Supreme Court Restricts Arbitrator’s Power to Award Interest When Contract Prohibits: Union of India vs. Manraj Enterprises (2021)

Date of the Judgment: 18 November 2021
Citation: (2021) INSC 737
Judges: M.R. Shah, J. and B.V. Nagarathna, J.
Can an arbitrator award interest on payments due to a contractor, even when the contract explicitly prohibits such interest? The Supreme Court of India addressed this crucial question in a recent case, clarifying the extent of an arbitrator’s powers in the face of contractual limitations. This judgment highlights the importance of contractual terms in arbitration proceedings, particularly concerning interest payments.

Case Background

The Union of India (appellant) and Manraj Enterprises (respondent) entered into three work contracts. Disputes arose, leading to arbitration. The sole arbitrator awarded ₹78,81,553.08 to the respondent, along with pendente lite (interest during the legal proceedings) and future interest at 12% and 18% respectively, excluding the earnest money deposit and security deposit. The Union of India challenged the award, specifically the interest component, citing a clause in the General Conditions of Contract (GCC) that barred interest on any amounts payable to the contractor.

Timeline

Course of Proceedings

The Union of India initially challenged the arbitrator’s award before a Single Judge of the High Court, who dismissed the appeal. Subsequently, the Union of India appealed to the Division Bench of the High Court, which also dismissed the appeal and upheld the arbitrator’s decision to award interest. The Union of India then appealed to the Supreme Court.

Legal Framework

The case revolves around Section 31(7)(a) of the Arbitration & Conciliation Act, 1996, which 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 section allows an arbitrator to award interest unless the parties have agreed otherwise. The General Conditions of Contract (GCC), specifically clause 16(2), was also a key part of the legal framework. Clause 16(2) 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 deposited in terms of Sub-clause (1) of this Clause will be repayable with interest accrued thereon.”

The Supreme Court had to determine whether this clause barred the arbitrator from awarding interest on the amounts payable to the contractor.

Arguments

Appellant (Union of India) Arguments:

• The appellant argued that clause 16(2) of the GCC explicitly bars the payment of interest on any amounts payable to the contractor, including the awarded amount.
• They contended that Section 31(7)(a) of the Arbitration & Conciliation Act, 1996, allows arbitrators to award interest only if the parties have not agreed otherwise, and in this case, they had.
• The appellant relied on the Supreme Court’s decision in Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, which held that a similar clause barred the payment of interest.
• They also cited Garg Builders v. Bharat Heavy Electricals Limited, 2021 SCC OnLine SC 855, which stated that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award it.
• The appellant argued against applying the principle of ejusdem generis to interpret “amounts payable to the contractor” as being similar to “earnest money” or “security deposit,” as the word “or” is used disjunctively.
• They referred to Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., (2019) 17 SCC 786, which held that if an agreement prohibits the grant of interest, the arbitrator cannot award pendente lite interest.

Respondent (Manraj Enterprises) Arguments:

• The respondent argued that clause 16 of the GCC pertains specifically to earnest money and security deposits and does not bar pendente lite interest on other amounts.
• They contended that the law laid down under the Arbitration Act, 1940, has been codified under Section 31(7)(a) of the 1996 Act.
• The respondent relied on Secretary, Irrigation Department, State of Orissa v. G.C. Roy, (1992) 1 SCC 508, which stated that an arbitrator has the power to award interest pendente lite if the agreement does not prohibit it.
• They also cited Raveechee and Company v. Union of India, (2018) 7 SCC 664, which held that the power to grant interest pendente lite is inherent in an arbitrator unless the agreement expressly bars it.
• The respondent argued that the bar in clause 16(2) applies to the parties and not the arbitrator, relying on Kailash v. Nanhku, (2005) 4 SCC 480, which stated that a bar is on a party before the court and not on the court’s inherent powers.
• They cited Union of India v. M/s Pradeep Vinod Construction Co., Civil Appeal No. 2099 of 2007, which distinguished judgments relied upon by the appellant and held that no interest is awardable on earnest money and security deposit.
• The respondent argued that the clauses in Tehri Hydro Development Corporation Ltd. were materially different from clause 16(2) and contained an express bar on payment of interest.
• They pointed out that the appellant had conceded that the issue was covered by M/s Pradeep Vinod Construction Co. and that the appellant had also claimed interest from the respondent.

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether, in view of the specific clause 16(2) of the GCC, the contractor is entitled to any interest pendente lite on the amounts payable to the contractor other than upon the earnest money or the security deposit.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Section 31(7)(a) of the Arbitration & Conciliation Act, 1996: This section allows an arbitrator to award interest unless the parties have agreed otherwise.

Judgment

How each authority was viewed by the Court?

• State of Karnataka v. Shree Rameshwara Rice Mills, (1987) 2 SCC 160:* The court relied on this case to establish that damages for breach of contract are considered amounts payable under the contract.
• Garg Builders v. Bharat Heavy Electricals Limited, 2021 SCC OnLine SC 855:* The court followed this precedent, which held that if a contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award it.
• Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695:* The court heavily relied on this three-judge bench decision, which held that a similar clause barring interest on amounts payable to the contractor is binding, and the arbitrator cannot award interest contrary to the contract.
• Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., (2019) 17 SCC 786:* The court cited this case to support the view that if an agreement prohibits the grant of interest, the arbitrator cannot award pendente lite interest.
• Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited, (2015) 5 SCC 718:* The court referred to this case to support its view that the rule of ejusdem generis is not applicable in this case.
• Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611:* The court used this case to reiterate that if a contract prohibits the award of interest for the pre-award period, the arbitrator cannot award interest for that period.

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of contractual terms and the limitations they impose on an arbitrator’s powers. The court noted that the parties had explicitly agreed that no interest would be payable on the amounts due to the contractor. The Court also highlighted that Section 31(7)(a) of the Arbitration & Conciliation Act, 1996, itself allows parties to agree otherwise regarding interest. The court was influenced by the fact that the arbitrator, being a creature of the contract, could not go beyond the terms of the agreement between the parties.

The court rejected the argument that the bar on interest was only applicable to the parties and not the arbitrator. It emphasized that the arbitrator’s powers are derived from the contract and cannot exceed the limitations set by the contract. The court also rejected the argument that the principle of ejusdem generis should be applied to interpret “amounts payable to the contractor” as being similar to “earnest money” or “security deposit.”

The court quoted from the judgment:

“Once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties herein, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract in question in this case.”

The court also stated:

“The expression “amounts payable to the contractor under the contract” has to be read independently and disjunctively to earnest money deposit and security deposit as the word used is “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the principle of ejusdem generis is not applicable in the present case.”

The court also observed:

“The concession if any by the counsel which is contrary to the law laid down by this Court shall not be binding on the parties. Further, merely because the appellant has claimed interest, does not imply that the contractor shall be entitled to interest pendente lite. Even if the appellant would have been awarded interest, the same also was not permissible and could have been a subject matter of challenge. In short, there cannot be an estoppel against law.”

There was no minority opinion in this case.

Key Takeaways

• Contractual terms are paramount in arbitration proceedings.
• An arbitrator’s power to award interest is limited by the terms of the contract.
• If a contract explicitly bars the payment of interest, an arbitrator cannot award it.
• The principle of ejusdem generis may not apply if the terms are disjunctive.

Directions

The Supreme Court quashed and set aside the judgments and orders passed by the High Court and the award passed by the arbitrator, which had awarded pendente lite and future interest on the amounts due and payable to the contractor under the contract. The court held that the contractor was not entitled to any interest due to the specific bar in clause 16(2) of the GCC.

Development of Law

The ratio decidendi of this case is that an arbitrator cannot award interest if the contract between the parties explicitly bars it. This decision reinforces the principle that contractual terms are paramount in arbitration proceedings and that arbitrators are bound by the limitations set by the contract. It also clarifies that the principle of ejusdem generis should not be applied when the terms are disjunctive.

Conclusion

The Supreme Court’s decision in Union of India vs. Manraj Enterprises clarifies that arbitrators cannot award interest when the contract between the parties explicitly prohibits it. This judgment emphasizes the importance of contractual terms in arbitration proceedings and limits the arbitrator’s power to award interest contrary to the agreed terms. The court’s decision reinforces the principle that arbitrators are bound by the contract and cannot go beyond its limitations.

Category

Parent Category: Arbitration Law

Child Category: Interest in Arbitration

Child Category: Section 31(7)(a), Arbitration & Conciliation Act, 1996

Parent Category: Contract Law

Child Category: General Conditions of Contract

FAQ

Q: Can an arbitrator award interest on a contract if the contract says no interest will be paid?

A: No, according to the Supreme Court, if the contract explicitly states that no interest will be paid on the amounts due, the arbitrator cannot award interest. The arbitrator is bound by the terms of the contract.

Q: What does “pendente lite interest” mean?

A: Pendente lite interest is the interest that accrues on a debt or claim during the course of legal proceedings, from the date the cause of action arose until the date of the award.

Q: What is the significance of Section 31(7)(a) of the Arbitration & Conciliation Act, 1996?

A: Section 31(7)(a) allows an arbitrator to award interest on the amount due, unless the parties have agreed otherwise. This section gives paramount importance to the contract between the parties.

Q: What is the principle of ejusdem generis?

A: The principle of ejusdem generis is a rule of interpretation that states that when specific words are followed by general words, the general words should be interpreted as being limited to things of the same kind as those specified. However, this principle does not apply if the terms are disjunctive.

Q: What does this ruling mean for future contracts?

A: This ruling emphasizes the importance of clear and specific language in contracts, especially when it comes to interest payments. Parties should ensure that their contracts clearly state whether interest will or will not be payable on amounts due.