Supreme Court clarifies interest on delayed payments in arbitration: Chittaranjan Maity vs. Union of India (2017)

Date of the Judgment: October 3, 2017
Citation: (2017) INSC 849
Judges: J. Chelameswar, S. Abdul Nazeer
Can an arbitrator award interest on delayed payments when the contract explicitly prohibits it? The Supreme Court of India addressed this crucial question in a case concerning a railway construction contract. The court clarified the extent of an arbitrator’s power to award interest, especially when the contract contains a clause barring such payments. The bench comprised Justices J. Chelameswar and S. Abdul Nazeer, with the judgment authored by Justice S. Abdul Nazeer.

Case Background

On March 20, 1991, the Union of India invited tenders for earthwork related to a new railway goods terminal. Chittaranjan Maity’s tender was accepted on June 17, 1991, for Rs. 61,24,159. An agreement was formalized on August 22, 1991, incorporating the General Conditions of Contract (GCC). Disputes arose regarding the execution and alleged abandonment of work. The respondent issued a notice on October 24, 1991, seeking termination of the agreement, followed by another notice on November 15, 1991, for rescission of the contract under Clause 62(1) of the GCC. Despite extensions, the appellant abandoned the remaining work on November 3, 2003.

The appellant raised a claim on October 30, 1996, and demanded arbitration on June 22, 1998. An application was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator. The Chief Justice of the High Court of Calcutta ordered the appointment of arbitrators on December 6, 2001. The Arbitral Tribunal was constituted, and it adjudicated the disputes, issuing an award on September 20, 2006. The respondent challenged this award under Section 34 of the 1996 Act, which was dismissed by a Single Judge of the High Court. However, the Division Bench of the High Court set aside the Single Judge’s order and the award, directing a fresh reference to the Arbitral Tribunal.

Timeline

Course of Proceedings

The appellant initially sought arbitration under Section 11(6) of the Arbitration and Conciliation Act, 1996, leading to the appointment of an Arbitral Tribunal by the High Court of Calcutta. The Tribunal adjudicated the disputes and issued an award on September 20, 2006. The respondent challenged this award under Section 34 of the 1996 Act before a Single Judge of the High Court, who dismissed the challenge. The respondent then appealed to the Division Bench of the High Court, which set aside the Single Judge’s order and the award, directing a fresh arbitration. The Division Bench’s decision was based on the argument that the appellant had issued a ‘No Claims Certificate,’ forfeiting their right to claim any dues. The appellant then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically:

• Section 11(6): This section deals with the procedure for appointing an arbitrator when parties fail to agree on one. It allows a party to apply to the Chief Justice of the High Court for the appointment of an arbitrator.
• Section 31(7)(a): This section of the Arbitration and Conciliation Act, 1996, states:
  “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.”
  This provision allows an arbitrator to award interest on the awarded amount from the date the cause of action arose until the date of the award, unless the parties have agreed otherwise.

Additionally, the case considers Clause 16(2) of the General Conditions of Contract (GCC), which states:
“No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract, but government securities deposit in terms of sub-clause (1) of this clause will be repayable (with) interest accrued thereon.”
This clause explicitly prohibits the payment of interest on amounts payable to the contractor under the contract.

Arguments

Appellant’s Arguments

• The appellant contended that the Division Bench of the High Court erred by considering the issue of the ‘No Claims Certificate’ for the first time in the appeal. This issue was not raised before the Chief Justice during the proceedings under Section 11(6) of the Arbitration and Conciliation Act, 1996, nor before the Arbitral Tribunal or the Single Judge.
• The appellant argued that the question of whether there was a live claim or an arbitrable dispute should have been raised in the proceedings under Section 11(6) or before the Arbitral Tribunal.
• The Arbitral Tribunal had correctly awarded pre-award and pendente lite interest from July 17, 1992, until the realization of the award amount.
• The appellant relied on the judgment in M/s. Ambica Construction vs. Union of India [(2017) SCC OnLine SC 678], arguing that a mere bar to award interest on the amounts payable under the contract would not be sufficient to deny payment of pendente lite interest.

Respondent’s Arguments

• The respondent argued that the ‘No Claims Certificate’ issued by the appellant forfeited their right to any claim except for the security deposit of Rs. 15,000.
• The respondent contended that there was no arbitrable dispute between the parties, making the claim itself not maintainable.
• The respondent argued that the appellant was not entitled to any interest, given the terms of the contract, specifically Clause 16(2) of the GCC.
• The respondent relied on the provision in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which states that if the agreement prohibits the award of interest, the arbitrator cannot award interest for the pre-award period.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court identified the following key issues for consideration:

1. Whether the Division Bench was justified in considering the arbitrability of the dispute for the first time in the appeal.
2. Whether the Arbitral Tribunal was justified in awarding interest on the delayed payments in favor of the appellant.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court

• National Insurance Company Limited vs. Boghara Polyfab Private Limited [(2009) 1 SCC 267] – Supreme Court of India: This case was cited to support the point that the issue of whether a claim is a live claim can be considered by the Chief Justice under Section 11(6) of the Arbitration and Conciliation Act, 1996, or kept open for the Arbitral Tribunal to decide if the plea is raised.
• Mcdermott International Inc. vs. Burn Standard Co. Ltd. and Others [(2006) 11 SCC 181] – Supreme Court of India: This case was cited to emphasize that a party questioning the jurisdiction of the arbitrator must raise the issue before the arbitrator.
• M/s. Ambica Construction vs. Union of India [(2017) SCC OnLine SC 678] – Supreme Court of India: The appellant relied on this case to argue that a mere bar on awarding interest on amounts payable under the contract would not be sufficient to deny pendente lite interest. However, the Court distinguished this case as it was decided under the Arbitration Act, 1940, which did not have the same provisions as the 1996 Act regarding interest.
• Secretary, Irrigation Department, Government of Orissa and Others. vs. G.C. Roy [(1992) 1 SCC 508] – Supreme Court of India: This case, cited in M/s. Ambica Construction (supra), was also distinguished as it was decided under the 1940 Act, which did not have specific provisions regarding interest.
• Sayeed Ahmed and Company vs. State of Uttar Pradesh and Others [(2009) 12 SCC 26] – Supreme Court of India: This case was cited to highlight that the 1940 Act did not have provisions regarding the power of the arbitrator to award interest, whereas the 1996 Act does, specifically in Section 31(7)(a).
• Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and Others [(2010) 8 SCC 767] – Supreme Court of India: This case, dealing with an identical Clause 16 of the GCC of Railways, was cited to support the view that if parties agree that 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.
• Union of India vs. Bright Power Projects (India) Private Limited [(2015) 9 SCC 695] – Supreme Court of India: This case was cited to reiterate that when the terms of the agreement prohibit the award of interest, the arbitrator cannot award interest for the pendente lite period.

Legal Provisions Considered by the Court

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators by the Chief Justice of the High Court.
• Section 31(7)(a) of the Arbitration and Conciliation Act, 1996: This section allows an arbitrator to award interest unless the parties have agreed otherwise.
• Clause 16(2) of the General Conditions of Contract (GCC): This clause explicitly prohibits the payment of interest on amounts payable to the contractor under the contract.

Authority Table

Judgment

Treatment of Submissions

Treatment of Authorities

• National Insurance Company Limited vs. Boghara Polyfab Private Limited [(2009) 1 SCC 267]*: The Court followed this authority to highlight that the issue of whether a claim is a live claim can be considered by the Chief Justice under Section 11(6) of the Arbitration and Conciliation Act, 1996, or kept open for the Arbitral Tribunal to decide if the plea is raised.
• Mcdermott International Inc. vs. Burn Standard Co. Ltd. and Others [(2006) 11 SCC 181]*: The Court followed this authority to emphasize that a party questioning the jurisdiction of the arbitrator must raise the issue before the arbitrator.
• M/s. Ambica Construction vs. Union of India [(2017) SCC OnLine SC 678]*: The Court distinguished this case, noting that it was decided under the Arbitration Act, 1940, which did not have the same provisions as the 1996 Act regarding interest.
• Secretary, Irrigation Department, Government of Orissa and Others. vs. G.C. Roy [(1992) 1 SCC 508]*: The Court distinguished this case, noting that it was decided under the 1940 Act, which did not have specific provisions regarding interest.
• Sayeed Ahmed and Company vs. State of Uttar Pradesh and Others [(2009) 12 SCC 26]*: The Court followed this authority to highlight that the 1940 Act did not have provisions regarding the power of the arbitrator to award interest, whereas the 1996 Act does, specifically in Section 31(7)(a).
• Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and Others [(2010) 8 SCC 767]*: The Court followed this authority, which dealt with an identical Clause 16 of the GCC of Railways, to support the view that if parties agree that 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.
• Union of India vs. Bright Power Projects (India) Private Limited [(2015) 9 SCC 695]*: The Court followed this authority to reiterate that when the terms of the agreement prohibit the award of interest, the arbitrator cannot award interest for the pendente lite period.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the explicit contractual clause (Clause 16(2) of the GCC) that barred the payment of interest. The Court emphasized that the parties were bound by their agreement, and the arbitrator could not override this express provision. The Court also noted the specific provision in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which allows parties to agree to exclude interest. The Court also emphasized on the fact that the issue of arbitrability of the dispute was not raised at the appropriate time, i.e., before the Chief Justice, Arbitral Tribunal or the Single Judge.

The Court’s reasoning was also guided by the principle that the supervisory role of courts in arbitration matters should be minimal, and intervention should only occur in cases of fraud, bias, or violation of natural justice. The Court clarified that it cannot correct errors of the arbitrators, but can only quash the award if necessary.

Sentiment Analysis Table

Fact:Law Ratio Table

Logical Reasoning

The Court considered the argument that the Arbitrator was justified in awarding pendente lite interest, however, it was rejected because of the specific clause in the contract and the provisions of the Arbitration Act.

The Court held that the Division Bench was not justified in considering the arbitrability of the disputes for the first time, particularly when the respondent had not raised the issue of the ‘No Claims Certificate’ before the Chief Justice, Arbitral Tribunal, or the Single Judge. The Court also held that the Arbitral Tribunal was not justified in awarding interest on delayed payments, as the contract explicitly barred such payments.

The Supreme Court reasoned that the parties were bound by the terms of their contract. The court referred to Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which allows parties to agree on the issue of interest. The Court noted that the contract between the parties contained a specific clause which barred the payment of interest. The Court held that the Arbitrator could not override this express provision and award interest.

The Court stated that, “Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators.”

The Court also observed that, “the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

The Court further stated, “When parties to the contract had agreed to the fact that interest would not be awarded on the amount payable to the contractor under the contract, in our opinion, they were bound by their understanding. Having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an Arbitral Tribunal.”

The Court allowed the appeal in part, setting aside the Division Bench’s order and affirming the Arbitral Tribunal’s award, but only to the extent of the principal amount awarded. The Court held that the appellant was not entitled to any interest. The Court noted that the appellant had already withdrawn an amount in excess of the award amount, and directed the respondent not to recover the excess amount.

Key Takeaways

• Contractual Clauses Prevail: Parties are bound by the terms of their contract. If a contract explicitly bars the payment of interest, an arbitrator cannot award it, unless the contract is in violation of the law.
• Limited Judicial Intervention: Courts have a limited supervisory role in arbitration matters and should not interfere with the arbitrator’s decision unless there is fraud, bias, or a violation of natural justice.
• Importance of Raising Issues Early: Issues regarding arbitrability and the existence of a live claim should be raised at the earliest opportunity, preferably before the Chief Justice under Section 11(6) of the Arbitration and Conciliation Act, 1996, or before the Arbitral Tribunal.
• Section 31(7)(a) of the Arbitration and Conciliation Act, 1996: This provision allows parties to agree on the issue of interest, and if they do, it is binding on the arbitrator.

Directions

The Supreme Court directed the respondent not to recover the excess amount withdrawn by the appellant, which was in excess of the award amount exclusive of interest.

Development of Law

The ratio decidendi of this case is that an arbitrator cannot award interest on delayed payments if the contract between the parties explicitly prohibits it. This decision clarifies the scope of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, emphasizing that parties are bound by their contractual agreements regarding interest. The judgment also reinforces the principle that courts should exercise minimal intervention in arbitration matters, and that issues regarding the arbitrability of a dispute should be raised at the earliest possible stage.

The Supreme Court’s decision in this case has further solidified the principle that contractual autonomy is paramount in arbitration. The court clarified that the arbitrator’s power to award interest is not absolute and is subject to the terms agreed upon by the parties. This ruling has significant implications for contract drafting, emphasizing the need for clear and unambiguous clauses regarding interest on delayed payments.

Conclusion

The Supreme Court’s judgment in Chittaranjan Maity vs. Union of India (2017) provides a crucial clarification on the extent of an arbitrator’s power to award interest on delayed payments. The court emphasized that parties are bound by their contractual agreements, and if a contract explicitly bars the payment of interest, an arbitrator cannot award it, unless the contract is in violation of the law. This decision reinforces the principle of contractual autonomy in arbitration and limits the scope of judicial intervention. It also highlights the importance of raising issues regarding arbitrability at the earliest opportunity. This case serves as a significant precedent for future arbitration disputes involving interest on delayed payments and underscores the need for clear and unambiguous contractual clauses.