Contract if expressly bars award of interest pendente lite, the same cannot be awarded by the Arbitrator #indianlaws

The Supreme Court, in this case has held that Arbitrator appointed with or without the intervention of the court, has jurisdiction to award interest, on the sums found due and payable, for the pre-reference period, in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest. Grant of pendente lite interest may depend upon several factors such as phraseology used in the agreement, clauses conferring power relating to arbitration, nature of claim and dispute referred to Arbitrator and on what items power to award interest has been taken away and for which period.

The present reference was on the issue of power of the Arbitrator to award pendente lite interest when contract contains bar for grant of interest in a case covered by the Arbitration Act, 1940 (“Act”).

The Constitution Bench judgment in Secretary, Irrigation Department, Government of Orissa & Ors. vs. G.C. Roy [(1992) 1 SCC 508] and Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. vs. N.C. Budharaj (D) by L.Rs. & Ors. [(2001) 2 SCC 721], had held that the Arbitrator had the jurisdiction and authority to award interest for pre-reference period, pendente lite and future period if there was no express bar in the contract regarding award of interest.

A doubt was expressed about the correctness of the decision in Engineers-De-Space Age in Sayeed Ahmed & Co. vs. State of U.P. & Ors. [(2009) 12 SCC 26] and Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat & Ors. [(2010) 8 SCC 767].

The matter was accordingly referred before the larger Bench for decision.

The question for consideration thus was whether an Arbitrator has the power to award pendente lite interest in case contract bars the same in a case covered by Act and decisions of Supreme Court in Engineers De-Space Age and Madnani Construction Corporation (P) Ltd. have been correctly decided.

There were two contrary submissions, one that the Arbitrator is bound by the terms of the contract and cannot award interest in case the contract bars the same and on the other hand, in view of the decision in Engineers-De-Space Age followed in Madnani Construction Corporation (P) Ltd., notwithstanding the terms in the contract agreement barring the award of interest would cover the pre-reference period and not pendente lite interest.

This is a case where the agreement does not provide for grant of such interest nor does it prohibit such grant. In other words, the agreement is silent as to award of interest. On a conspectus of aforementioned decisions, the following principles emerge:
(i) A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages. This basic consideration is as valid for the period the dispute is pending before the Arbitrator as it is for the period prior to the Arbitrator entering upon the reference. This is the principle of Section 34, Civil Procedure Code and there is no reason or principle to hold otherwise in the case of Arbitrator.

An Arbitrator is an alternative forum for resolution of disputes arising between the parties. If so, he must have the power to decide all the disputes or differences arising between the parties. If the Arbitrator has no power to award interest pendente lite, the party claiming it would have to approach the court for that purpose, even though he may have obtained satisfaction in respect of other claims from the Arbitrator. This would lead to multiplicity of proceedings.
(iii) An Arbitrator is the creature of an agreement. It is open to the parties to confer upon him such powers and prescribe such procedure for him to follow, as they think fit, so long as they are not opposed to law. (The proviso to Section 41 and Section 3 of Arbitration Act illustrate this point). All the same, the agreement must be in conformity with law. The Arbitrator must also act and make his award in accordance with the general law of the land and the agreement.

Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim for principal amount or independently) is referred to the Arbitrator, he shall have the power to award interest pendente lite. This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes “” or refer the dispute as to interest as such “” to the Arbitrator, he shall have the power to award interest. This does not mean that in every case the Arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case, keeping the ends of justice in view.

It was accordingly held that the Arbitrator appointed with or without the intervention of the court, has jurisdiction to award interest, on the sums found due and payable, for the pre-reference period, in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest. The decision in Jena case taking a contra view does not lay down the correct position and stands overruled, prospectively, which means that this decision shall not entitle any party nor shall it empower any court to reopen proceedings which have already become final, and apply only to any pending proceedings.

It would depend upon the stipulation in the contract in each case whether power of Arbitrator to grant pendente lite interest is expressly taken away. If answer is ‘yes’ then Arbitrator would have no power to award pendente lite interest.

Grant of pendente lite interest may depend upon several factors such as phraseology used in the agreement, clauses conferring power relating to arbitration, nature of claim and dispute referred to Arbitrator and on what items power to award interest has been taken away and for which period.

[Union of India vs. M/s. Ambica Construction]

SC, 16.03.2016

Special Leave Petition (C) No. 11114/2009