India: Can The Arbitrator Grant Pendente Lite Interest Despite The Contract Expressly Barring Payment Of Interest? The Supreme Court Answers

INTRODUCTION

It is ordinary commercial prudence that interest is the corollary for delay in payments. However, the question that is discussed herein is, whether the aggrieved party can claim interest as a matter of right even when there is an express prohibition regarding the payment of interest in the contract. In other words, can two parties mutually agree to bar the payment of interest in case there is a default in payment by one party to another party? This question arose before the Supreme Court in the case of Garg Builders v. Bharat Heavy Electrical Limited¹ wherein the court dealt with the question whether the arbitrator can award pendente lite interest even when there is an express provision in the contract prohibiting the same. This article provides a brief overview of the law declared by the Supreme Court on the said point.

FACTUAL MATRIX

The parties, Garg Builders (Appellant) and Bharat Heavy Electrical Limited (Respondent), entered into a contract for the construction of a boundary wall at Combined Cycle Power at Bawana, Delhi. The contract between the parties provided that "no interest shall be payable by BHEL on Earnest Money deposit, security deposit or on any moneys due to the contractor".² Pursuant to certain disputes that followed, the matter was referred to arbitration. The Appellant claimed amounts under various heads and, inter alia, claimed pendente lite interest. The Tribunal came to the conclusion that there was no express bar under the contract to award pendente lite interest and hence, awarded interest at the rate of 10% per annum to the appellant.

The Respondent challenged the impugned award under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) contending that the Arbitrator went beyond the terms of the contract. A single-judge bench of the Delhi High Court set aside the award on the ground that "pre-award interest includes both prereference interest as well as pendente lite interest". The court opined that the tribunal erred in holding thatthe claim of interest is not barred under Clause 17 of the contract between the parties. The same was upheld by the division bench of the High Court, aggrieved by which the Appellant filed a Special Leave Petition before the Supreme Court, wherein leave to appeal was granted.

COURT'S REASONING

The primary question before the hon'ble Supreme Court was whether the parties can, by an express provision in the contract, prohibit the payment of pendente-lite interest and whether there was an express prohibition for payment of interest in the present dispute. The controversy revolved around the interpretation of Section 31(7)(a) of the Act which provides for the arbitrator's powers to award interest but starts with a qualifier – "unless otherwise agreed by the parties".³ The court observed that the position with respect to award of pendente lite interest is no longer res integra, and the parties can, by an agreement, expressly bar the payment of interest. The court referred to various judgments supporting this view.⁴ It was thus observed, that once it is established that the parties have agreed to prohibit the payment of interest by a contract, it is not open for the arbitrator to grant interest in terms of Section 31(7)(a) of the Act.

Another submission by the Appellants was regarding the scope of Section 28 of the Indian Contract Act, 1872, which declares void any agreement that restricts the enforcement of the rights of the parties. The Appellants contended that the said clause 17 is violative of Section 28 as it restricts the right of the Appellant vis-à-vis interest.

The court while rejecting this submission held that "when there is an express statutory permission for the parties to contract out of receiving interest⁵ and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest." The appeal was hence dismissed, resulting in upholding the decision of High Court setting aside the Arbitral award to the extent it provided pendente lite interest.

ANALYSIS

The principle of party autonomy is one of the main reasons for the arbitration gaining popularity in the modern-day society. Arbitration jurisprudence is tailored by the norms of contractarianism to a great extent. It is applicable to the cases of pendente lite interest to the same degree. The provisions of the contract agreed by the parties are of the utmost importance with regards to the payment of interest applicable to the principal amount. Pertinently, the position under the Arbitration Act, 1940, was such that in the absence of any provision related to the award of interest in a contract, the arbitrator had the power to award interest.⁶ The rationale was based on the assumption that interest was viewed as an implied contractual term between the parties, and thus the arbitrator had the power to award interest. However, this position transformed after the introduction of Section 31 (7) in the 1996 Act. The new provision, as declared by the hon'ble Supreme Court, gave autonomy to the parties and therefore, the tribunal cannot award interest if there exists an express contractual provision barring payment of interest.⁷

CONCLUSION

The Supreme Court, through this judgment has once again reaffirmed the law related to the award of pendente lite interest and the scope of power of an arbitrator to grant the same. It is now well settled that the parties can expressly bar the payment of interest by an agreement and the same is permissible within the Indian law. If the parties opt for such an exclusion, then the arbitrator is bound by such terms and cannot traverse outside the barring clause. The judgment upholds the sanctity of the contract in an arbitration and reaffirms the established principle that the arbitrator is a creature of the contract and is thus, bound by its terms.

Footnotes

1 Garg Builders v. Bharat Heavy Electrical Limited, Civil Appeal No. 6216 of 2021 (Arising out of S.L.P. (C) No. 16320 of 2018).

2 Clause 17 of the Contract between the parties.

3 Section 31(7)(a) reads as – "Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, 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, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made."

4 Sayeed Ahmed and Co. v. State of Uttar Pradesh and Ors., (2009) 12 SCC 26;

Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat and Ors., (2010) 8 SCC 767; Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited, (2015) 5 SCC 718; Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611.

5 The court referred to Section 31(7)(a) of the Act and Section 3(3)(a)(ii) of the Interest Act, 1978.

6 Executive Engineer Dhenkanal Minor Irrigation Division, Orissa v. N.C. Budharaj (2001) 2 SCC 721; Secretary, Irrigation Dept., Government of Orissa v. G.C. Roy (1992) 1 SCC 508.

7 Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors., (2010) 8 SCC 767; Union of India v. M/s Ambica Construction, SLP [C] No. 11114/2009.

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