Supreme Court Upholds Contractual Bar on Pendente Lite Interest in Arbitration: Garg Builders vs. BHEL (2021)

Introduction

Date of the Judgment: October 4, 2021

Citation: (2021) INSC 688

Judges: S. Abdul Nazeer, J. and Krishna Murari, J.

Can a contractual clause that bars interest also prevent an arbitrator from awarding interest during the pendency of a dispute (pendente lite)? The Supreme Court of India addressed this critical question in a recent judgment, clarifying the extent to which parties can contractually limit an arbitrator’s power to award interest. This case revolves around a dispute between Garg Builders and Bharat Heavy Electricals Limited (BHEL), where the core issue was whether a clause in their contract barring interest extended to pendente lite interest.

The Supreme Court bench, comprising Justices S. Abdul Nazeer and Krishna Murari, delivered the judgment. Justice S. Abdul Nazeer authored the opinion for the court.

Case Background

Bharat Heavy Electricals Limited (BHEL) issued a tender for the construction of a boundary wall at its Pragati III Combined Cycle Power Project in Bawana, Delhi. Garg Builders submitted a bid, which BHEL accepted. A Letter of Intent (LOI) was issued on September 9, 2008, followed by a formal contract on October 24, 2008. This contract contained a clause (Clause 17) that explicitly barred the payment of interest on any amounts due to the contractor.

Disputes arose between the parties regarding the contract. Garg Builders initiated arbitration proceedings under Section 11 of the Arbitration and Conciliation Act, 1996, in the Delhi High Court. The High Court appointed Hon’ble Mr. Justice M.A. Khan (Retd.) as the sole arbitrator on September 16, 2011. In their claim, Garg Builders sought various amounts, including pre-reference, pendente lite, and future interest at 24% per annum.

Timeline

Course of Proceedings

The arbitrator concluded that there was no explicit prohibition in the contract or LOI regarding the payment of interest for pre-suit, pendente lite, and future periods. Consequently, the arbitrator awarded pendente lite and future interest at 10% per annum to Garg Builders from the date of filing the claim petition (December 2, 2011) until the realization of the award amount.

BHEL challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Delhi High Court. BHEL argued that the arbitrator had exceeded the terms of the contract by awarding pendente lite interest, which was expressly barred by Clause 17. The Single Judge of the High Court agreed with BHEL, setting aside the portion of the award that granted pendente lite interest on March 10, 2017. The Single Judge held that the arbitrator erred in interpreting Clause 17 as not prescribing pendente lite interest. The Division Bench of the High Court upheld the Single Judge’s decision on September 19, 2017.

Garg Builders then appealed to the Supreme Court, which issued notice on July 3, 2018, noting the reliance placed on the order in Ambica Construction v. Union of India.

Legal Framework

The case primarily revolves around the interpretation of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which states:

“31(7)(a) 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 arbitral tribunal to award interest unless the parties have agreed otherwise. The court also considered Section 28 of the Indian Contract Act, 1872, which deals with agreements that restrain legal proceedings, and Exception 1 to that section, which allows for arbitration agreements. Additionally, the Interest Act, 1978, was considered, particularly Section 3(3)(a)(ii), which states that the Act does not apply where the payment of interest is barred by an express agreement.

Arguments

Arguments by Garg Builders (Appellant):

• The arbitrator had taken a plausible view that Clause 17 of the contract did not bar the payment of pendente lite interest.
• Relied on the judgment in Ambica Construction v. Union of India, where the appellant was entitled to pendente lite interest.
• Cited Raveechee and Company v. Union of India to support their claim.
• Clause 17 of the contract, which bars payment of interest, is ultra vires and against the provisions of Section 28 of the Indian Contract Act, 1872.

Arguments by Bharat Heavy Electricals Limited (Respondent):

• Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, gives paramount importance to the contract between the parties and restricts the arbitrator’s power to award pre-reference and pendente lite interest when the parties have agreed to the contrary.
• If the contract contains a specific clause that expressly bars the payment of interest, the arbitrator cannot grant pendente lite interest.
• Ambica Construction is not applicable as it was decided under the Arbitration Act, 1940, while the present case falls under the 1996 Act.
• Section 3 of the Interest Act allows the court to grant interest but Section 3(3) recognizes the right of parties to contract out of the payment of interest. Therefore, Clause 17 of the contract is not violative of any provisions of the Indian Contract Act, 1872.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the arbitrator can award pendente lite interest when the contract between the parties expressly bars it.
2. Whether Clause 17 of the contract is ultra vires in terms of Section 28 of the Indian Contract Act, 1872.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 31(7)(a) of the Arbitration and Conciliation Act, 1996
• Section 28 of the Indian Contract Act, 1872
• Section 3 of the Interest Act, 1978

Judgment

How each submission made by the Parties was treated by the Court?

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of upholding contractual agreements and the specific provisions of the Arbitration and Conciliation Act, 1996. The Court emphasized that Section 31(7)(a) of the Act gives paramount importance to the contract between the parties, and if the contract explicitly bars the payment of interest, the arbitrator cannot award it. The Court also noted that Section 3(3) of the Interest Act, 1978, allows parties to contract out of receiving interest by express agreement.

The Court’s reasoning focused on the following points:

• The clear and unambiguous language of Clause 17 of the contract, which barred interest on “any moneys due to the contractor.”
• The primacy of contractual terms under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.
• The permissibility of waiving interest claims by express agreement under Section 3(3) of the Interest Act, 1978.
• The distinction between the Arbitration Act, 1940, and the Arbitration and Conciliation Act, 1996, with specific reference to the inapplicability of the judgments in Ambica Construction and Raveechee and Company.

The Court’s reasoning was a blend of legal interpretation, statutory provisions, and contractual principles. The Court’s analysis was primarily based on the legal provisions and the contractual terms, with a secondary emphasis on the factual context of the case.

Fact:Law Ratio

Logical Reasoning:

Judgment

The Supreme Court held that the High Court was correct in rejecting Garg Builders’ claim for pendente lite interest. The Court emphasized that the arbitrator’s power to award interest is subject to the agreement of the parties, as per Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. The Court also found that Clause 17 of the contract was not ultra vires in terms of Section 28 of the Indian Contract Act, 1872, as parties are allowed to waive interest by virtue of an agreement under Section 3(3)(a)(ii) of the Interest Act, 1978.

The Court stated:

“Therefore, if the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite 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 Court dismissed the appeal, upholding the decisions of the Single Judge and Division Bench of the Delhi High Court. The Court directed the parties to bear their own costs.

Key Takeaways

• Contractual Primacy: The judgment reinforces the principle that contractual terms are paramount in arbitration proceedings under the 1996 Act.
• Bar on Interest: If a contract explicitly bars the payment of interest, including pendente lite interest, an arbitrator cannot award it.
• Validity of Interest Bar Clauses: Clauses barring interest are not ultra vires under Section 28 of the Indian Contract Act, 1872, as they are protected by the exception for arbitration agreements and the provisions of the Interest Act, 1978.
• Distinction of 1940 Act and 1996 Act: The judgment clarifies that precedents under the Arbitration Act, 1940, are not applicable to cases under the Arbitration and Conciliation Act, 1996, especially concerning the award of interest.

Potential Future Impact: This judgment provides clarity on the extent to which parties can contractually limit an arbitrator’s power to award interest. It will likely lead to more careful drafting of contracts, especially in the context of arbitration clauses, to explicitly address the issue of interest. This decision also reinforces the importance of adhering to the specific provisions of the Arbitration and Conciliation Act, 1996.

Directions

The Supreme Court directed the parties to bear their own costs.

Development of Law

Ratio Decidendi: The ratio decidendi of this case is that under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, if a contract explicitly bars the payment of interest, including pendente lite interest, an arbitrator cannot award such interest. This is further supported by Section 3(3) of the Interest Act, 1978, which allows parties to waive interest by express agreement.

Change in Previous Positions of Law: This judgment does not change the previous position of law but clarifies the application of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, and reinforces the primacy of contractual terms. It also distinguishes the applicability of precedents under the Arbitration Act, 1940, from those under the 1996 Act, particularly concerning the award of interest.

Conclusion

The Supreme Court’s judgment in Garg Builders vs. Bharat Heavy Electricals Limited reinforces the principle that contractual terms are paramount in arbitration proceedings under the Arbitration and Conciliation Act, 1996. The Court held that if a contract explicitly bars the payment of interest, including pendente lite interest, an arbitrator cannot award it. This decision clarifies the legal position on the interplay between contractual clauses and the arbitrator’s power to award interest, emphasizing the importance of clear and unambiguous contractual language. The Court dismissed the appeal, upholding the High Court’s decision.

Category

Parent Category: Arbitration Law

Child Categories:

• Arbitration and Conciliation Act, 1996
• Section 31(7)(a), Arbitration and Conciliation Act, 1996
• Interest Act, 1978
• Section 3, Interest Act, 1978
• Indian Contract Act, 1872
• Section 28, Indian Contract Act, 1872
• Pendente Lite Interest
• Contractual Interpretation

FAQ

Q: Can an arbitrator award interest if the contract says no interest is payable?

A: No, according to the Supreme Court, if the contract explicitly bars the payment of interest, including during the pendency of the dispute (pendente lite), the arbitrator cannot award interest. This is because the Arbitration and Conciliation Act, 1996, gives importance to the contract between the parties.

Q: What does ‘pendente lite interest’ mean?

A: Pendente lite interest refers to the interest that accrues on a sum of money during the period that a legal case or arbitration proceeding is ongoing, i.e., from the date of filing the claim until the date of the award.

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

A: Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, allows an arbitrator to award interest on the sum awarded, unless the parties have agreed otherwise. This means that if the contract between the parties bars the payment of interest, the arbitrator cannot award it.

Q: Does this judgment mean that all clauses barring interest are valid?

A: Yes, the Supreme Court held that clauses barring interest are valid and not against the law, especially in the context of arbitration. This is because the law allows parties to agree to waive their right to interest by express agreement.

Q: What should I do if I have an arbitration clause in my contract?

A: You should carefully review your arbitration clause and ensure that it clearly addresses the issue of interest. If you do not want to pay interest during the pendency of a dispute, you must explicitly state so in the contract. It is advisable to seek legal advice to ensure your contract is drafted correctly.