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Garg Builders vs. Bharat Heavy Electricals Limited - (Supreme Court) (04 Oct 2021)

If the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period



Present appeal is directed against the Order of the Division Bench of the High Court whereby it has upheld the judgment of the learned Single Judge resulting in denial of pendente lite interest on the award amount to the appellant. Learned counsel for the Appellant, contended that, the learned Arbitrator had taken a plausible view, in terms of the Clause 17 of the Contract and held that, the said clause does not bar the payment of interest for pendente lite period.

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 pre-reference and pendente lite interest when the parties themselves have agreed to the contrary.

It is clear from the above provision that if the contract prohibits pre-reference 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.

In Sri Chittaranjan Maity v. Union of India, it was categorically held that if a contract prohibits award of interest for pre-award period, the arbitrator cannot award interest for the said period. 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.

Exception I to Section 28 of Contract Act, 1872 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 of Act. 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.

Interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter. Section 2 (a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator. In turn, Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that, the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

Thus, 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.


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