Arbitrator Cannot Award Interest If Contract Between Parties Bars Payment Of Interest: Supreme Court

Additional Solicitor General Mr. K.M. Nataraj appeared for the Appellant-Union of India while Senior Advocate Mr. Vikas Singh appeared for the Respondent during the proceedings before the Court.

An appeal was preferred by the Union of India before the Supreme Court assailing the judgment of Delhi High Court which had dismissed the appeal of the Appellant and upheld the order of the Single Judge upholding the award of interest by the Sole Arbitrator.

In this case, the parties had entered into a contract, after which a dispute arose between the two. The matter was referred to arbitration and the Arbitrator had awarded an amount of Rs. 78,81,553.08 along with pendente lite and future interest at the rate of 12% and 18% respectively on the entire awarded amount except for the earnest money deposit and security deposit.

It was contended by the Appellant before the Supreme Court that as per clause 16(2) of GCC governing the contract between the parties, there was a bar against payment of interest. Also, as agreed between the parties and as per clause 16(2), no interest would be payable upon the earnest money or the security deposit "or amounts payable to the contractor under the contract".

The learned ASG further argued that when there was an express agreement between the parties that no interest would be payable, parties were bound by such an agreement and no interest either pendente lite or future interest on the amount due and payable under the contract was to be awarded. The parties could not traverse beyond what was contemplated in the contract between them.

Furthermore, the Appellant contended that the expression "amounts payable to the contractor under the contract" could not be read with "earnest money deposit" or "security deposit" by applying the principle of Ejusdem Generis.

While the Respondent relied upon the precedent Secretary, Irrigation Department, State of Orissa v. G.C. Roy and argued that in this case it was held that when the agreement between the parties does not prohibit grant of interest and where the party claims interest and the dispute has been referred to an arbitrator, then the arbitrator does have the power to award interest pendente lite.

Additionally, the Respondent argued that the arbitrator is never a party to the agreement, and therefore it does not bar the arbitrator from awarding pendente lite interest. Also, the bar is on the parties from claiming interest on security deposits and earnest money and not on the arbitrator from awarding interest pendente lite on other amounts.

Senior Advocate Mr. Singh also contended that the Appellant too had claimed interest at 18% from the Respondent by way of counter-claim. The Appellant now could not be permitted to state that no pendente lite was liable to be awarded.

The Apex Court after analyzing the various precedents relied upon by the Respondent held that they had no application as the same were under the Arbitration Act, 1940 and in this case, the parties were governed by the 1996 Act.

While relying on the case of Union of India v. Bright Power Projects (India)(P) Ltd., opined that where the parties had agreed that no interest shall be payable, the Arbitral Tribunal could not award interest.

"Therefore, the contention raised on behalf of the respondent that de hors the bar under clause 16(2), the Arbitral Tribunal independently and on equitable ground and/or to do justice can award interest pendente lite or future interest has no substance and cannot be accepted, the Court observed.

Further, the Court noted, "The expression "amounts payable to the contractor under the contract" has to be read independently and disjunctively to earnest money deposit and security deposit as the word used is "or" and not "and" between "earnest money deposit", "security deposit" and "amounts payable to the contractor under the contract". Therefore, the principle of ejusdem generis is not applicable in the present case."

Additionally, the Bench asserted that the Arbitrator could not have awarded the interest, pendente lite, or future interest on the amount due and payable to the contractor under the contract.

The Court rejected the contention of the Respondent that since the Appellant had too had claimed interest at 18% from the Respondent by way of counter-claim, the Appellant now could not be permitted to state that no pendente lite was liable to be awarded and observed, "The concession if any by the counsel which is contrary to the law laid down by this Court shall not be binding on the parties. Further, merely because the appellant has claimed interest, does not imply that the contractor shall be entitled to interest pendente lite. Even if the appellant would have been awarded interest, the same also was not permissible and could have been a subject matter of challenge. In short, there cannot be an estoppel against law."

In the light of these observations, the Court allowed the appeal and set aside and quashed the impugned judgment of the Division Bench of the Delhi High Court.

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