GARG BUILDERS Vs. BHARAT HEAVY ELECTRICALS LTD. [CIVIL APPEAL NO. 6216 OF 2021]

S. ABDUL NAZEER, J

Date: OCTOBER 4, 2021

LAW POINT- The arbitrator does not have the power  to  grant pendente  lite  interest, when the arbitration agreement explicitly bars the payment of interest.

FACTS

The respondent floated a tender for the construction of a boundary wall at its Combined  Cycle   Power  Project  at  Bawana,  Delhi.  The   appellant  submitted  its bid for the project which was accepted by the respondent. Subsequently, on 24.10.2008 the parties entered into a contract which, inter alia,  contained  the interest baring  clause.  The  disputes  arose  between  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  before  the  Delhi High Court  wherein the Court-appointed  Hon’ble   Mr.  Justice   M.A.  Khan  (Retd.) as the sole Arbitrator to adjudicate the disputes.

Learned Arbitrator after hearing  the  contentions  of  both  and  awarded  pendente lite and future interest at the rate of 10%  p.a.  to  the  appellant  on  the  award amount from  the  date  of  filing  of  the  claim  petition  i.e.  02.12.2011  till  the  date of realization of the award amount. The respondent challenged the said award under Section 34 of the 1996 Act,  before  the Delhi High Court  on  the  ground  that  the  learned Arbitrator being a creature of the arbitration agreement travelled beyond  the  terms  of  the contract. The learned  Single  Judge  vide  his  final  judgment  and  order  dated 10.03.2017   set   aside   the   impugned   order   and   this   judgment   was    upheld   by the Division Bench of the High Court.

ARGUMENT  OF  APPELLANT

the learned Arbitrator had taken a plausible view, in terms of Clause 17 of the Contract and held that the said clause does not bar the payment of interest for pendente lite period. This argument relied on the judgments of the court in Ambica Construction v. Union of India and Raveechee and  Company  v. Union of India.

ARGUMENT  OF  RESPONDENT

Section 31(7)(a)  of  the  1996  Act  gives  paramount  importance  to  the  contract entered into between  the  parties  and  categorically  restricts  the  power  of  an arbitrator to  award  preference  and  pendente  lite  interest  when  the  parties themselves have agreed to the contrary.

ISSUE: Whether the arbitrator can award pendente lite interest when the same is expressly barred by the agreement between the parties?

OBSERVATIONS OF HON’BLE SUPREME COURT

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 a decision passed recently in PSA Sical Terminal Pvt. Ltd. v. Board of Trustees of  V.O.  Chidambranar  Trust  Tuticorin and Ors., 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”

The Supreme Court has elaborated on the interplay between the provisions of the Arbitration Act, Indian Contract Act, 1827 (Contract Act) and the Interest Act, 1978 (Interest Act) and ultimately held that the  arbitrator  cannot  grant  interest  pendente lite. The interplay between the provisions can be interpreted as under:

  • With respect to Section 31(7) of the Arbitration Act, the Court held that the law relating to award of pendente lite interest by Arbitrator under the 1996 Act is no longer res integra. The provisions of the Arbitration Act give paramount importance to the contract between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest where the parties themselves have agreed to the contrary.
  • With respect to Section 28 of the Contract Act, the court considered exception I to the said section, which states that a contract referring the disputes  to arbitration is not illegal and held that this exception, when read with section 31(7)(a) of the Arbitration Act allows the parties to waive any claim of interest including pendente lite and the  power  of  the  arbitrator  to  award  interest  is only subject to the agreement of the parties and the arbitrator cannot travel beyond the same.
  • With respect to Section  3(3)(a)(ii)  of the  Interest Act, the  court  observed that the expression “Court” in the interest act also includes  an  arbitral tribunal  and the said section categorically states that the Interest Act will not apply  to situations where the payment is “barred  by  virtue  of  an  express  agreement”. The SC thus  held  that there  is  an express  statutory  permission  for the  parties to contract out of receiving interest.

The    hon’ble    court,     while     relying     on     the     judgments     in     the     case of Sayeed Ahmed and Company v. State of Uttar Pradesh &   Ors,    Bharat Heavy       Electricals       Limited       v.       Globe        HiFabs        Limited        and Sri Chittaranjan Maity   v.   Union  of   India, stated that “If the contract prohibits pendente lite interest, the arbitrator  cannot  award  interest  for  the said period.

In the  present  case,  clause  barring  interest  is  very  clear  and  categorical.  Thus, the arbitrator does not have the power to grant pendente lite interest when the arbitration agreement explicitly bars the payment of interest.

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.

DECISION– The appeal failed and accordingly, the matter was dismissed.

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