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.
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.