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The Supreme Court has upheld an order whereby an award granting pendente lite and future interest at the rate of 10% p.a. on the award amount was set aside while holding that such interest was expressly restricted in the Agreement entered into by the parties to the arbitration.

A Bench of Justices S Abdul Nazeer and Krishna Murari held that the provisions of the Arbitration and Conciliation Act, 1996 gave paramount importance to the contract entered into between the parties and the contract had categorically restricted power of an arbitrator to award pre­-reference and pendente lite interest when the parties themselves have agreed to the contrary.  

BHEL, the respondent had floated a tender for construction of boundary wall at its 2x750 MW Pragati III Combined Cycle Power at Bawana, Delhi.   

The appellant’s bid was accepted, following which the parties entered into a contract which, contained an interest barring clause (Clause 17 of the agreement).

When a dispute arose between the parties, the appellant filed a petition under Section 11 of the 1996 Act before the Delhi High Court wherein a sole Arbitrator was appointed to adjudicate the disputes.

The appellant in the claim petition claimed pre-­reference, pendente lite and future interest at the rate of 24% on the value of the award. 

It was concluded by the arbitrator that there was no prohibition in the contract about payment of interest and he awarded pendente lite and future interest at the rate of 10% p.a. to the appellant on the award amount from the date of filing of the claim petition i.e. 02.12.2011 till the date of realization of the award amount.

The said award was challenged under Section 34 on the ground that the Arbitrator being creature   of the arbitration agreement travelled beyond the terms of the contract.

A Single Judge Bench of the Delhi High Court denied payment of such interest, and this order was then upheld by a Division Bench.

While relying on Section 31(7)(a) of the 1996 Act which deals with the payment of interest, the Court opined that:

“In the present case, clause barring interest is very clear and categorical. It uses the expression “any moneys due to the contractor” by the employer which includes the amount awarded by the arbitrator.“

Justice Nazeer in his judgment also answered whether the said Clause 17 of the Contract was ultra vires in terms of Section 28 of the Indian Contract Act, 1872.

Exception I to Section 28, the Court noted, saves contracts where the right to move the Court for appropriate relief is restricted but where the parties have agreed to resolve their dispute through arbitration.

Thus, a lawful agreement to refer the matter to arbitration can be made a condition precedent before going to courts and it does not violate Section 28, it said.

Reference was also made to the Interest Act, 1978 which governed interest payments, wherein it was stated under Section 3(3)(a)(ii) that the statute will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

The Court while dismissing the appeal thus held that:

“Thus, when there is an express statutory permission for the parties to contact 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.”

Cause Title: Garg Builders v. Bharat Heavy Electricals Limited

Click here to access a copy of the Judgment.