Recently, the Supreme Court allowed the appeal and directed payment of pendente lite interest on the arbitral sum, holding that a contractual clause barring interest claims does not necessarily prohibit an arbitrator from awarding pendente lite interest. The case arose from a dispute between a contractor and the government regarding a contract clause that restricted interest claims. The Court emphasized that unless a clause explicitly bars the arbitrator from granting such interest, the arbitrator retains the discretion to do so.
Brief Facts:
The appellant was awarded a works contract by the respondent and entered into an agreement dated 06.02.1988, which contained Clause 22, explicitly stating that 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." Subsequently, disputes arose under the contract, leading the appellant to invoke arbitration.
The arbitrator, by an award dated 07.03.1995, granted the appellant a sum of Rs. 1,78,17,146, along with 15% per annum pendente lite interest from 18.12.1991 until payment or decree. However, the District Judge, upon objections raised by the respondent, set aside the interest award and instead granted 9% simple interest from 16.08.2005 until payment. The High Court, by an order dated 06.01.2023, upheld the District Judge’s decision, leading to the present appeal.
Contention of the Appellant:
The counsel for the appellant contended that the issue is covered by the Supreme Court’s decision in Reliance Cellulose Products Ltd. v. ONGC, which held that a contractual clause must explicitly bar the arbitrator from awarding pendente lite interest to have an ouster effect. It was argued that Clause 22 of the contract does not expressly prohibit such interest and thus should not prevent the arbitrator from granting it. Further reliance was placed on Pam Developments Private Limited v. State of West Bengal to support the claim.
Contention of the Respondent:
The counsel for the respondent argued that the interpretation of ouster clauses has remained consistent under both the Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996. Both statutes allow arbitrators to grant interest unless explicitly restricted by contract. It was contended that several Supreme Court decisions have upheld narrower contractual clauses as effective ousters, thereby preventing arbitrators from awarding pendente lite interest.
The appellant relied on the decisions in Reliance Cellulose and Engineers-De-Space-Age. However, the latter ruling has been questioned in subsequent judgments, particularly in Union of India v. Ambica Construction. Furthermore, the respondent asserted that Rs. 4.65 crores had already been paid to the appellant, including Rs. 2.83 crores as interest, making any additional claim for pendente lite interest unwarranted.
Observation of the Court:
The Supreme Court analyzed the judicial precedents governing the grant of interest under the 1940 and 1996 Acts. Relying on G.C. Roy and N.C. Budharaj, the Court reaffirmed that an arbitrator has the authority to award pre-reference, pendente lite, and post-award interest unless there exists a contractual prohibition.
The Court distinguished between different types of contractual clauses and noted that under the 1940 Act, an arbitrator’s power to grant pendente lite interest is only restricted if the contract contains a clear and express bar against interest claims in arbitration. Citing Reliance Cellulose, the Court emphasized, "A clause that merely states no interest is payable on amounts due does not automatically prevent an arbitrator from awarding pendente lite interest under the 1940 Act. Instead, an explicit prohibition on interest concerning arbitration proceedings is required."
Additionally, the Court observed that Engineers-De-Space-Age, which the appellant relied upon, has been subject to scrutiny, and its findings have been clarified in Ambica Construction, where it was held that each contractual clause must be interpreted based on its language and context.
Further, the Court found that Clause 22 of the contract does not unequivocally bar the arbitrator from awarding pendente lite interest. The phraseology of the clause only restricts the contractor from claiming interest directly under the contract, but does not address interest within the context of arbitration proceedings. As such, the arbitrator had the authority to grant pendente lite interest.
The decision of the Court:
The Apex Court set aside the orders of the District Judge and the High Court to the extent they denied pendente lite interest. The appeal was allowed, and the respondent was directed to pay interest as awarded by the arbitrator. The judgment reinforces the principle that unless a contract explicitly bars the arbitrator from granting pendente lite interest, such interest can be awarded under the Arbitration Act, 1940.
Case Title: M/S Ferro Concrete Construction (India) Pvt. Ltd. vs. The State of Rajasthan
Citation: SLP (C) No. 7851 OF 2023
Coram: Justice Pamidighantam Sri Narasimha, Justice Joymalya Bagchi
Advocate for Petitioner: Adv. Vinayak Mehrotra (AOR), Sonali Jain, Nandini
Advocate for Respondent: Adv. Sansriti Pathak (A.A.G.), Nidhi Jaswal (AOR), Aman Prasad
Picture Source :
