India: Arbitrator's Power To Award Pendente Lite Interest: A Myth Or A Reality

Last Updated: 26 July 2018
Article by Jeevan Ballav Panda, Shalini Sati Prasad and Asees Jasmine Kaur

Most Read Contributor in India, August 2019

On 03 July 2018, the Supreme Court of India (Supreme Court) in the matter of M/s Raveechee & Co v Union of India1 has held that the bar to award interest on the amounts payable under the contract would not be sufficient to deny the payment of interest pendente lite by the Arbitrator. It has been further held that as a matter of general rule the Arbitrator does have the power to award interest pendente lite unless there is a clear and specific bar which prohibits grant of interest.

This view appears to be contrary to the recent judgment of a coordinate Bench of the Supreme Court of India in the matter of Chittaranjan Maity v Union of India2 which held that under the provisions of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 (1996 Act) when parties have agreed under the terms of the agreement that interest shall not be payable, the Arbitrator cannot award pendente lite interest i.e. interest between the date on which the cause of action arose till the date of the award.

Interestingly, both the judgments dealt with almost identical clauses under the respective contracts which provided that no interest will be payable upon the earnest money and the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of the Contract will be payable with interest accrued thereon. As such, there was no specific provision in either of the two matters which prohibited the Arbitrator from awarding pendente lite interest. Significantly, the Raveechee case does not refer to or deal with the Chittaranjan Maity case or other recent decisions of the Supreme Court (referred to hereinbelow) which specifically dealt with the power of the Arbitrator to award pendente lite interest.

BACKGROUND

The Supreme Court granted leave to appeal to the Appellant challenging the final judgments and orders dated 23 July 2015 and 05 November 2015 passed by the Gujarat High Court. The High Court had partly allowed the appeal of the Respondent – Union of India and quashed the order of the Arbitrators and set aside the amount awarded by them in respect of pendente lite interest at the rate of 12% on the award of INR 30,00,000 excluding security deposits.

The matter before the Supreme Court was limited to the issue of whether Clause 16(3) of the General Contract Clauses (GCC) restricted the power of the Arbitrators to award pendente lite interest.

In the present case, the Appellant and the Respondent had entered into a contract dated 02 June 1981 for quarrying, stacking and loading stone ballast, broken stone aggregate, rubble etc from the Western Railway quarry at Udvada at an estimated cost of INR 55,81,000. Disputes arose between the parties due to which the Appellant called upon the General Manager, Western Railway to appoint Arbitrators in order to settle the disputes.

The Arbitration proceedings commenced on 26 September 1988 and the award was passed on 22 March 2001 inter alia awarding pendente lite interest at the rate of 12% per annum on the award for losses and damages (mainly due to the ban on mining) excluding security deposits for the period 26 September 1988 till 22 March 2001. The Appellant filed a Civil Miscellaneous Application No. 22 of 2001 along with the award dated 22 March 2001 in the Civil Court. The award was made a rule of the Court by an order dated 29 July 2004 under Section 17 of the Arbitration Act, 1940 (1940 Act).

The Arbitrators in their award relied on Clause 16(3) of the GCC to hold that what was intended under the Clause barred the grant of interest on earnest money, security deposit and amounts payable to the Appellant, it does not in any way bar grant of pendente lite interest. Clause 16(1) and Clause 16(3) of the GCC provides as follows:

"16(1) – The earnest money deposited by the contractor with his tender will be retained by the Railways as part of security for the due and faithful fulfilment of the contract by the contractor. The balance to make up the security deposit, the rates for which are given below, may be deposited by the contractor in cash or in the form of Government Securities or may be recovered by percentage deduction from the contractor's 'on account' bills.

Provide also that in case of defaulting contractor the Railway may retain any amount due for payment to the contractor on the pending 'on account bills' so that the amounts so retained may not exceed 10% of the total value of the contract."

"16(3) – No interest will be payable upon the earnest money and the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of sub-clause (1) of this clause will be payable with interest accrued thereon."

The Respondent challenged the order of the Civil Court dated 29 July 2004 in appeal. The High Court by a judgment and order dated 23 July 2015 partly allowed the appeal and set aside the order of Arbitrators qua award of pendente lite interest. The Appellant aggrieved by the High Court's judgment and order dated 23 July 2015 filed a review application before the High Court. The High Court dismissed the review application vide judgment and order dated 05 November 2015.

Being aggrieved and dissatisfied with the judgments and orders dated 23 July 2015 and 05 November 2015, the Appellant preferred Special Leave Petitions before the Supreme Court before the Supreme Court primarily on the grounds that - 

  • Clause 16(3) only bars interest upon earnest money and security deposits or amounts payable to the contractor under the contract.
  • The amounts are in a sense amounts belonging to the contractor which are voluntarily deposited with the other contracting party in order to be refunded or forfeited depending on performance of the contract.
  • The amounts are not awarded on account of any payment due under the contract but are awarded on losses determined in course of arbitration or the 'lis'.
  • Thus, clause barring the award of interest on the amounts payable under the contract would not be sufficient to deny payment on pendente lite interest as per the decision of the Supreme Court in the case of M/s Ambica Construction v Union of India3.

JUDGMENT

The Supreme Court allowed the Appeals by setting aside the judgments and orders of the High Court and restoring the Award passed by the Arbitral Tribunal in respect of award of pendente lite interest. It was held that when a dispute is referred to for adjudication to an arbitrator, a term of such a nature as contained in the Clause 16(3) of the GCC, that is binding on the parties cannot be extended to bind an Arbitrator. The Arbitrator has the power to award interest pendente lite where justified.

The Supreme Court rejected the contention of the Respondent that by reason of Clause 16(3) of the GCC, the Arbitrators could not have awarded interest pendente lite. It held that interest has not been awarded under any of the three heads provided under Clause 16(3) of the GCC. The Court held that on a plain reading of the provision, ex facie the clause does not deal with interest pendente lite and there is no such bar to award the same.

The Court observed that in a case of unascertained damages like the present case, the question of interest would arise upon the ascertainment of the damages in course of the lis. Such damages could attract pendente lite interest for the period from the commencement of the arbitration to the award. Thus, the liability for pendente lite interest does not arise from any term of the contract, or during the terms of the contract, but in the course of determination by the Arbitrators of the losses or damages that are due to the claimant. In other words, the liability to pay pendente lite interest arises because the claimant has been found entitled to the damages and has been kept out from those dues due to the pendency of the arbitration. Such a power was considered to be inherent in an Arbitrator who also exercises the power to do equity, unless the agreement expressly bars an Arbitrator from awarding interest pendente lite. An agreement which bars interest is essentially an agreement that the parties will not claim interest on specified amounts. It does not bar an Arbitrator, who is never a party to the agreement from awarding it.

The Court also relied upon earlier decisions of the Supreme Court under the 1940 Act including Secretary, Irrigation Department, Government of Orissa and Others v GC Roy 4, Board of Trustee for the Port of Calcutta v Engineers-De-Space Age5, Madnani Construction Corporation Private Limited  v Union of India and Others6, Sayeed Ahmed & Co v State of Uttar Pradesh and Others7, Union of India v Ambica Construction8 and M/s Ambica Construction v Union of India9.

The Court specifically noted that, in the present case, the Court has not been called upon to decide whether parties can agree that they will not claim pendente lite interest even in respect of unascertained damages determined in the course of arbitration. Accordingly, the Court proceeded to decide the case on the general rule that an arbitrator has the power to award interest unless specifically barred from awarding it; and the bar must be clear and specific.

KHAITAN COMMENT

It is to be noted that both Chittaranjan Maity case and Raveechee case are on the face of it factually distinct, as the former case was dealing with an award passed under the 1996 Act whereas the latter case was dealing with an award passed under the 1940 Act. Needless to mention that while deciding the Raveechee case, the Supreme Court was conscious of the fact that when there is a clear and specific bar on power of Arbitrator to award interest, the same cannot be awarded. However, the Raveechee case does not even deal with or refer to the Chittaranjan Maity case even though the subject clause of the contract in both cases were almost identical and the interpretation given by the coordinate Benches of the Supreme Court are completely different.

The 1940 Act did not prohibit the Arbitrator from awarding interest for the pre-reference, pendente lite or post-award period. On the contrary the 1996 Act under the provisions contained in Section 31(7)(a) of the 1996 Act specifically provides that "Unless otherwise agreed by the parties...", in case of a monetary award, the Arbitral Tribunal may include in the sum for which the Award is made interest, at such rates as its deem 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.

In the Chittaranjan Maity case, the focus was that in view of specific provision contained in Section 31(7)(a) of the 1996 Act, award of interest has been made subject to any agreement to the contrary between the parties. Accordingly, Clause 16(2) of the GCC in that case expressly barring award of interest would therefore prevail over the power of the Arbitrator to award interest. The Court distinguished the applicability of the judgment of M/s Ambica Construction v Union of India10 due to lack of clarity as to whether the same was decided under the 1940 Act or under the 1996 Act as it relied upon the Constitution Bench judgment of the Supreme Court in Secretary, Irrigation Department, Government of Orissa and Others v GC Roy11, which was with reference to the 1940 Act. Instead, the Court relied upon its earlier decisions in the cases of Sree Kamatchi Amman Constructions v Divisional Railway Manager (Works), Palghat and Ors.12 (while dealing with an identical case wherein Clause 16 of the GCC of the Railways had required interpretation) and Union of India v Bright Power Projects (India) Private Limited13 (while dealing with similar provision prohibiting award of interest) by referring to and interpreting the provisions of Section 31 (7) (a) of the 1996 Act, held that where parties had agreed that interest shall not be payable under the Contract, the Arbitral Tribunal could not award interest for the pendente lite period.

On the contrary in the Raveechee case, the Supreme Court laid emphasis on the subject clause in the Contract to hold that the clause only bars interest upon earnest money and security deposits or amounts payable to the contractor under the Contract. A distinction was made between liability of interest payable on determination of unascertained damages in course of the lis and liability of interest as per any term of the contract, or during the terms of the contract. The Court relying upon the judgment of M/s Ambica Construction v Union of India14 which considered an identical clause in the contract held that the bar to award interest on the amounts payable under the contract would not be sufficient to deny the payment of pendente lite interest. It was further held that the clause in the GCC did not bar the arbitrator from awarding pendente lite interest as the power of the Arbitrator would depend upon several factors such as; phraseology used in the agreement clauses conferring power relating to arbitration, nature of claim and dispute referred to arbitrator, and on what items power to award interest has been taken away and for which period15.

On a closer analysis of both the judgments, it is evident that there is apparent difference in the approach and the interpretation given to almost identical clauses in the respective contracts and as such, may result in multiplicity of litigation. While on the one hand the role of Arbitrators to do justice and equity cannot be ruled out but at the same time it has to be also borne in mind that Arbitrators (unlike Courts) are creatures of the contract, being bound by their terms of reference and have to function within four corners of the contract and specific terms of reference.

Such clauses/ provisions usually form part of standard contracts, particularly those entered by private parties/ contractors with Government entities (like the Railways) and Public Sector Undertakings (PSUs) and clarity in interpretation as to the scope and extent of power of arbitrators to award pendente lite interest is quintessential. A settled position of law addressing the ambiguity is significant to render necessary guidance and support to Arbitral Tribunals, which usually comprises of technical and non-judicial members leaving room for challenge to arbitral awards.

It would be interesting to note if a Larger Bench of the Supreme Court addresses the ambiguity whilst dealing with similar clauses, and more specifically, the contrary interpretation given by the coordinate Benches in Chittaranjan Maity case and the Raveechee case in the light of the phrase "Unless otherwise agreed by the parties..." contained in Section 31(7)(a) of the 1996 Act as to the scope and extent of powers of Arbitrator to award pendente lite interest.

Footnotes

1 Civil Appeal Nos. 15545 – 15546 of 2017 arising out of SLP (C) Nos. 39038 – 39039 of 2012 reported as 2018 SCC OnLine SC 654

2 (2017) 9 SCC 611

3 (2017) 14 SCC 323

4 (1992) 1 SCC 508

5 (1996) 1 SCC 516

6 (2010) 1 SCC 549

7 (2009) 12 SCC 26

8 (2016) 6 SCC 36

9 (2017) 14 SCC 323

0  (2017) 14 SCC 323

1 (1992) 1 SCC 508

2 (2010) 8 SCC 767.

3 (2015) 9 SCC 695.

4 (2017) 14 SCC 323

5 (2016) 6 SCC 36

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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