December 4, 2021

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Can an arbitrator grant pendente lite interest if the contract expressly bars payment of interest : an insight

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This article has been written by Vaishnavi Nair pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Zigishu Singh (Associate, Lawsikho) and Prashant Baviskar (Associate, Lawsikho).

Table of Contents

A person has a right to receive compensation when he is deprived of the use of money to which he is lawfully entitled to. Interest is a monetary charge or compensation paid by the borrower to the lender over the principal amount. In a suit for recovery of money, interest can be paid in three stages: prior to the suit, i.e. from the date when the cause of action arises, to the date of filing of the suit; from the date of filing of the suit to the date of decree; and from the date of the decree to the date of payment of the interest. That is to say, interest can be awarded during the pre-reference period, pendente lite and future period respectively. The term pendente lite means “during the pendency of the suit” and the term pendente lite interest would refer to the interest owed to the borrower over the principal amount during the pendency of the suit. This article would solely focus on the power of the Arbitrator to grant pendente lite interest. 

  1.  Section 31(7)(a) of the Arbitration and Conciliation Act, 1996: The arbitral tribunal has the power to award pendente lite interest unless otherwise agreed by the parties. 
  1. Section 3(3)(a)(ii) of the Interest Act, 1978: The court cannot award interest where such payment is expressly barred by the contract. 
  1. Section 28 of the Indian Contracts Act, 1872: A contract which bars a party absolutely from enforcing his right by usual legal proceedings in the ordinary tribunals, or which limits the time within which he may enforce his right is void. 
  1. Arbitration Act of 1940: Contains no provision that bars the power of an Arbitrator to award payment of interest when the contract prohibits the same explicitly.
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  1. Secretary Irrigation Department Gov of Orissa v. G.C Roy (1992): The present case relates to an agreement for construction of head works entered between the respondent (G.C. Roy) and plaintiff. The contract contained a provision for resolution of dispute by way of arbitration. Further, the contract was silent on the award of interest. The Arbitrator awarded the respondent pendente lite interest @9% on the awarded amount. The Supreme Court of India considered the question of Arbitrator’s jurisdiction to award pendente lite interest. The court noted that as opposed to the Arbitration Act of 1940, Section 34 of the Code of Civil Procedure, 1908 (hereinafter referred to as CPC) expressly bestows power upon the court to award pendente lite interest. However, as per Section 3 of the Interest Act, 1978, arbitration tribunal comes within the term ‘court’ and is authorised to award interest. The court referred to English law judgments of Chandris (1951 (1) K.B. 240), Edwards {(1851) 138 E R 603} and Podar Trading (1949 (2) All EL R 62) and concluded that where a contract contains implied terms, the Arbitrator must resolve the dispute in accordance with the law. Accordingly, the court held that the Arbitrator had the jurisdiction to award pendente lite interest in cases where the contract is silent on such interest in accordance with Section 34 of the CPC. 
  1. The Board of Trustees for the Port of Calcutta v. Engineers-De-Space Age (1995): In this case, the contract contained a prohibition against payment of interest with respect to any money owed. The prohibition clause reads as follows: 

“No claim for interest will be entertained by the Commissioners with respect to any money or balance which may be in their hands owing to any dispute between themselves and the Contractor or with respect to any delay on the part of the Commissioners in making interim or final payment or otherwise.”

The court strictly interpreted the above clause and held that the intention of the clause was to bar the Commissioner and not the Arbitrator. Further, the prohibition applied only to the pre-reference period, and the Arbitrator had the power to award pendente lite interest notwithstanding the prohibition clause. 

  1. Sayeed Ahmed & Co v State of UP & Ors. (2009): In this case a construction contract has a prohibition clause which reads as follows:  

No claim for interest or damage will be entertained by the Government with respect to any money or balance which may be lying with the Government or any become due owing to any dispute….”

The court noted that unlike the Arbitration Act of 1940, the Arbitration Act of 1996 (hereinafter “new provision”) had a specific provision that deals with award of interest by the Arbitrator. Further, The difference between pre-reference interest and pendente lite interest had been done away with within Section 31(7) of the new provision. The court held that prior judgements such as Engineer-De-Space Age[1996 (1) SCC 516] and G.C. Roy,(supra) wherein it was held that the Arbitrator had the power to award pendente lite interest despite the prohibition clause, can no longer apply under the new provision as Section 31(7)(a) expressly limits the scope of the Arbitrator’s power. 

  1. UOI v. Ambica Construction (2016): The court held that the clause that prohibits award interest is not enough to restrict Arbitrator’s discretion to award pendente lite interest. This judgement relied on the old provision i.e. Arbitration Act of 1940. 
  1. Sri. Chittaranjan Maity v Union of India (2017): In this case various disputes arose between the parties to the contract which were decided under the parties to the contract. One of the questions which came for consideration before the Supreme Court in the present case was whether the arbitral tribunal was right in awarding interest on delayed payments in favor of the applicant despite a clause in the contract that disallowed a claim of interest. The contract between the parties contained a clause which read as:

Clause 16(2) – No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract, but government securities deposit in terms of sub-clause (1) of this clause will be repayable (with) interest accrued thereon.

The court relying on Sayeed Ahmed(supra) and Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and Others (2010) 8 SCC 767, amongst other decisions, held that the when parties to a contract agree upon, ‘no interest to be paid to one party’ then the parties are bound by such clauses and claims related to interest cannot be prayed for in any forum.  The court opined that the awarded amount is categorized as the losses determined in the course of arbitration and not as a payment due under the terms of a contract.  The party is entitled to claim the amount not as compensation for damages but for the money which was rightfully owed to him.

  1. Raveechee and Co. v Union of India (2018): The Appellant and Union of India entered into an agreement for quarrying, stacking and loading stone ballast etc. Subsequently, a dispute arose between them and an Arbitrator was appointed to resolve the dispute. The Arbitrator awarded appellant pendente lite interest @12% of the award for damages. Union of India, aggrieved by the decision of the Arbitrator, approached the High Court and the pendente lite interest awarded by the Arbitrator was set aside. The appellant then approached the Supreme court and contested that Clause 16(3) of the contract allowed for award of pendente lite interest. The clause reads as follows: 

No interest will be payable upon the earnest money and security deposit or amount payable to the contractor under the contract, but government securities deposited in terms of sub-clause (1) of this clause shall be payable.”

The appellant contended that the above-mentioned clause barred interest on earnest money, security deposit and the amount payable to the contract, not the pendente lite interest. While the respondent contended that the clause barred award of pendente lite interest. The court sided with the appellant and held that earnest money, security deposit or amount payable to the contractor doesn’t belong to the respondent. It was deposited by the appellant in his own accord. The amount was supposed to be refunded or forfeited as per the performance of the contract and did as such not deprive the respondent of the use of money. Therefore, no interest could be granted. The court concluded that the interest granted to the appellant by the Arbitrator did not fall under any of the three heads mentioned above. Thus pendente lite interest could be granted despite the presence of clause 16(3). 

  1. Garg Builders v. Bharat Heavy Electricals Ltd. (2021): In the present case, the contract between the parties contained a clause prohibiting award of interest. It reads as follows: 

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

The question before the Supreme Court was whether the Arbitrator had the power to award pendente lite interest where the contract expressly barred payment of interest. The appellant relied on Raveechee and Ambika Constructions case and contended that Clause 17 of the contract did not bar payment of pendente lite interest. The court rejected the contention of the appellant and held that both Raveechee and Ambika Constructions were not applicable to the present case as they pertained to the old provision. Further, Section 31(7)(a) of the new provision is clear and bars payment of pre-award interest when such restriction is clearly embodied in the contract. Furthermore, the appellant contended that Clause 17 was ultra vires as per Section 28 of the Indian Contracts Act, 1872. In this regard, the court held that Clause 17 was not imposing an absolute bar on the parties’ right to approach, but merely imposed a mandatory reference to arbitration which falls within Exception-I to Section 28 of the Indian Contracts Act, 1872. 

  1. Vedanta Limited v. Shenzhen Shandong Nuclear Power Construction Company Ltd (2018): This was a case of international commercial arbitration having a seat in India. The question before the court was whether the Arbitrator had the power to award pendente lite interest in case of International Commercial Arbitration seated in India. The court held that Arbitrator can award pendente lite interest as per Section 31(7)(a) of the new provision as long as the contract does not  explicitly bar such action. 

In the Raveechee judgement, the Supreme concluded that a restrictive clause was not enough to bar the Arbitrator from awarding pendente lite interest. This position was arrived at by the court after the assessment of damages faced by the parties. Where the damage to the party is uncertain, the question of interest can only rise after ascertainment of the damage. The court held that the liability to pay pendente lite interest could only arise during the course of the arbitration proceedings and not during the terms of the contract or due to any specific term of the contract. It is interesting to note that despite having identical clauses, the conclusion arrived by the court in Chittaranjan Maity was widely different from Raveechee’s judgement. In Chittaranjan Maity judgement the court tested the restrictive clause against Section 31(7) of the Arbitration Act, 1996 rather than going into the entire ‘ascertainment of damage’ issue. Since the restrictive clause expressly barred payment of interest, it was held that pendente lite interest was not payable. While in the Raveechee judgement, the award was granted based on the principles of natural justice.

An Arbitrator is a creature of the terms of the contract and therefore he cannot go beyond the scope of the terms agreed upon by the parties to the arbitration. Section 31(7) of the Arbitration Act of 1996 upholds this view. The recurring judicial trend showcases that Indian courts largely accept the position that the Arbitrator cannot award pendente lite interest where the contract bars the payment of interest. There is an imperative need to clear the position taken by the Supreme Court in Raveechee judgment. This article is in agreement with the position taken by the Supreme Court in Raveechee judgement in the interest to do justice in cases where an intentional act of the party causes damage to the aggrieved party.  


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