The Supreme Court of India (SC) in a recent case of a Garg Builders v Bharat Heavy Electricals Limited has held that the arbitrator does not have the power to grant pendente lite interest when the arbitration agreement explicitly bars the payment of interest. This update briefly analyses the said judgement of the Supreme Court.

FACTS:

  • On 24 October 2008, the parties, viz. Garg Builders (Appellant) and Bharat Heavy Electricals Limited (Respondent) entered into a contract subsequent to the floating of a tender by the Respondent. The contract contained a clause barring the payment of interest. The clause is reproduced hereunder: ``Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.`` (Interest barring clause) .  
  • When the disputes arose between the parties, the Appellant filed an application before the Delhi High Court for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Subsequently an order was passed by the Delhi High Court and appointed a sole arbitrator.  
  • The Claimant had, in their statement of claim, inter alia claimed pre-reference, pendente lite and future interest at the rate of 24% per annum on the value of the award.  
  • The sole arbitrator concluded that there cannot be a prohibition in the contract on the payment of interest and granted interest at the rate of 10% per annum from the date of filing of the statement of claim till the date of realization of the award amount.  
  • The Respondent challenged the award passed by the sole arbitrator on various grounds before the Delhi High Court. The learned single judge of the Delhi High Court set aside the award to the extent that it awarded pendente lite interest. The Division Bench of Delhi High Court upheld the order of the single judge.

ISSUE: Whether the arbitrator can award pendente lite interest when the same is expressly barred by the agreement between the parties?

HELD The SC 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 SC 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.

MHCO Comment : The judgment confirms and reaffirms the position of law on the point of whether the arbitrator has the power to award pendente lite interest when the same is barred by an agreement. Essentially since the jurisdiction of an arbitrator springs from the agreement between the parties, it is obvious that the arbitrator cannot travel beyond the terms of the contract. Further, the court has made clear that the contract which bars payment of pendente lite interest is not bad in law and such option is statutorily available to the parties.