2021 (10) TMI 250 - SC - Indian Laws

Arbitrator cannot award pre-reference or pendente lite interest when contract expressly excludes 'any moneys due' - Sections 28, 31(7)(a)

The SC held that an arbitrator under the 1996 Act cannot award prereference or pendente lite interest where the parties' contract expressly bars such ... Scope of the Arbitration - Denial of pendente lite interest on the award amount - Clause 17 of the Contract is ultra vires in terms of Section 28 of the Indian Contract Act, 1872 or not? - 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 1996 Act give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award prereference and pendente lite interest when the parties themselves have agreed to the contrary - if the contract prohibits prereference and pendente lite interest, the arbitrator cannot award interest for the said period. 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. Therefore, 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 - the High Court was justified in rejecting the claim of the appellant seeking pendente lite interest on the award amount. Whether Clause 17 of the Contract is ultra vires in terms of Section 28 of the Indian Contract Act, 1872? - HELD THAT:- Exception I to Section 28 saves contracts where the right to move the Court for appropriate relief is restricted but where the parties have agreed to resolve their dispute through arbitration. Thus, a lawful agreement to refer the matter to arbitration can be made a condition precedent before going to courts and it does not violate Section 28. No cause of action then accrues until the Arbitrator has made the award and the only amount awarded in such arbitration is recoverable in respect of the dispute so referred. Section 31(7)(a) of the 1996 Act which allows parties to waive any claim to interest including pendente lite and the power of the Arbitrator to grant interest is subject to the agreement of the parties - when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest. Clause 17 of the contract is not ultra vires in terms of Section 28 of the Indian Contract Act, 1872 - Appeal dismissed. Issues:1. Denial of pendente lite interest on the award amount.2. Interpretation of the contract clause barring interest.3. Applicability of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.4. Validity of the contract clause in light of Section 28 of the Indian Contract Act, 1872.Issue 1: Denial of Pendente Lite Interest on the Award AmountThe appellant claimed pendente lite and future interest on the award amount in an arbitration proceeding. The Arbitrator awarded interest at the rate of 10% p.a. The respondent challenged this award under Section 34 of the 1996 Act, arguing that the Arbitrator exceeded his authority by awarding pendente lite interest. The High Court upheld the challenge, stating that the contract clause expressly barred such interest. The Supreme Court concurred, emphasizing that if the contract prohibits pendente lite interest, the arbitrator cannot award it.Issue 2: Interpretation of the Contract Clause Barring InterestThe contract clause in question stated that no interest shall be payable on any moneys due to the contractor. The appellant argued that this clause did not bar interest for the pendente lite period. However, the courts held that the clause was clear and categorical in its prohibition of interest on amounts due to the contractor, including the award amount. Precedents were cited to support the interpretation that specific clauses barring interest prevent the arbitrator from awarding pendente lite interest.Issue 3: Applicability of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996Section 31(7)(a) of the 1996 Act emphasizes the importance of the contract between parties in determining the arbitrator's power to award interest. It stipulates that unless agreed otherwise, the arbitrator may include interest in the award amount. However, if the contract prohibits interest, the arbitrator cannot award it. This provision was central to the courts' decision to deny pendente lite interest in this case.Issue 4: Validity of the Contract Clause in Light of Section 28 of the Indian Contract Act, 1872The appellant argued that the contract clause barring interest was ultra vires Section 28 of the Indian Contract Act, 1872. Section 28 renders contracts void if they restrict a party from enforcing their rights. However, Exception I to Section 28 saves contracts that refer disputes to arbitration. The courts held that the contract clause did not violate Section 28 as it was a lawful agreement between the parties. The Interest Act, 1978 also allowed parties to waive interest claims by agreement, further supporting the validity of the contract clause.In conclusion, the Supreme Court dismissed the appeal, upholding the denial of pendente lite interest. The court emphasized the importance of contractual clauses barring interest and the limitations they impose on arbitrators. The validity of the contract clause in light of relevant legal provisions was also affirmed.