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Garg Builders Vs. Bharat Heavy Electricals Ltd.

[Civil Appeal No. 6216 of 2021 arising out of S.L.P. (C.) No. 16320 of 2018]

S. Abdul Nazeer, J.

1. 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 10.03.2017, resulting in denial of pendente lite interest on the award amount to the appellant.

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, 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 power of the arbitral tribunal to award pre award interest is contingent to the parties not agreeing to the contrary. Preaward interest includes both prereference 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 judgment of this Court in Ambica Construction v. Union of India1, 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 India2 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 ultra vires and against the provisions of Section 28 of the Indian 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 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 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 & Ors.3 this Court has held that a provision has been made under Section 31(7)(a) of the 1996 Act in relation to the power of the 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 Railway Manager (Works), Palghat & Ors.4 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.

14. Bharat Heavy Electricals Limited v. Globe HiFabs Limited5 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"."

15. In Sri Chittaranjan Maity v. Union of India6 it was categorically held that if a contract prohibits award of interest for preaward period, the arbitrator cannot award interest for the said period.

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:

"16. Relying on a decision of this Court in 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 prereference, 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 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 Raveechee and Company (supra) relied on by 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 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 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.

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.

1 (2017) 14 SCC 323

2 (2018) 7 SCC 664

3 (2009) 12 SCC 26

4 (2010) 8 SCC 767

5 (2015) 5 SCC 718

6 (2017) 9 SCC 611


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