Arbitration and Conciliation Act, 1996: s.31(7)(a) – Pendente lite interest on the award amount – Interest barring clause in the contract – Claim for pre-reference pendente lite and future interest – Held: It is clear from s.31(7)(a) that if the contract prohibits prereference and pendente lite interest, the arbitrator cannot award interest for the said period – In the instant case, clause barring interest is very clear and categorical – It uses the expression “any moneys due to the contractor” by the employer – Therefore, it is not open for the arbitrator to grant pendente lite interest – Interest – Contract Act, 1872 – s.28.
Contract Act, 1872: s.28 – Interest barring clause – Whether contract barring payment of interest extinguish the rights of the parties and, therefore, ultravires in terms of s.28 of the Contract Act, 1872 – Held: The provisions of s.3(3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to interest by virtue of an agreement – s.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 pendente lite interest – Thus, interest barring clause of the contract is not ultra vires in terms of s.28 of the Contract Act, 1872 – Interest Act, 1978.
Dismissing the appeal, the Court
HELD: 1. 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. It is clear from Section 31(7)(a) 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. [Paras 10 and 11][87-E-F, H; 88-A]
Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors. (2009) 12 SCC 26 : [2009] 10 SCR 841; Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors. (2010) 8 SCC 767 : [2010] 10 SCR 487 ; Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited (2015) 5 SCC 718 ; Sri Chittaranjan Maity v. Union of India (2017) 9 SCC
611 : [2017] 11 SCR 722 – relied on.
Ambica Construction v. Union of India (2017) 14 SCC 323; Raveechee and Company v. Union of India (2018)
7 SCC 664 : [2018] 5 SCR 138 – held inapplicable.
2.1 Whether Clause 17 of the Contract (Interest barring clause) is ultra vires in terms of Section 28 of the Indian Contract Act, 1872. According to Section 28, a contract is void to the extent it restricts absolutely a party from enforcing his rights by usual proceedings in ordinary courts or if it limits the time within which he may enforce his rights. Exception I to this section contains a rule that a contract by which two or more persons agree that any dispute which has arisen or which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not illegal. 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. [Paras 19, 20][89-F-G; 90-B-C]
2.2 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. [Paras 21 and 22][90-D-F]
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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