UNION OF INDIA vs. MANRAJ ENTERPRISES

[CIVIL APPEAL NO. 6592 OF 2021]

Date : NOVEMBER 18, 2021

LAW POINT- An arbitrator, being the creature of contract, cannot  award  interest contrary to the terms of the agreement.

FACTS

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.

ISSUE-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 SC, 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.

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 Supreme Court(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.

NO POWER TO AWARD INTEREST ON BASIS OF EQUITY

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.

EXPRESSION “AMOUNTS PAYABLE TO THE CONTRACTOR  UNDER THE CONTRACT”

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.

NO ESTOPPEL APPLIES

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.

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

DECISION -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.

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