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Arbitrator's Power vis-a-vis Grant of Interest Pendente Lite: Supreme Court Settles the Law in India

July 12, 2019

[Rajarshi Singh is a student at National University of Study and Research in Law, Ranchi.]

 

The Supreme Court of India (Court), recently, had an opportunity to decide whether an arbitrator can grant interest pendente lite in arbitration proceedings seated in India. This precedential judgment was delivered on February 7 2019 in the case of Jaiprakash Associates Limited v. Tehri Hydro Development Corporation India Limited (Jaiprakash). A three-judge bench comprising Justices A.K. Sikri, Abdul Nazeer and M.R. Shah heard the appeal filed against the judgment of the Delhi High Court wherein the Court quashed an arbitration award to the extent it granted interest to the present appellant, though being barred by the agreement between the parties to grant the same. The decision settles the law on this point, which has seen constant judicial dissonance in the recent past.

 

Introduction

 

The central and primary value of arbitration is not speed, or economy, or privacy, or neutral expertise, but rather the ability of users to make key process choices to suit their particular needs.[1] Hence, arbitration jurisprudence is largely guided by contractarian origins. This is equally applicable in cases where claims of interest, pre-reference or pendente lite are in issue. In such cases, the terms of the contract are the primary signifier of what the parties intended with regard to the payment of interest. This also serves as a determinant of the extent of authority accorded to the arbitrator in such claims. Clauses in contracts which, in effect, bar the payment of interest affect the authority of the arbitrator to decide and grant interest pendente lite significantly. This was also discussed by the Court in the Jaiprakash case. In this case, the appellant was awarded a works contract (Contract) by the respondents. The Contract contained a provision for arbitration of any dispute arising out of the concerned transaction by a panel of three arbitrators (Tribunal) under the Arbitration and Conciliation Act, 1996 (Act). It is important here to note that interpretation of Clause 51 of the Contract clarifies that interest is not payable to the contractor on the money due to him.

 

"Clause 51.0   No claim for delayed payment due to dispute etc.

 

No claim for interest or damage will be entertained or be payable by the corporation in respect of any amount or balance which may be lying with the corporation owing to any dispute, difference or misunderstanding between the parties or in respect of any delay or omission on the part of the Engineer-in-charge in making intermediate or final payments on in any other respect whatsoever."   

It was the case of the appellants that the correct interpretation of Clause 51 would not restrict the arbitrator’s authority to grant interest pendente lite. They argued for the application of the rule of ejusdem generis to extract the true meaning of ‘any other respect whatsoever.’ This interpretation would limit the application of the bar provided for under Clause 51. It would operate only where some amount or balance is lying with the respondent because of any dispute, difference or misunderstanding between the parties etc. upon which the interest is not payable by the party holding such sum. The arbitrator’s discretion to grant such remedy would not be affected.

 

They further supported this contention by placing reliance on the judgment of the Court itself in State of Uttar Pradesh v. Harish Chandra and Company, wherein a similarly worded clause was interpreted to include the arbitrator’s discretion in awarding such interest. Talking of precedents, there is a catena of judgments that favours the appellants’ case. The decision of the Court in Board of Trustees for the Port of Calcutta v Engineers-De-Space-Age, which was ultimately relied upon by the tribunal, affirms that the claim for interest can be considered by the arbitral tribunal. Further, a constitutional bench judgment of the Court in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy exhaustively dealt with this issue of arbitral tribunal’s power to grant pre-reference and pendente lite interest. The court therein, taking into consideration statutory as well as common law principles, answered in the affirmative.

 

Implication of Section 31(7) of the Act

 

Though the rulings of the Court in the above-mentioned judgments support the grant of interest pendente lite, a pertinent point which was highlighted in Jaiprakash case by Mr. Gourab Banerji, learned Senior Counsel appearing for the respondent, was that the awards rendered were a result of the arbitration proceedings initiated under the Arbitration Act, 1940. The law pertaining to the point in issue in India has transformed after the introduction of the Act. Hence, the reliance placed on these precedents by the appellants was wrongfully founded. The Court, highlighting this difference, observed:

 

“Insofar as the 1940 Act is concerned, it was silent about the jurisdiction of the arbitrator in awarding interest pendente lite. However, there is a significant departure on this aspect in the 1996 Act…. The position under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996 Act sanctifies agreements between the parties and states that the moment  the agreement says otherwise, no interest becomes payable right from the date of the cause of action until the award is delivered.”

 

Hence, the authority of the arbitrator will flow from the terms of the contract in line with Section 31(7) of the Act. Under the Act, if the contract between the parties bar the payment of interest, the arbitrator has no discretion to award interest pendente lite.[2] Hence, grant of interest presupposes an arrangement without a bar to this effect. The principle pronounced by the Court in this regard is that the contract should specifically prohibit grant of such interest. Conversely, if an agreement between the parties is silent as to whether interest is to be awarded or not, the arbitrator would be within his jurisdiction to award pre-reference or pendente lite interest. What flows from this observation is that the arbitrator is vested with the power to grant interest pendente lite as a general rule, to which a specific barring clause in the contract serves as an exception. The question that now arises is whether this general rule will be applicable in every case or whether the nature of damage claimed will determine its applicability?

 

Case of unliquidated damages: Different from liquidated damages?

 

The most contrasting, and arguably the most interesting, position was reached by the Court in M/s Raveechee & Co v Union of India (Raveechee), wherein it held that a bar to award interest on amounts which are payable under the contract would not be sufficient to deny the payment of interest pendente lite by the arbitrator. It was further affirmed that, as a general rule, the arbitrator was vested with the power to award interest pendente lite. What differentiates Raveechee from other cases allowing interest is the type of damage that accrued. In this case, the claim related to unliquidated damages. In cases of unascertained damages, the question of interest arises only subsequent to ascertainment of the damages. In such arbitration proceedings, the ascertainment of damages is also an issue to be determined by the tribunal. In the light of this observation, the Court ruled that such damages could attract pendente lite interest for the period between commencement of the arbitration and the declaration of the award.

 

The contractual bar on payment of interest is not operational since it is limited only to certain pre-fixed amounts under the contract. An agreement barring claims of interest is essentially an agreement that the parties will not claim interest on specified amounts such as earnest money or security deposit which, in a sense, are voluntary deposits to be returned or forfeited subject to the contractor’s performance. Hence, where the question revolves around unliquidated damages, the arbitrator will not be barred since the arbitrator is not a party to the agreement which restricts the payment of such interest.

 

Conclusion

 

The extent of power vested in arbitrators has been a subject of recurring judicial intervention. The judiciary in India has been constantly clarifying these issues as and when such questions arise. Through the recent pronouncement in the Jaiprakash case, the Court has settled the law pertaining to an arbitrator’s power to grant interest pendente lite. However in light of the judgment in Raveechee, its applicability in cases concerning unliquidated damages is yet to be tested. This question has been a subject of judicial dissonance with divided precedents on both ends of the spectrum. This clear restatement will prevent arbitration proceedings from unwanted vexatious challenges aiming to delay the execution of the award.

 

 

[1]Thomas J. Stipanowich, Arbitration: The “New Litigation,” 2010. ILL. L. REV. 1, 51 (2010).

[2]M/S. Sayeed Ahmed & Co v. State of U.P., (2009) 12 SCC 26.

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