Supreme Court of India: Can the Arbitrator Award Pendente Lite Interest When the Agreement Between the Parties Specifically Prohibits It?

Supreme-Court-of-India-1_85138_730x419

In Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation India Ltd. Civil Appeal No(s). 1539 of 2019 decided on 7 February 2019, the Supreme Court of India addressed the issue of whether the Arbitrators could award any interest in view of specific clauses in the Agreement between the parties which categorically provide that no interest would be payable to the Appellant on the money due to him. Considering the paradigm shift in legal position between the 1940 Act (‘Old Act’) and the Arbitration and Conciliation Act, 1996 (‘1996 Act’), the Court inter-alia held that the Arbitral Tribunal did not have any jurisdiction to award the pendente lite interest since the clauses in the agreement which are in question put a bar on the Arbitral Tribunal to do so. Detailed case analysis given below:

Factual Matrix

The Appellant was awarded certain construction work by the Respondent which was formalised by an Agreement. Clause 60.0 this Agreement provided for a dispute resolution mechanism wherein in the first place the dispute or difference was to be resolved by the Engineer-in-Charge of the Respondent failing which the Appellant could appeal to the Chairman, of the Respondent who would constitute a committee to resolve the dispute with its General Manager being its convener. Further, the failure of such Committee to give a decision would give the Appellant a right to seek reference to arbitration.

Dissatisfied with the decision of the Committee, the Appellant invoked the arbitration clause and an Arbitral Tribunal consisting of the Presiding Arbitrator and one nominee each of the Parties came to be constituted.

The Arbitral Tribunal awarded the Appellant a pendente lite interest taking the date of cause of action/invocation of arbitration as the reference date for calculation till the expiry of sixty days from the date of the Award and thereafter future interest till the date of actual payment. The Respondent challenged the Award under Section 34 of the Act before the Single judge of the High Court to the extent of the award of pendente lite interest.

The Single Judge set aside the award of pendente lite interest on the premise that if a contract prohibits grant of interest with respect to any claim, the Arbitrator cannot order payment of pendente lite or future interest. This observation of the Single Judge was based on Sub Section 7 of Section 31 of the 1996 Act who further noted that under the Old Act, an arbitrator could award pendente lite interest unless there was an express bar in the contract against his awarding such interest, but the instant case falls under the 1996 Act. This decision of the Single Judge was upheld by the Division Bench of the High Court as well. The decisions of the High Court were challenged in the present proceedings before the Supreme Court of India.

Relevant Clauses of the Agreement

The Respondent argued that by virtue of Clauses 50.0 and 51.0 of the Agreement, the Arbitral Tribunal could not award pre-reference and pendente lite interest. The said two clauses read as under:

Clause 50.0 Interest on money due to the contractor

No omission on the part of the Engineer in charge to pay the amount due upon measurement or otherwise shall vitiate or make void the contract, nor shall the contractor be entitled to interest upon any guarantee or payments in arrears nor upon any balance which may on the final settlement of his account, be due to him.

Clause 51.0 No claim for delayed payment due to dispute etc.

No claim for interest or damage will be entertained or be payable by the corporation in respect of any amount or balance which may be lying with the corporation owing to any dispute, difference or misunderstanding between the parties or in respect of any delay or omission on the part of the Engineer in charge in making intermediate or final payments or in any other respect whatsoever.

Applicable Legal Principles

Section 31(7)(a) of the 1996 Act

Section 31 – Form and contents of arbitral award

(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

Parties Contentions

The Appellant contended as under:

  • that the phrase “in any other respects whatsoever” occurring in Clause 51 was interpreted by Supreme Court in State of Uttar Pradesh v. Harish Chandra and Co. 1991 (1) SCC 63 (‘Harish Chandra Case’) to mean “any other amount which might have been with the government and refund of which might have been withheld by the government” in a similarly worded Clause;
  • that Clause 51 in the Agreement in the instant case was similar to Clause 1.9 of the contract in Harish Chandra Case and the Court interpreted the said Clause to mean that Arbitrator was not precluded from awarding the interest;
  • that the Supreme Court judgment in Tehri Hydro Development Corporation Limited and Another v. Jai Prakash Associates Limited, (2012) 12 SCC 10 (‘THDC Case’) is contrary to the earlier judgment rendered by Supreme Court in Harish Chandra In the THDC Case, the Supreme Court inter-alia held such clauses to mean that no interest was payable on claim for delayed payment due to the Contractor but as per the Appellant since Harish Chandra Case was decided prior in time, the Court should be guide by its dicta and not of the THDC Case;
  • that the words “in any other respects whatsoever” in Clause 51 are to be read ejusdem generis and should take their colour from the earlier part of the clause which would then mean that interest is not payable only in those cases where some amount or balance is lying with the Respondent because of any dispute different or misunderstanding between the parties etc.

The Respondent contended as under:

  • that clauses in Harish Chandra case and the present case were altogether different;
  • that the instant case was governed by the law laid down in THDC Case which was in fact a case between the same parties and in that case the Court had, while construing the identically worded clauses, came to the conclusion that the Arbitrators were precluded from granting any interest;
  • that there was a difference between the scheme provided under the Old Act when contrasted with the 1996 Act and that Harish Chandra Case was under the Old Act whereas in the instant case Award was passed under the 1996 Act.

Judgement

To decide the extent of the powers of the Arbitral Tribunal in granting pre-reference and/or pendente lite interest, the Court relied on the principles deduced from the various judgments which are tabularised below:

Name Ratio Act
Secretary, Irrigation Department, Government of Orissa and Ors. v. G.C. Roy (1992) 1 SCC 508 Under the general law, the Arbitrator is empowered to award interest for the pre-reference, pendente lite or post award period. Old Act
Sayeed Ahmed and Co. v. State of U.P., (2009) 12 SCC 26 Distinguished the Harish Chandra Case and negatived the claim for pendente lite interest on the basis of the wordings of a clause in that case which barred the interest under any head in clear and categorical terms. 1996 Act
Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat and Ors. (2010) 8 SCC 767 Relying on the phrase “No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract” in the Contract, it was held that since the parties had agreed that no interest should be paid, the refusal by the arbitrator to award pendente-lite was correct. 1996 Act
Union of India v. Bright Power Projects (India) Private Limited (2015) 9 SCC 695 The Court considered the expression “unless otherwise agreed by parties” employed in Section 31(7)(a) of the 1996 Act and laid down that in case contract bars claim of interest the contractor could not have claimed interest. 1996 Act
Sri Chittaranjan Maity v. Union of India (2017) 9 SCC 611 After noticing that Clause 16(2) of the Contract in that case bars the payment of interest, it was held that under the 1996 Act, the position wherein is different from Old Act, the interest could not be awarded. 1996 Act
Reliance Cellulose Products Limited v. Oil and

Natural Gas Corporation Limited (2018) 9 SCC 266

The Court held as under:

  • that under the Old Act, an arbitrator has power to grant pre-reference interest under the Interest Act as well as pendente lite and future interest, however, he is constricted only by the fact that an agreement between the parties may contain an express bar to the award of pre-reference and/or pendente lite interest;
  • that 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 unless there is a clear and express bar to the payment of interest that can be awarded by an arbitrator;
  • that the grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the Arbitrator, and on what items the power to award interest has been taken away and for which period;
  • that the position under Section 31(7) of the 1996 Act, is wholly different from the Old Act, inasmuch as Section 31(7) of the 1996 Act sanctifies agreements between the parties and states that the moment the agreement says otherwise, no interest becomes payable right from the date of the cause of action until the award is delivered.
Old Act

After considering the law laid down in the above cases, the Court concluded that since the present case is regulated by 1996 Act, and since clauses 50 and 51 of the Agreement put a bar on the Arbitral Tribunal to award interest, the Tribunal did not have any jurisdiction to do so. Thus, the rationale given by the High Court is in tune with the legal position which stands crystallised by catena of judgments.

Comparison of position in India with Singapore and the UK

In my previous post (Supreme Court of India: Power to Grant Pre & Post Award Interest in India), I had compared the position of law on this issue in Singapore and the UK and the same is reproduced hereunder.

The following table provides a comparison of the corresponding Sections of the Indian Arbitration Act, the English Arbitration Act and the International Arbitration Act of Singapore

Section 31(7) of the Indian Arbitration Act Section 49(3) & (4) of the English Arbitration Act Section 20 of International Arbitration Act of Singapore
31. Form and content of arbitral award—

(7)…

(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent, higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.

Explanation – The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).”

49. Interest

(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justiceof the case—

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

(4) The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justice of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any award as to costs).

20. Interest on awards

(1) Subject to subsection (3), unless otherwise agreed by the parties, an arbitral tribunal may, in the arbitral proceedings before it, award simple or compound interest from such date, at such rate and with such rest as the arbitral tribunal considers appropriate, for any period ending not later than the date of payment on the whole or any part of —

(a) any sum which is awarded by the arbitral tribunal in the arbitral proceedings;

(b) any sum which is in issue in the arbitral proceedings but is paid before the date of the award; or

(c) costs awarded or ordered by the arbitral tribunal in the arbitral proceedings.

(2) Nothing in subsection (1) shall affect any other power of an arbitral tribunal to award interest.

(3) Where an award directs a sum to be paid, that sum shall, unless the award otherwise directs, carry interest as from the date of the award and at the same rate as a judgment debt.

The English Arbitration Act and the International Arbitration Act of Singapore clearly provides two types of interest which can be awarded by the Arbitral Tribunal in terms of award i.e. simple or compound. This choice is absent in the Indian Arbitration Act. But the position of law in this regard is settled by the Supreme Court of India in Hyder Consulting (UK) Ltd. v. State of Orissa wherein the Court inter alia held that “the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period.”

The Indian Arbitration Act stipulates that the post award interest shall be granted at the rate 2%, higher than the current rate of interest prevalent on the date of award. The expression “current rate of interest” takes its meaning from the Interest Act, 1978. The English Arbitration Act does not provide any such definite scheme of rate and its totally upon the discretion of the arbitral tribunal “as it considers meets the justice of the case”. Like the Indian Arbitration Act, the International Arbitration Act of Singapore, also provides a specific rate of interest to be award by the tribunal under Section 20(3) by using the expression “at the same rate as a judgment debt”. This means that unless the Award otherwise provides, the sum awarded carries interest at the same rate as a judgement debt, although it is not clear whether compound interest can be awarded by the arbitrators as well as interest at a higher rate rather than the judgement debt rate. Presently in Singapore, interest rates on post-judgment debts, default judgments, costs and under Order 30 Rule 6(2) of the Rules of Court are fixed at 6% per annum pursuant to the Rules of Court of Singapore.

In my view, one major difference in the Indian Arbitration Act and the International Arbitration Act of Singapore is that while in Indian Arbitration Act under 31(7)(a), parties can decide whether to waive the right to claim the pre-award interest, but the same is not true in post award situation. The phrase “unless otherwise agreed by the parties” present in Section 31(7)(a) is absent from Section 31(7)(b). Rather Section 31(7)(b) specifies a statutory rate of Interest which is 2% higher than the current rate of Interest prevalent on the date of the award. On the other hand, under the International Arbitration Act of Singapore, there is no such demarcation with regard to the rate of interest between the pre and post Award period as evident from the expression “for any period ending not later than the date of payment…(a) any sum which is awarded by the arbitral tribunal in the arbitral proceedings; (post-award) (b) any sum which is in issue in the arbitral proceedings but is paid before the date of the award (pre-award)”. The English Arbitration Act also follows a similar approach.

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