Contract containing a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest.

The Supreme Court in the matter of Garg Builders vs Bharat Heavy Electricals Limited S.L.P. (C.) No. 16320 of 2018 decided on 04.10.2021 had an opportunity to deal with the issue whether an arbitrator can grant pendent lite interest, if the contract specifically bars payment of interest?

FACTS

The contract between the parties had the following clause pertaining to interest:

“Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.”

Relying upon this clause, the Arbitrator concluded that there is no prohibition in the contract about payment of interest for the pre-suit, pendente lite and future period, therefore awarded pendente lite and future interest on the award amount from the date of filing of the claim petition till the date of realization of the award amount.

Single Judge of Delhi High Court set aside the award, which order was upheld by the Division Bench. Aggrieved of the same the Appellant preferred the SLP before the Supreme Court.

ANALYSIS OF JUDGMENT

Supreme Court observed that the provisions of the Arbitration and Conciliation Act 1996  give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendent lite interest when the parties themselves have agreed to the contrary. Relying upon Sec 31(7) (a) of the Arbitration and Conciliation Act 1996 it was held if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period.

Upon the facts it was said, in the present case, clause barring interest is very clear and categorical. It uses the expression “any moneys due to the contractor” by the employer which includes the amount awarded by the arbitrator.  Supreme Court referred the Judgment of Sayeed Ahmed and Company v. State of Uttar Pradesh (2009) 12 SCC 26 wherein this Court has held that a provision has been made under Section 31(7)(a) of the 1996 Act in relation to the power of the arbitrator to award interest. As per this section, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award. And the decision of Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited (2015) 5 SCC 718, is an identical case where this Court has held as under:

“16. In the present case we noticed that the clause barring interest is very widely worded. It uses the words “any amount due to the contractor by the employer”. In our opinion, these words cannot be read as ejusdem generis along with the earlier words “earnest money” or “security deposit”.”     

Further the Supreme Court observed that interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter. Section 2(a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator. In turn, Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3(3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

Thus if 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.

And on the basis of above observation Supreme Court upheld the decision of High Court for setting aside the Arbitral award passed by the Sole Arbitrator.