Arbitrator's Power To Award Pre-Reference & Pendente Lite Interest Is Not Restricted When Agreement Is Silent About It: Supreme Court

The Supreme Court held that the power of the Arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded or does not contain a specific term that prohibits the same.

The Court summarised the propositions relating to the power of the Arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest under the Arbitration and Conciliation Act (A&C Act).

The Court was deciding civil appeals preferred by a private company challenging the order of the Calcutta High Court by which it restored the arbitral award and modified a claim relating to pre-reference interest.

The two-Judge Bench of Justice P.S. Narasimha and Justice Pankaj Mithal observed, “The power of the Arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest under Section 31(7) of the Act is fairly well-settled. The judicial determinations also highlight the difference in the position of law under the Arbitration Act, 1940.”

The Bench summarised the following propositions with respect to the said power of the Arbitrator –

I. Under the Arbitration Act, 1940, there was no specific provision that empowered an Arbitrator to grant interest. However, through judicial pronouncements, this Court has affirmed the power of the Arbitrator to grant pre-reference, pendente lite, and post-award interest on the rationale that a person who has been deprived of the use of money to which he is legitimately entitled has a right to be compensated for the same. When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the Arbitrator has the power to decide the same.

II. Under the 1940 Act, this Court has adopted a strict construction of contractual clauses that prohibit the grant of interest and has held that the Arbitrator has the power to award interest unless there is an express, specific provision that excludes the jurisdiction of the Arbitrator4 from awarding interest for the dispute in question.

III. Under the 1996 Act, the power of the Arbitrator to grant interest is governed by the statutory provision in Section 31(7). This provision has two parts. Under sub-section (a), the Arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise agreed by the parties. Sub-section (b) provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest, from the date of the award to the date of payment.

IV. The wording of Section 31(7)(a) marks a departure from Arbitration Act, 1940 in two ways: first, it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are provided for under this sub-section; second, it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest the moment the agreement bars payment of interest, even if it is not a specific bar against the Arbitrator.

V. The power of the Arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded or does not contain a specific term that prohibits the same.

VI. While pendente lite interest is a matter of procedural law, pre-reference interest is governed by substantive law. Therefore, the grant of pre-reference interest cannot be sourced solely in Section 31(7)(a) (which is a procedural law), but must be based on an agreement between the parties (express or implied), statutory provision (such as Section 3 of the Interest Act, 1978), or proof of mercantile usage.

Advocate Saurav Agarwal appeared on behalf of the appellant while AOR Madhumita Bhattacharjee appeared on behalf of the respondents.

Facts of the Case -

The West Bengal State issued a notice inviting tenders in 2010 for the widening and strengthening of Egra Bajkul road under the Tamluk Highway Division in Purbo Medinipur District and accepted the appellant’s offer, leading to grant of a Work Order for the project to be completed within 18 months. The project got delayed by about 5 months but the work was completed in November 2012. The appellant raised a bill for Rs. 77,85,290/- and that was in addition to seven other claims under different heads, owing to alleged delays on part of the respondent. As the respondent denied any liability, the dispute was referred to Arbitration for resolution. The Arbitrator gave his award in 2018, holding that the respondents are liable to the tune of Rs. 1,37,25,252/- with interest.

There were seven claims and the respondents challenged the award under Section 34 of A&C Act, 1996. It was allowed in part by the District Judge setting aside the claim no. 1 for loss of business. Claim no. 2 for uneconomic utilization of plant and machinery was also set aside because the Arbitrator didn’t account for the loss of 135 days at the behest of the appellant while determining the alleged 200 days of ‘wasted machine’. Being aggrieved, the appellant filed an appeal and the respondent filed a cross appeal. The High Court set aside the claim no. 1 as well as claim nos. 3 and 4, but restored the award with respect to claim no. 2. However, while retaining claim no. 5 as it is, the High Court slightly modified claim no. 6 relating to pre-reference interest. Therefore, the appellant was before the Supreme Court.

The Apex Court in view of the facts and circumstances of the case said, “… the High Court had no reason to interfere with the Arbitral Award with respect to grant of pre-reference interest, since the Contract between parties does not prohibit the same.”

Having analysed the reasoning in the award and the judgment of the District Judge under Section 34 of A&C Act and of the High Court under Section 37 with respect to claim nos. 3, 4 and 6, the Court:

(a) upheld the decision of the High Court in setting aside the award with respect to claim no. 3 and dismissed the appeal to this extent.

(b) allowed the appeal and set aside the judgment of the High Court in so far as it rejected and set aside claim no. 4 awarded by the Arbitrator, as upheld by the District Judge under Section 34.

(c) allowed the appeal and set aside the judgment of the High Court in so far as it modified claim no. 6, to the extent of rejecting pre-reference interest awarded by the Arbitrator, as upheld by the District Judge under Section 34.

(d) set aside the award of claim no. 3, upheld the award of claim no. 4, and clarified that under claim no.6, the appellant will also be entitled to claim pre-reference interest.

Accordingly, the Supreme Court disposed of the appeals.

Cause Title- Pam Developments Private Limited v. The State of West Bengal & Anr. (Neutral Citation: 2024 INSC 628)

Appearance:

Appellant: AOR Sarad Kumar Singhania, Advocates Saurav Agrawal, Priyankar Saha, Anshuman Choudhary, Rashmi Singhania, and Yash Singhania.

Respondents: AOR Madhumita Bhattacharjee, Advocates Debarati Sadhu, Srija Choudhury, Anant, and Sajal.

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