Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.6216 OF 2021
(Arising out of S.L.P. (C.) No. 16320 of 2018)
GARG BUILDERS …APPELLANT(S)
VERSUS
BHARAT HEAVY ELECTRICALS LIMITED …RESPONDENT(S)
J U D G M E N T
S. ABDUL NAZEER, J.
Leave granted.
2. This appeal is directed against the Order of the Division Bench
of the High Court of Delhi dated 19.09.2017 in FAO(OS)
(COMM)No.120/2017 whereby it has upheld the judgment of the
learned Single Judge in OMP (COMM) No.28 of 2017 dated
Signature Not Verified
10.03.2017, resulting in denial of interest on the
pendente lite
Digitally signed by
Anita Malhotra
Date: 2021.10.04
16:45:27 IST
Reason:
award amount to the appellant.
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3. The respondent floated a tender for construction of boundary
wall at its 2x750 MW Pragati III Combined Cycle Power at Bawana,
Delhi (hereinafter referred to as ‘the project’). The appellant
submitted its bid for the project which was accepted by the
respondent. Pursuant to which, the respondent issued a Letter of
Intent (LOI) to the appellant dated 09.09.2008. Subsequently, on
24.10.2008 the parties entered into a contract which, inter alia,
contained the interest barring clause which is reproduced
hereunder:
“Clause 17: No interest shall be payable by BHEL on
Earnest Money Deposit, Security Deposit or on any
moneys due to the contractor.”
4. The disputes arose between the parties with respect to the
aforesaid contract and subsequently the appellant filed a petition
under Section 11 of the Arbitration and Conciliation Act, 1996 (for
short, “the 1996 Act”) before the Delhi High Court wherein the
Court vide Order dated 16.09.2011 appointed Hon’ble Mr. Justice
M.A. Khan (Retd.) as the sole Arbitrator to adjudicate the disputes.
The appellant in the claim petition, apart from claiming various
amounts under different heads, inter alia claimed prereference,
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pendente lite and future interest at the rate of 24% on the value of
the award. Learned Arbitrator after hearing the contentions of both
the parties concluded that there is no prohibition in the contract
dated 24.10.2008 and LOI dated 09.09.2010 about payment of
interest for the presuit, pendente lite and future period. Therefore,
he awarded pendente lite and future interest at the rate of 10% p.a.
to the appellant on the award amount from the date of filing of the
claim petition i.e. 02.12.2011 till the date of realization of the award
amount.
5. The respondent challenged the said award under Section 34 of
the 1996 Act before the Delhi High Court in O.M.P. (COMM.)
28/2017 on various grounds, inter alia, on the ground that the
learned Arbitrator being creature of the arbitration agreement
travelled beyond the terms of the contract in awarding pendente lite
interest on the award amount as the same was expressly barred in
terms of the contract. The learned Single Judge vide his final
judgment and order dated 10.03.2017 held as under:
“The Arbitrator fell in error in holding that the
aforesaid clause only prescribed prereference
interest and not pendente lite interest. As stated
earlier, in terms of Section 31(7)(a) of the Act, the
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power of the arbitral tribunal to award pre award
interest is contingent to the parties not agreeing to
the contrary. Preaward interest includes both pre
reference interest as well as pendente lite interest.
Thus, the conclusion of the Arbitrator that award of
pendente lite interest was not prescribed by clause
17 of the Agreement is not sustainable.
Accordingly, the impugned award to the extent
of award of pendente lite interest is set aside. The
petition is disposed of. No orders as to costs.”
6. As noticed above, the Division Bench of the High Court has
upheld the judgment and order of the Learned Single Judge in the
impugned order.
7. On 03.07.2018, this Court issued notice observing as under:
“Learned counsel for the petitioner has placed
reliance on an order of this Court in Ambica
Construction v. Union of India, (2017) 14 SCC 323.”
8. We have heard learned counsel for the parties and perused the
materials on record. Mr. Sanjay Bansal, 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. This argument was advanced in view of
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judgment of this Court in Ambica Construction v. Union of
1
India , wherein the appellant was entitled for the payment of
interest for the pendente lite period. He has also relied on another
judgment of this Court in Raveechee and Company v. Union of
2
India in support of his contentions. Further, it was argued by the
learned counsel that the Clause 17 of the Contract barring payment
of interest to the contractor on any sum due to the contractor, is
and against the provisions of Section 28 of the Indian
ultra vires
Contract Act, 1872.
9. On the other hand, Mr. Pallav Kumar, learned counsel for the
respondent, submitted that Section 31(7)(a) of the 1996 Act gives
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. He argued that if the
contract itself contains a specific clause which expressly bars the
payment of interest, then it is not open for the arbitrator to grant
pendente lite interest. It was further argued that Ambica
1 (2017) 14 SCC 323
2 (2018) 7 SCC 664
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Construction (supra) is not applicable to the instant case because
it was decided under the Arbitration Act, 1940 whereas the instant
case falls under the 1996 Act. It was further argued that Section 3
of the Interest Act confers power on the Court to allow interest in
the proceedings for recovery of any debt or damages or in
proceedings in which a claim for interest in respect of any debt or
damages already paid. However, Section 3(3) of the Interest Act
carves out an exception and recognizes the right of the parties to
contract out of the payment of interest arising out of any debt or
damages and sanctifies contracts which bars the payment of
interest arising out of debt or damages. Therefore, Clause 17 of the
Contract is not violative of any the provisions of the Indian Contract
Act, 1872. In light of the arguments advanced, the learned counsel
prays for dismissal of the appeal.
10. We have carefully considered the submissions of the learned
counsel for both the parties made at the Bar. 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
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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. Section 31(7)(a) of the
1996 Act which deals with the payment of interest is as under :
“31(7)(a) Unless otherwise agreed by the parties,
where and insofar 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.”
11. It is clear from the above provision that if the contract
prohibits prereference 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.
12. In Sayeed Ahmed and Company v. State of Uttar Pradesh &
3
this Court has held that a provision has been made under
Ors.
Section 31(7)(a) of the 1996 Act in relation to the power of the
3 (2009) 12 SCC 26
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arbitrator to award interest. As per this section, if the contract bars
payment of interest, the arbitrator cannot award interest from the
date of cause of action till the date of award.
13. In
Sree Kamatchi Amman Constructions v. Divisional
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Railway Manager (Works), Palghat & Ors. it was held by this
Court that where the parties had agreed that the interest shall not
be payable, the Arbitral Tribunal cannot award interest between the
date on which the cause of action arose to the date of the award.
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14. Bharat Heavy Electricals Limited v. Globe HiFabs Limited
is an identical case where this Court has held as under :
“16. In the present case we noticed that the clause
barring interest is very widely worded. It uses the
words “any amount due to the contractor by the
employer”. In our opinion, these words cannot be
read as ejusdem generis along with the earlier words
“earnest money” or “security deposit”.”
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15. In it was
Sri Chittaranjan Maity v. Union of India
categorically held that if a contract prohibits award of interest for
preaward period, the arbitrator cannot award interest for the said
period.
4 (2010) 8 SCC 767
5 (2015) 5 SCC 718
6 (2017) 9 SCC 611
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16. 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. The judgment on which
reliance was placed by the learned counsel for the appellant in
Ambica Construction (supra) has no application to the instant
case because Ambica Construction was decided under the
Arbitration Act 1940 whereas the instant case falls under the 1996
Act. This has been clarified in Sri Chittaranjan Maity (supra) as
under :
“ Relying on a decision of this Court in
16. Ambica
Construction v. Union of India, (2017) 14 SCC 323,
the learned Senior Counsel for the appellant
submits that mere bar to award interest on the
amounts payable under the contract would not be
sufficient to deny payment on pendente lite interest.
Therefore, the arbitrator was justified in awarding
the pendente lite interest. However, it is not clear
from Ambica Construction (supra) as to whether it
was decided under the Arbitration Act, 1940 (for
short “the 1940 Act”) or under the 1996 Act. It has
relied on a judgment of Constitution Bench in State
of Orissa v. G.C. Roy, (1992) 1 SCC 508. This
judgment was with reference to the 1940 Act. In the
1940 Act, there was no provision which prohibited
the arbitrator from awarding interest for the pre
reference, pendente lite or postaward period,
whereas the 1996 Act contains a specific provision
which says that if the agreement prohibits award of
interest for the preaward period, the arbitrator
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cannot award interest for the said period. Therefore,
the decision in Ambica Construction (supra) cannot
.”
be made applicable to the instant case
17. The decision in (supra) relied on by
Raveechee and Company
the learned counsel for the appellant is again under the Arbitration
Act 1940 which has no application to the facts of the present case.
18. Having regard to the above, we are of the view that the High
Court was justified in rejecting the claim of the appellant seeking
pendente lite interest on the award amount.
19. This takes us to the next question as to whether Clause 17 of
the Contract 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. The question, therefore, is whether the
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contracts barring payment of interest extinguish the rights of the
parties. Exception 1 to Section 28 reads as under :
“ Exception 1: Saving of contract to refer to
arbitration dispute that may arise. – This section
shall not render illegal a contract, by which two or
more persons agree that any dispute which may
arise between them in respect of any subject or
class of subjects shall be referred to arbitration, and
that only the amount awarded in such
arbitration shall be recoverable in respect of the
dispute so referred .”
20. 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
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Arbitrator to grant interest is subject to the agreement of the
parties.
21. It is pertinent to note that 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”.
22. 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. We are of the considered opinion that
Clause 17 of the contract is not ultra vires in terms of Section 28 of
the Indian Contract Act, 1872.
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23. In the result, the appeal fails and is accordingly dismissed.
Having regard to the facts and circumstances of the case, we direct
the parties to bear their own costs.
24. Pending application, if any, shall also stand disposed of.
…………………………………J.
(S. ABDUL NAZEER)
…………………………………J.
(KRISHNA MURARI)
New Delhi;
October 4, 2021.
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