerned.
It was further observed and held that where the parties had agreed that no interest shall be payable, the arbitral tribunal cannot award interest. The SC refuted the contention of the Respondent that the arbitral tribunal can independently and on equitable ground and/or to do justice, award interest pendente lite or future interest, and noted that once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in Clause 16(2) of the GCC, the arbitrator in the arbitration proceedings, being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to Clause 16(2) of the GCC.
The SC explained that the expression “amounts payable to the contractor under the contract” has to be read independently and disjunctively to earnest money deposit and security deposit, as the word used is “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the principle of ejusdem generis was not applicable in the present case. The SC further opined that, merely because the Appellant has claimed interest, does not imply that the Respondent shall be entitled to interest pendente lite. Had the Appellant been awarded interest, the same would not be permissible and could have been a subject matter of challenge. In other words, there cannot be an estoppel against law.
Decision of the Supreme Court
The SC held that the arbitrator, in the instant case, had erred in awarding pendente lite and future interest on the amount due and payable to the contractor under the contract in question and the same had been erroneously confirmed by the DHC.
The impugned judgment and order passed by the division bench of the DHC in an appeal under Section 37 (Appealable orders) of the 1996 Act and the order passed by the learned Single Judge in an application under Section 34 of the 1996 Act, and the award passed by the learned arbitral tribunal awarding pendente lite and future interest on the amounts held to be due and payable to the contractor under the contract, were quashed and set aside. It was held that in view of the specific bar contained in Clause 16(2) of the GCC, the Respondent was not entitled to any interest pendente lite or future interest on the amounts due and payable to it under the contract.
The SC by this Judgement has categorically laid down that a contractual bar on payment of interest bars not only the parties to the contract from claiming it, but also the arbitrator from awarding such interest. The SC rightly decided that the arbitral tribunal cannot independently on the grounds of being just and equitable award interest de hors the contractual bar. Once the parties have agreed to the terms of interest not being paid, they are bound by such terms.
Thus, upholding the concept of party autonomy, the SC held that an arbitral tribunal, as a creature of the contract entered into between the parties, cannot be said to be empowered to award pendente lite interest or future interest when the parties had specifically agreed not to have such interest awarded in their contract.
The Judgement is in line with the recent decision of the SC in M/s Garg Builders v. Bharat Heavy Electricals Limited, 2021 (supra), which dealt with an identical issue as the instant case. In light of this law, reiterated by the SC, the lower courts and arbitral tribunals must take note of these decisions of the SC as precedents and abide by the same, while awarding interest.