Supreme Court Upholds Arbitrator’s Power to Award Interest Pendente Lite in Contract Disputes: Raveechee and Co. vs. Union of India (3 July 2018)

Introduction

Date of the Judgment: 3 July 2018. Citation: Not Available. Judges: S.A. Bobde, J. and L. Nageswara Rao, J. Can a clause in a contract that prohibits interest on certain payments also prevent an arbitrator from awarding interest for the period during which a dispute is being resolved? The Supreme Court of India addressed this question in a case involving a contract for quarrying and loading stone ballast. The core issue was whether a specific clause in the General Contract Clauses (GCC) restricted the arbitrator’s power to award interest during the pendency of the arbitration proceedings (pendente lite). The judgment was delivered by a bench comprising Justice S.A. Bobde and Justice L. Nageswara Rao.

Case Background

M/s Raveechee and Co. (the appellant) entered into a contract with the Union of India (the respondent) on 2 June 1981, for quarrying, stacking, and loading stone ballast. Disputes arose between the parties, leading the appellant to invoke arbitration. The arbitration proceedings commenced on 26 September 1988, and the arbitral award was issued on 22 March 2001. The Arbitral Tribunal awarded a total of Rs. 76,43,800/- against the appellant’s claim of Rs. 1,34,87,044/-, which included interest pendente lite at 12% on the awarded damages (excluding security deposits) from 26 September 1988 to 22 March 2001. The High Court partly allowed the appeal of the respondent and set aside the award of interest pendente lite.

Timeline

Course of Proceedings

The appellant filed a Civil Miscellaneous Application along with the arbitral award in the Civil Court. The Civil Court made the award a rule of the court on 29 July 2004 under Section 17 of the Arbitration Act of 1940. The respondent challenged this order in appeal before the High Court. The High Court partly allowed the appeal, setting aside the arbitrator’s award of interest pendente lite (Claim No. 12). The appellant then filed a review application, which was also dismissed by the High Court on 5 November 2015. The appellant then approached the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of Clause 16(3) of the General Contract Clauses (GCC). This clause states: “No interest will be payable upon the earnest money and 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 payable with interest accrued thereon.” The Supreme Court examined whether this clause restricts the arbitrator’s power to award interest pendente lite. The Arbitration Act of 1940, specifically Section 17, was also relevant as it pertains to making an award a rule of the court.

Arguments

Appellant’s Arguments:

• The appellant contended that Clause 16(3) of the GCC only bars interest on earnest money, security deposits, and amounts payable under the contract. It does not restrict the arbitrator’s power to award interest pendente lite on damages.
• The appellant argued that interest pendente lite is not a payment under the contract but compensation for being kept out of the money due to them during the arbitration.
• The appellant relied on the principle that an arbitrator has the power to award interest unless specifically barred by the agreement.

Respondent’s Arguments:

• The respondent argued that Clause 16(3) of the GCC bars the arbitrator from awarding interest pendente lite.
• The respondent contended that the clause should be interpreted broadly to include all types of interest, including pendente lite interest.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether Clause 16(3) of the General Contract Clauses (GCC) restricted the power of the arbitrator to award interest pendente lite?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Court relied on Irrigation Deptt., State of Orissa v. G.C Roy (1992) 1 SCC 508* to establish that an arbitrator has the power to award interest pendente lite when the agreement does not prohibit it.
• The Court followed Board of Trustee for the Port of Calcutta v. Engineers-De-Space Age (1996) 1 SCC 516* and Madnani Construction Corporation Pvt. Ltd. v. Union of India and Ors. (2010) 1 SCC 549*, which affirmed the arbitrator’s power to award interest pendente lite based on the view in Irrigation Deptt., State of Orissa.
• The Court referred to Sayeed Ahmed & Co v. State of Uttar Pradesh and Ors. (2009) 12 SCC 26* and Superintending Engineer and Ors. v. B. Subba Reddy (1999) 4 SCC 423* to reiterate that an arbitrator can award interest pendente lite.
• The Court relied on the three-judge bench decision in Union of India v. Ambica Construction (2016) 6 SCC 36* to hold that an arbitrator can award interest pendente lite unless expressly barred by the contract.
• The Court considered Ambica Constructions v. Union of India (2017) 14 SCC 323*, which involved an identical clause and held that it did not bar the arbitrator from awarding interest pendente lite.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that an arbitrator has the inherent power to award interest pendente lite unless explicitly barred by the contract. The Court emphasized that Clause 16(3) of the GCC only restricts interest on specific amounts (earnest money, security deposits, and amounts payable under the contract) and does not extend to interest on damages awarded during arbitration. The Court also noted that interest pendente lite is not a payment under the contract but compensation for being kept out of the money due during the arbitration process.

The Court stated, “In terms, the clause only bars interest upon earnest money and security deposits or amounts payable to the contractor under the contract.” The Court further clarified, “The above mentioned amounts are amounts which in a sense belong to the contractor…they are not amounts of which the contractor is deprived the use of against his wishes, so as to attract interest.” The Court concluded, “Thus, the liability for interest pendente lite does not arise from any term of the contract, or during the terms of the contract, but in the course of determination by the Arbitrators of the losses or damages that are due to the claimant.”

Key Takeaways

• An arbitrator has the power to award interest pendente lite unless the contract explicitly bars it.
• A clause in a contract barring interest on specific amounts does not automatically bar interest pendente lite.
• Interest pendente lite is considered compensation for being kept out of the money due during the arbitration process, not a payment under the contract.

Directions

The Supreme Court set aside the judgment of the High Court and restored the award passed by the Arbitral Tribunal in respect of Claim No. 12.

Development of Law

The ratio decidendi of this case is that an arbitrator has the power to award interest pendente lite unless the contract explicitly bars it. This judgment reinforces the principle established in previous cases such as Irrigation Deptt., State of Orissa v. G.C Roy and clarifies that a general clause barring interest on specific payments does not restrict the arbitrator’s power to award interest pendente lite. This case does not introduce a new position of law but reaffirms the existing legal position.

Conclusion

The Supreme Court’s judgment in M/s Raveechee and Co. vs. Union of India reinforces the power of arbitrators to award interest pendente lite, unless explicitly barred by the contract. The Court clarified that a clause barring interest on specific payments does not extend to interest on damages awarded during arbitration. This decision provides clarity on the interpretation of such clauses and ensures that parties are fairly compensated for delays in dispute resolution.