LEGAL ISSUE: Whether an arbitrator can award interest when the contract between parties explicitly prohibits it.
CASE TYPE: Arbitration Law
Case Name: Jaiprakash Associates Ltd. vs. Tehri Hydro Development Corporation India Ltd.
Judgment Date: 07 February 2019
Date of the Judgment: 07 February 2019
Citation: (2019) INSC 123
Judges: A.K. Sikri, J., S. Abdul Nazeer, J., M. R. Shah, J.
Can an arbitrator grant interest on a claim when the contract between the parties clearly states that no interest is payable? The Supreme Court of India addressed this question in a dispute between Jaiprakash Associates Ltd. and Tehri Hydro Development Corporation India Ltd. The core issue revolved around the interpretation of clauses in a contract that seemingly barred the payment of interest on delayed payments. The court had to determine whether these clauses were indeed a bar on the arbitrator’s power to award interest. The judgment was delivered by a three-judge bench comprising Justices A.K. Sikri, S. Abdul Nazeer, and M. R. Shah, with Justice A.K. Sikri authoring the opinion.
Case Background
Jaiprakash Associates Ltd. (JAL) was awarded a contract to execute certain works. An agreement was signed on December 18, 1998. Disputes arose between JAL and Tehri Hydro Development Corporation India Ltd. (THDC), leading to arbitration. The arbitral tribunal, consisting of three arbitrators, partially allowed two claims raised by JAL on October 10, 2010. The arbitrators also awarded interest at 10% per annum from the date the arbitration was invoked (October 9, 2007) until 60 days after the award, and future interest at 18% per annum until payment.
Timeline:
| Date | Event |
|---|---|
| December 18, 1998 | Agreement signed between Jaiprakash Associates Ltd. (JAL) and Tehri Hydro Development Corporation India Ltd. (THDC). |
| October 9, 2007 | Arbitration invoked by JAL. |
| October 10, 2010 | Arbitral tribunal pronounces majority award. |
| November 15, 2011 | Single Judge of the High Court of Delhi quashes the award limited to the interest awarded by the Arbitrators. |
Course of Proceedings
The High Court of Delhi, in its single-judge bench, quashed the arbitral award, specifically regarding the interest awarded. The court held that Clauses 50 and 51 of the General Conditions of Contract (GCC) barred the arbitrators from granting interest. JAL appealed this decision in an intra-court appeal, which was dismissed by the Division Bench of the High Court, upholding the single judge’s decision.
Legal Framework
The case revolves around the interpretation of Clauses 50 and 51 of the General Conditions of Contract (GCC), which read:
“Clause 50.0 Interest on money due to the contractor No omission on the part of the Engineer in charge to pay the amount due upon measurement or otherwise shall vitiate or make void the contract, nor shall the contractor be entitled to interest upon any guarantee or payments in arrears nor upon any balance which may on the final settlement of his account, be due to him.”
“Clause 51.0 No claim for delayed payment due to dispute etc. No claim for interest or damage will be entertained or be payable by the corporation in respect of any amount or balance which may be lying with the corporation owing to nay dispute, different or misunderstanding between the parties or in respect of any delay or omission on the part of he Engineer in charge in making intermediate or final payments on in any other respect whatsoever.”
The Supreme Court also considered the Arbitration and Conciliation Act, 1996, particularly Section 31(7)(a), which deals with the power of the arbitral tribunal to award interest.
Arguments
Appellant (Jaiprakash Associates Ltd.) Arguments:
- The judgment in Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited is contrary to the earlier judgment in State of Uttar Pradesh v. Harish Chandra and Company. Both judgments are by three-judge benches, and the earlier judgment should prevail.
- Clauses 50 and 51 of the GCC do not prohibit the arbitrators from granting interest. The phrase “or any other respect whatsoever” in Clause 51 should be read ejusdem generis, meaning it should be interpreted in light of the preceding words. Thus, it would only apply to situations where money is held by the respondent due to disputes, not to claims awarded by arbitrators.
Respondent (Tehri Hydro Development Corporation India Ltd.) Arguments:
- The clauses in State of Uttar Pradesh v. Harish Chandra and Company and the present case are different. The present case is governed by Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited, which construed identical clauses to mean that arbitrators cannot grant interest.
- The Arbitration Act, 1996, differs from the Arbitration Act, 1940. Most judgments cited by the appellant were under the 1940 Act. Under the 1996 Act, an arbitrator cannot award pendente lite interest when there is an express bar, as per Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, and as clarified in Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors.
- The arbitrators themselves acknowledged that Clauses 50 and 51 deny interest but still awarded it based on Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, which was under the 1940 Act.
Submissions of Parties
| Main Submission | Sub-Submission (Appellant) | Sub-Submission (Respondent) |
|---|---|---|
| Conflict in Judgments | Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited is contrary to State of Uttar Pradesh v. Harish Chandra and Company. Earlier judgment should prevail. | Clauses in Harish Chandra are different from the present case. Present case is governed by THDC v. JAL. |
| Interpretation of Clauses 50 & 51 | Clauses do not prohibit interest. “Or any other respect whatsoever” should be read ejusdem generis. | Clauses bar interest. Arbitrators acknowledged this. |
| Applicability of Arbitration Act | – | 1996 Act differs from 1940 Act. Most judgments cited by appellant are under 1940 Act. |
Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether the Arbitrators could award any interest in view of Clauses 50 and 51 of the General Conditions of Contract (GCC) which governed the terms between the parties.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the Arbitrators could award any interest in view of Clauses 50 and 51 of the General Conditions of Contract (GCC) | No, the Arbitrators could not award interest. | Clauses 50 and 51 of the GCC, as interpreted by the High Court and in line with previous judgments, specifically bar the payment of interest. The 1996 Act, unlike the 1940 Act, upholds contractual bars on interest. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was Considered |
|---|---|---|
| Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy [ (1992) 1 SCC 508] | Supreme Court of India | Explained the general principle that a person deprived of money is entitled to compensation, but this is subject to the agreement between the parties. |
| Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age [(1996) 1 SCC 516] | Supreme Court of India | The arbitral tribunal relied on this case to justify awarding interest, however this case was distinguished as it was under the 1940 Act. |
| State of Uttar Pradesh v. Harish Chandra and Company [(1999) 1 SCC 63] | Supreme Court of India | Distinguished. The Court noted that the clause in this case was different and more restrictive than the clauses in the present case. Also, it was under the 1940 Act. |
| Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited [(2012) 12 SCC 10] | Supreme Court of India | Followed. The clauses in this case were identical to the present case and were interpreted to mean that no interest was payable. |
| Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors. [(2009) 12 SCC 26] | Supreme Court of India | Explained. This case clarified that under the 1996 Act, an arbitrator cannot award pendente lite interest when there is an express bar in the contract. |
| Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors. [(2010) 8 SCC 767] | Supreme Court of India | Reiterated the position that under the 1996 Act, the arbitrator’s power to award interest is limited by the terms of the agreement. |
| Union of India v. Bright Power Projects (India) Private Limited [(2015) 9 SCC 695] | Supreme Court of India | Reiterated the position that under the 1996 Act, the arbitrator’s power to award interest is limited by the terms of the agreement. |
| Sri Chittaranjan Maity v. Union of India [(2017) 9 SCC 611] | Supreme Court of India | Reiterated the position that under the 1996 Act, the arbitrator’s power to award interest is limited by the terms of the agreement. |
| Reliance Cellulose Products Limited v. Oil and Natural Gas Corporation Limited [(2018) 9 SCC 266] | Supreme Court of India | Reiterated the position that under the 1940 Act, an arbitrator has power to grant pre-reference interest under the Interest Act as well as pendente lite and future interest. However, he is constricted only by the fact that an agreement between the parties may contain an express bar to the award of pre-reference and/or pendente lite interest. |
| Lokmat Newspapers Pvt. Ltd. v. Shankarprasad [(1999) 6 SCC 275] | Supreme Court of India | Cited for the principle of ejusdem generis and its limitations. |
| Bharat Heavy Electricals Limited v. Globe Hi-Fabs Limited [(2015) 5 SCC 718] | Supreme Court of India | Cited for the principle of ejusdem generis and its limitations. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited is contrary to State of Uttar Pradesh v. Harish Chandra and Company. Earlier judgment should prevail. | Rejected. Harish Chandra was under the 1940 Act, and the clauses were different. THDC v. JAL, which was between the same parties with identical clauses, was followed. |
| Clauses 50 and 51 do not prohibit interest. “Or any other respect whatsoever” should be read ejusdem generis. | Rejected. The rule of ejusdem generis does not apply as there is no distinct genus or category. The clause is widely worded to bar interest in any respect whatsoever. |
How each authority was viewed by the Court?
✓ Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age [(1996) 1 SCC 516]* was distinguished as it was under the 1940 Act, while the present case is under the 1996 Act.
✓ State of Uttar Pradesh v. Harish Chandra and Company [(1999) 1 SCC 63]* was distinguished because it was under the 1940 Act and had a different clause.
✓ Tehri Hydro Development Corporation (THDC) Limited & Anr. v. Jai Prakash Associates Limited [(2012) 12 SCC 10]* was followed as it was between the same parties with identical clauses.
✓ Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors. [(2009) 12 SCC 26]* was followed to clarify that under the 1996 Act, an arbitrator cannot award pendente lite interest when there is an express bar.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the explicit contractual terms and the legal framework of the Arbitration and Conciliation Act, 1996. The Court emphasized that the clauses in the contract clearly barred the payment of interest, and the 1996 Act respects such agreements, unlike the 1940 Act. The Court also considered the principle of contractual autonomy, which means that parties are free to enter into agreements and the Court should not interfere with such agreements. The Court also considered the need for consistency in the interpretation of similar clauses, particularly in cases involving the same parties. The Court also rejected the argument of ejusdem generis, stating that the phrase “or any other respect whatsoever” was broad enough to include all types of claims, including interest.
| Sentiment | Percentage |
|---|---|
| Contractual Terms | 40% |
| Arbitration and Conciliation Act, 1996 | 30% |
| Consistency in Interpretation | 20% |
| Rejection of ejusdem generis | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning:
Contract has clauses barring interest (Clauses 50 & 51 of GCC)
Arbitration Act, 1996, Section 31(7) respects contractual terms
Clauses are similar to those in THDC v. JAL, where interest was barred
Harish Chandra is distinguished as it was under the 1940 Act and had a different clause
Rule of ejusdem generis is not applicable
Arbitrators cannot award interest
The Court rejected the appellant’s argument that the phrase “or any other respect whatsoever” should be read ejusdem generis, stating that the clause was broad enough to cover all types of claims. The Court also emphasized the principle of contractual autonomy, stating that parties are free to enter into agreements and the Court should not interfere with such agreements.
The Court’s reasoning is clearly articulated in the following quotes:
“The High Court, both Single Bench as well as Division Bench, rightly noted that the aforesaid judgment was under the 1940 Act and the legal position in this behalf have taken a paradigm shift which position is clarified in Sayeed Ahmed and Company case.”
“The Clauses 50 and 51 of GCC are pari materia with Clauses 1.2.14 and 1.2.15 of GCC in THDC case. Those clauses have been interpreted by holding that no interest is payable on claim for delayed payment due to the contractor.”
“In this scenario, when we find that Harish Chandra case which is of the vintage of 1940 Act and is distinguished in Sayeed Ahmed and Company coupled with the fact that the ratio of Sayeed Ahmed and Company has been consistently followed, there is no reason to deviate from the construction to Clauses 50 and 51 of the GCC given by the arbitral tribunal in the first instance as well as the High Court.”
The Court concluded that the High Court’s decision was correct and needed no interference. The appeal was dismissed.
Key Takeaways
- Under the Arbitration and Conciliation Act, 1996, if a contract explicitly bars the payment of interest, an arbitrator cannot award interest, even if it is for the pendente lite period.
- The principle of contractual autonomy is upheld, meaning that courts will respect the agreements that parties enter into.
- Clauses barring interest are interpreted strictly, and unless the language is clear and unambiguous, an arbitrator may be able to award interest.
- The rule of ejusdem generis should be applied with caution, and only when there is a clear genus or category.
- The Arbitration Act, 1996, differs significantly from the Arbitration Act, 1940, particularly regarding the power of arbitrators to award interest.
Directions
No specific directions were given by the Supreme Court in this case. The appeal was dismissed, upholding the High Court’s decision.
Development of Law
The ratio decidendi of this case is that under the Arbitration and Conciliation Act, 1996, an arbitrator’s power to award interest is limited by the terms of the agreement between the parties. If the agreement contains an express bar on the award of interest, the arbitrator cannot award interest, even for the pendente lite period. This clarifies the position of law under the 1996 Act, distinguishing it from the 1940 Act where the arbitrator had more discretion to award interest. The judgment reinforces the principle of contractual autonomy and the importance of clear and unambiguous language in contracts. This case does not change the previous position of law but rather clarifies and reinforces the existing position under the 1996 Act.
Conclusion
The Supreme Court dismissed the appeal, affirming that arbitrators cannot award interest when the contract explicitly prohibits it. The court emphasized the importance of upholding contractual agreements, particularly under the Arbitration and Conciliation Act, 1996. This judgment reinforces the principle that parties are bound by the terms of their contracts, and arbitrators must respect these terms.
Category
Parent Category: Arbitration Law
Child Categories:
- Arbitration and Conciliation Act, 1996
- Contractual Interpretation
- Interest on Delayed Payments
- Section 31(7), Arbitration and Conciliation Act, 1996
FAQ
Q: Can an arbitrator award interest if the contract says no interest is payable?
A: No, according to this Supreme Court judgment, if the contract clearly states that no interest will be paid, the arbitrator cannot award interest under the Arbitration and Conciliation Act, 1996.
Q: What is the difference between the Arbitration Act of 1940 and 1996 regarding interest?
A: Under the 1940 Act, arbitrators had more discretion to award interest. However, the 1996 Act respects the contractual terms, meaning if the contract bars interest, the arbitrator cannot award it.
Q: What does “pendente lite” interest mean?
A: “Pendente lite” interest refers to the interest awarded for the period during which the arbitration proceedings are ongoing.
Q: What is the principle of contractual autonomy?
A: Contractual autonomy means that parties are free to enter into agreements, and courts should respect those agreements. In this case, the Supreme Court upheld the contractual bar on interest.
Q: What is the meaning of ejusdem generis?
A: Ejusdem generis is a rule of interpretation where general words are limited to things of the same kind as those specifically mentioned. In this case, the court decided that the rule does not apply because there is no specific category.