2025 (4) TMI 173 - SC - Indian Laws

Contractual clause barring contractor interest claims doesn't prohibit arbitrator awarding pendente lite interest under Arbitration Act 1940

SC held that a contractual clause barring contractor from claiming interest on payments does not constitute express prohibition on arbitrator's power to ... Whether the contractual clause that bars the appellant/contractor from claiming any interest on any payment, arrears or balance due to it amounts to an express bar on the arbitrator’s power to grant pendente lite interest as per the law under the Arbitration Act, 1940? - HELD THAT:- Under the 1940 Act, a stricter approach is followed that requires a clear and express clause against the payment of interest in case of difference, dispute, or misunderstanding, in case of delay of payment, or any other case whatsoever, to constitute a bar on the arbitrator from granting interest. A clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient. On the other hand, under the 1996 Act wherein Section 31(7)(a) sanctifies party autonomy, interest is not payable the moment the contract provides otherwise. Clause 22 prohibits the appellant (contractor) from claiming interest on any payment, arrears or balance, which may be found due to him at any time. Applying the above-stated law, we find that this clause does not expressly bar the award of pendente lite interest in the event of disputes, differences, or misunderstandings between the parties, or on delayed payment, or in any other respect whatsoever. Under the 1940 Act, this Court has not readily inferred a bar on the arbitrator from clauses that merely bar the contractor from claiming interest, and the same will apply to this case as well. Considering that the arbitrator entered reference in 1991 and the award was made in 1995, along with the passage of time in litigation as well as the amounts already paid by the respondent including post-award interest @ 9%, it is deemed appropriate to grant 9% pendente lite interest, instead of 15% as granted by the arbitral tribunal, from 18.12.1991 till 07.03.1995 (date of the arbitral award) within a period of 60 days. Application disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether a contractual clause barring the contractor from claiming any interest on payments, arrears, or balances due amounts to an express prohibition on the arbitrator's power to grant pendente lite interest under the Arbitration Act, 1940 ('1940 Act'). Specifically, the Court examined:Whether Clause 22 of the contract, which prohibits the contractor from claiming interest 'at any time,' constitutes an express bar on the arbitrator's jurisdiction to award pendente lite interest on the arbitral sum under the 1940 Act.The interpretation of such contractual clauses under the 1940 Act vis-`a-vis the Arbitration and Conciliation Act, 1996 ('1996 Act'), including the relevance of statutory provisions and judicial precedents.The applicability and scope of the arbitrator's power to grant pre-reference, pendente lite, and post-award interest under the 1940 Act in light of the contractual clause.The extent to which prior payments of interest and post-award interest affect the entitlement to pendente lite interest.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether Clause 22 bars the arbitrator's power to grant pendente lite interest under the 1940 ActRelevant legal framework and precedents: The Court relied heavily on the Constitution Bench decisions in G.C. Roy Secretary, Irrigation Department, Government of Orissa v. G.C. Roy and N.C. Budharaj Executive Engineer v. N.C. Budharaj, which established that arbitrators have the power to grant pre-reference, pendente lite, and post-award interest under the 1940 Act unless expressly barred by the contract. The Court also examined subsequent rulings interpreting contractual clauses barring interest payments, including the First Ambica Construction case, Reliance Cellulose Products Ltd v. Oil and Natural Gas Corporation Ltd, and Pam Developments Private Limited v. State of West Bengal.Court's interpretation and reasoning: The Court reaffirmed that under the 1940 Act, a strict construction applies to clauses barring interest. An express and specific bar on the arbitrator's power to award pendente lite interest must be clearly articulated in the contract, especially in the context of disputes or delayed payments. Clauses that merely prohibit the contractor from claiming interest on amounts payable under the contract without reference to disputes or arbitration proceedings do not suffice as an ouster of the arbitrator's jurisdiction. The Court emphasized that interest is compensatory and parasitic on the principal sum, and thus, clauses barring interest are construed narrowly.Key evidence and findings: Clause 22 stated: 'The contractor shall not be entitled to claim any interest upon any payment, any arrears or upon any balance, which may be found due to him at any time.' The Court found this language too general and not an explicit ouster of the arbitrator's power in arbitration proceedings or in case of disputes or delayed payments. The clause did not mention claims before arbitrators or bar interest in the context of arbitration.Application of law to facts: Applying the strict construction test, the Court held that Clause 22 does not expressly bar the arbitrator from awarding pendente lite interest on the arbitral sum under the 1940 Act. The clause's broad prohibition on interest claims was insufficient to oust the arbitrator's jurisdiction.Treatment of competing arguments: The respondent argued that the clause's wide wording barred any interest claims, relying on precedents where narrower clauses were treated as ouster clauses. The Court distinguished those cases by emphasizing the necessity of an express and clear bar, noting that the clause here did not refer to arbitration or disputes. The Court also rejected the respondent's submission that Reliance Cellulose was wrongly decided, affirming that it remains good law and consistent with the First Ambica case.Conclusion: Clause 22 does not constitute an express bar on the arbitrator's power to grant pendente lite interest under the 1940 Act.Issue 2: Distinction between the 1940 Act and the 1996 Act regarding interest awards and interpretation of contractual clausesRelevant legal framework and precedents: The Court analyzed the difference in statutory frameworks. The 1940 Act does not expressly empower arbitrators to grant interest; such power is judicially recognized and subject to strict construction of contractual bars. The 1996 Act explicitly empowers arbitrators to grant interest under Section 31(7), which also sanctifies party autonomy, making any contractual bar effective immediately. The Court referred to cases including Sayeed Ahmed & Co. v. State of U.P., Bright Power Projects (India) (P) Ltd., and Pam Developments Private Limited v. State of West Bengal.Court's interpretation and reasoning: The Court explained that under the 1940 Act, the arbitrator's power to award interest is presumed unless there is an express bar, and such bars are strictly construed. Under the 1996 Act, Section 31(7)(a) provides that interest shall not be payable if the contract so provides, reflecting a legislative shift favoring party autonomy. The Court highlighted that the 1996 Act does not distinguish between pre-reference and pendente lite interest, while the 1940 Act's position is more nuanced.Key evidence and findings: The Court noted that the clause in question was governed by the 1940 Act, and thus the stricter interpretative approach applied. The Court also observed that the 1996 Act's approach cannot be transposed onto the 1940 Act cases.Application of law to facts: Since the contract was entered in 1988 and arbitration proceedings commenced before the 1996 Act's applicability, the 1940 Act's principles governed the case. Hence, the absence of an express bar in Clause 22 allowed the arbitrator to grant pendente lite interest.Treatment of competing arguments: The respondent's reliance on the 1996 Act's provisions and related case law was rejected as inapplicable to the present facts. The Court clarified that the interpretative approach under the 1940 Act remains valid and binding for contracts and arbitrations governed by it.Conclusion: The 1940 Act requires a clear and express contractual bar to oust the arbitrator's power to grant interest, unlike the 1996 Act which gives effect to any contractual bar immediately.Issue 3: Quantum and period of pendente lite interest to be awardedRelevant legal framework and precedents: The Court considered the arbitral award granting 15% pendente lite interest from 18.12.1991 to the date of payment or decree, the District Judge's order substituting 9% simple interest from 2005 onwards, and the High Court's dismissal of appeals. The Court also referred to the principle that courts have wider powers to modify awards under the 1940 Act than under Section 34 of the 1996 Act.Court's interpretation and reasoning: The Court noted the considerable delay in the arbitration process (award in 1995 with reference in 1991), the substantial amounts already paid by the respondent including interest components, and the passage of time in litigation. It deemed it appropriate to grant pendente lite interest at 9% per annum instead of the 15% originally awarded by the arbitrator.Key evidence and findings: Respondent had already paid Rs. 4.65 crores, including Rs. 2.83 crores as interest. The Court found that awarding 9% pendente lite interest from 18.12.1991 to 07.03.1995 (date of award) was reasonable and just.Application of law to facts: The Court set aside the High Court's order denying pendente lite interest and restored the arbitrator's power to award such interest, but moderated the rate to 9% considering the circumstances.Treatment of competing arguments: The respondent argued that further pendente lite interest was unwarranted due to prior payments. The Court balanced this by awarding a lower rate of interest for the relevant period, ensuring fairness.Conclusion: The Court allowed pendente lite interest at 9% per annum from 18.12.1991 to 07.03.1995, to be paid within 60 days.3. SIGNIFICANT HOLDINGS'It has therefore evolved the test of strict construction of such clauses, and has gone on to state that unless there is a clear and express bar to the payment of interest that can be awarded by an arbitrator, clauses which do not refer to claims before the arbitrators or disputes between parties and clearly bar payment of interest, cannot stand in the way of an arbitrator awarding pre-reference or pendente lite interest.' (Paragraph 9)'If the contract expressly bars the award of interest pendente lite, the same cannot be awarded by the arbitrator. We also make it clear that the bar to award interest on delayed payment by itself will not be readily inferred as express bar to award interest pendente lite by the Arbitral Tribunal, as ouster of power of the arbitrator has to be considered on various relevant aspects referred to in the decisions of this Court.' (Paragraph 12)'Under the Arbitration Act, 1940, this Court has adopted a strict construction of contractual clauses that prohibit the grant of interest and has held that the arbitrator has the power to award interest unless there is an express, specific provision that excludes the jurisdiction of the arbitrator.' (Paragraph 10 and 23.2)'The wording of Section 31(7)(a) marks a departure from the Arbitration Act, 1940 in two ways: first, it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are provided for under this sub-section; second, it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest the moment the agreement bars payment of interest, even if it is not a specific bar against the arbitrator.' (Paragraph 10)'Clause 22 prohibits the appellant (contractor) from claiming interest on any payment, arrears or balance, which may be found due to him at any time. Applying the above-stated law, we find that this clause does not expressly bar the award of pendente lite interest in the event of disputes, differences, or misunderstandings between the parties, or on delayed payment, or in any other respect whatsoever.' (Paragraph 15)Final determinations:The contractual clause barring interest claims must be clear and express to exclude the arbitrator's power to grant pendente lite interest under the 1940 Act.Clause 22 in the present contract does not constitute such an express bar.The arbitrator's power to award pendente lite interest under the 1940 Act remains intact unless expressly excluded.Under the facts, pendente lite interest at 9% per annum from 18.12.1991 to 07.03.1995 is to be paid.The High Court's order denying pendente lite interest is set aside.