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SC: If a contract contains a specific clause expressly barring the payment of interest the arbitrator cannot grant pendente lite interest

Team SoOLEGAL 5 Oct 2021 3:19pm

SC: If a contract contains a specific clause expressly barring the payment of interest the arbitrator cannot grant pendente lite interest

The Supreme Court has observed when a contract contains a particular clause expressly barring the payment of pendente lite interest, the arbitrator cannot grant the same.

According to the Arbitration and Conciliation Act, 1996 the powers of an arbitrator in awarding pre-reference and pendentre lite interest are restricted if the parties themselves have undertaken an inference to the contrary. The division bench comprising of Justices Krishna Murari and S Abdul Nazeer observed that such a contractual clause will not violate Section 28 of the Indian Contract act, 1827.

The contract in the instant case contained a similar clause which states, that BHEL shall not be liable to pay any interest on Earnest Money Deposit, Security Deposit, or any amount due to the contractor. Thereafter, the claimant was awarded with the pendentre lite and future interest of 10% p.a. by the arbitrator on the award amount from the date of filing of the petition i.e., 2/12/2011 till the date of realization of the award amount. However, the award was challenged by the opposing party in accordance with the provision of Section 34 of the Act before the Delhi HC. It was contented that the arbitrator over exercised his power while awarding pendentre lite interest on the award amount as the same was barred in the terms of the contract, the High Court set aside the award.

The court held referring to Section 31(7)(a) of the Act which deals with the payment of interest that the law associated with the award of pendentre lite interest under the 1996 Act is no longer res integra. Since the use of expression “any money due to the contractor” which includes money awarded by the arbitrator was used in the contractual clause in the present case, it prohibits the arbitrator clearly and categorically in awarding pre-reference and pendentre lite interest.

To support the stated contentions the appellant relied upon two major judgments of Ambica Construction v. Union of India and Raveechee and Company v. Union of India. The court noted that both the supporting judgments had no application to the present case as it dealt with 1940 Act.

Subsequently, another issue was raised challenging Clause 17 of the contract to be ultra vires to Section 28 of the Indian Contract Act, 1872. In accordance with the provision, the court observed that considering exception I to Section 28 a lawful agreement to refer the dispute to arbitration can be made a condition precedent before approaching courts and it does not violate Section 28.

The court held that “there is an express statutory permission for the parties to contract out of receiving interest.” 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.

The Delhi HC order was upheld while dismissing the appeal. 



Tagged: SC   Arbitration and Conciliation Act   Indian Contract act   Justice Krishna Murari   Justice S Abdul Nazeer   Delhi HC  
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