Summary
In an arbitration governed by the Arbitration Act, 1940, the Supreme Court held that a works-contract clause stating that the contractor shall not be entitled to claim interest on any payment, arrears or balance found due to him does not amount to an express bar on the arbitrator's power to award pendente lite interest, and restored pendente lite interest (at 9% instead of the 15% awarded) that the District Judge and High Court had set aside.
Issues
- Whether Clause 22 of the contract, which barred the contractor from claiming interest upon any payment, arrears or balance found due to him at any time, operates as an express bar on the arbitrator's power to grant pendente lite interest under the Arbitration Act, 1940.
- Whether paragraph 24 of Reliance Cellulose Products v. ONGC, relied on by the appellant, is unreliable because it draws on Engineers-De-Space-Age, which was later read down by the three-judge bench in Union of India v. Ambica Construction (First Ambica case).
- What rate of pendente lite interest should be awarded given the lapse of time and the sums already paid by the State, including post-award interest.
Provisions considered
- Power of arbitrator to award pendente lite interest (as recognised in G.C. Roy and N.C. Budharaj), Arbitration Act, 1940Under the 1940 Act the arbitrator may award pre-reference, pendente lite and post-award interest unless the contract contains a bar; such ouster clauses are strictly construed and only a clear and express bar on interest in case of dispute, difference, delay or any other respect whatsoever suffices. A clause merely stating that no interest is payable on amounts due under the contract does not take away the arbitrator's power. (¶¶ 8, 9, 10, 13, 14, 15)
- Section 31(7)(a), Arbitration and Conciliation Act, 1996Contrasted with the 1940 Act: Section 31(7)(a) ('unless otherwise agreed by the parties') sanctifies party autonomy, so under the 1996 Act interest ceases to be payable the moment the agreement provides otherwise, even without a specific bar directed at the arbitrator. The Court therefore does not readily transpose 1996 Act principles to contracts under the 1940 Act. (¶¶ 9, 10)
- Section 34, Arbitration and Conciliation Act, 1996Noted in a footnote that, since the proceedings arise under the 1940 Act, the Court's scope to modify or vary the award is larger than that of a court acting under Section 34 of the 1996 Act, which is why the Court itself substituted a reduced rate of pendente lite interest. (¶ 16)
Held
- The Constitution Bench decisions in G.C. Roy and N.C. Budharaj recognise the arbitrator's power to grant pre-reference, pendente lite and post-award interest on an award under the 1940 Act unless there is a contractual bar; whether such a bar exists necessarily requires interpretation of the clause. (¶ 8)
- Clauses barring interest are interpreted differently under the two statutes. Under the 1940 Act a strict approach applies: only a clear and express clause barring interest in the event of difference, dispute or misunderstanding, delay in payment, or in any other respect whatsoever bars the arbitrator; a clause providing merely that no interest is payable on amounts due under the contract is insufficient. Under Section 31(7)(a) of the 1996 Act, which sanctifies party autonomy, interest is not payable the moment the contract provides otherwise. Reliance Cellulose (para 24) and Pam Developments (para 23) were followed. (¶¶ 9, 10)
- Under the First Ambica case (three-judge bench), the arbitrator's power to award pendente lite interest depends on whether the contractual clause expressly takes it away, assessed from the phraseology of the agreement, the arbitration clauses, the nature of the claim and dispute referred, and the items and period for which interest is barred; a bar on interest for delayed payment will not readily be inferred as an express bar on pendente lite interest. (¶¶ 12, 13)
- Paragraph 24 of Reliance Cellulose is consistent with the First Ambica case: both require an express contractual bar on pendente lite interest and make the question turn on the phraseology of the clause. Reliance Cellulose undertook a comprehensive survey including the First Ambica case, so the State's challenge to its correctness was rejected; a settled precedent must be followed and applied, not unsettled. (¶¶ 2, 11, 14)
- Clause 22, which only prohibited the contractor from claiming interest on any payment, arrears or balance found due to him at any time, does not expressly bar the award of pendente lite interest in the event of disputes, differences, misunderstandings, delayed payment or in any other respect whatsoever; consistently with the approach under the 1940 Act, no bar on the arbitrator could be inferred from it, and the District Judge and High Court erred in setting aside the pendente lite interest. (¶¶ 3, 15, 16)
- Having regard to the arbitrator entering reference in 1991, the award in 1995, the long passage of time in litigation and the amounts already paid by the State including 9% post-award interest, pendente lite interest was granted at 9% rather than the 15% awarded by the arbitrator; the Court's power to vary an award under the 1940 Act being wider than under Section 34 of the 1996 Act. (¶ 16)
Result
Appeal allowed; High Court judgment dated 06.01.2023 set aside; respondent to pay pendente lite interest at 9% (instead of 15%) from 18.12.1991 to 07.03.1995 (date of the award) within 60 days; no order as to costs; pending applications disposed of.