Power of arbitral tribunal to award interest when contract contains express bar - International Law Office

International Law Office

Litigation - India

Power of arbitral tribunal to award interest when contract contains express bar

October 26 2010

Facts
Decision
Comment


In Shri Kamatchi Amman Construction v The Divisional Railway Manager, Railway the Supreme Court made an important pronouncement concerning the power and scope of an arbitral tribunal to award interest pendente lite (pending litigation) when the contract between the parties to the arbitration agreement contains an explicit and express bar on the grant of interest.(1) The court was of the opinion that where the parties have agreed that no interest will be paid, the arbitral tribunal cannot award interest for the period between the date on which the cause of action arose and the date of the award.

Facts

In 1995 the railway (the respondent) contracted Amman Construction (the appellant) to carry out construction work. Alleging a breach by the respondent, the appellant invoked the arbitration clause and the disputes were referred to an arbitral tribunal. Accordingly, the tribunal passed an award dated December 5 2001 awarding the appellant certain amounts in damages and directing that the respondent pay these amounts by January 4 2002. If the respondent failed to do so, the appellant would be entitled to simple interest at a an annual rate of 10% of the awarded amounts from December 5 2002 until the date of payment. In other words, the arbitral tribunal awarded only future interest and refused to award interest for the pre-reference period and pendente lite.

Aggrieved by the award, the respondent filed a petition under Section 34 of the Arbitration and Conciliation Act 1996. Aggrieved by the rejection of some of its claims and the failure to award interest for the pre-reference period and pendente lite, the appellant also filed a petition under Section 34 of the act before the single judge of the Madras High Court. The single judge rejected both challenges to the award.

Both the respondent and the appellant filed appeals against this order. The division bench of the Madras High Court dismissed the appellant's appeal, but allowed the respondent's appeal. As a result, what remained were an award of Rs3,892,455 under claim 4 (erroneous billing) and an award of Rs94,100 (refund of security deposit) under claim 6, with interest charged at an annual rate of 10% from January 5 2002 until the date of payment.

Aggrieved, the appellant approached the Supreme Court by means of a special leave petition. However, the court granted leave only in regard of the non-award of interest for the pre-reference period and pendente lite.

Decision

The appellant argued that a bare reading of Clause 16(2) of the General Conditions of Contract did not prohibit or prevent the tribunal from directing payment of interest, and that therefore the award, insofar as it denied interest for the pre-reference period and pendente lite by relying on Clause 16(2), was liable for interference. It further contended that as the tribunal had recorded a clear finding that the delay in completion of the work was due to reasons attributable to the respondent, the appellant could not be denied interest for the pre-reference period and pendente lite.

On the other hand, the respondent contended that the contract contained a specific bar against the award of interest on any amount payable to the contractor under the contract or on the earnest payment or security deposit, and that therefore the tribunal was barred from awarding interest for the periods under Section 31(7)(a) of the act.(2) It further submitted that if the contract between the parties barred payment of interest, the tribunal could not award interest for the period between the date on which the cause of action arose and the date of the award. Therefore, the arbitral tribunal had correctly not awarded interest for the same period.

Accordingly, the Supreme Court framed two questions for disposal of the petition. The first was whether the contract between the parties contained an express bar regarding award of interest. The second was, if so, whether the tribunal was justified in refusing interest for the period between the date of cause of action and the date of the award.

As regards the first question, the court referred to Clause 16(2) of the General Conditions of Contract, which reads as follows:

"16(2). No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposit in terms of Sub-clause (1) of this Clause will be repayable (with) interest accrued thereon."

The court was of the opinion that the claims about the interest which was not calculated by the tribunal pertained to an "amount payable to the contractor under the contract", and that by virtue of Clause 16(2), no interest could be paid thereon due to the bar contained in the contract.

In answering the second question, the court discussed in detail the law as it was under the Arbitration Act 1940 and as it is under the present act. It observed that it had had occasion to consider the jurisdiction and authority of the arbitrator to award interest under the 1940 act and under the present act in Sayeed Ahmed & Co v State of UP,(3) wherein it was held that if there is no express bar in the contract regarding the award of interest, the arbitrator has the jurisdiction and authority to award interest for three distinct periods:

  • the pre-reference period (ie, the period between the date of cause of action and the date of reference);
  • pendente lite (ie, the period between the date of reference and the date of the award); and
  • the future period (ie, the period between the date of the award and the date of payment).

However, the court also noticed that the present act has been amended and held that, with regard to Section 31(7)(a) of this act, the difference between the pre-reference period and pendente lite has disappeared insofar as an arbitrator's award of interest is concerned. This section recognises only two periods and makes the following provisions. In regard to the period between the date on which the cause of action arose and the date of the award (ie, the pre-reference period plus pendente lite), the arbitral tribunal may award interest at such rate as it deems reasonable, for the whole or any part of the period, unless otherwise agreed by the parties. For the period between the date of the award and the date of payment, interest shall be charged at an annual rate of 18% if no specific order is made in regard to interest. However, the arbitrator may award interest at a different rate for the period between the date of the award and the date of payment.

Thus, the court was of the opinion that its decisions with reference to awards under the 1940 act which distinguished between the pre-reference period and pendente lite and the observation therein that an arbitrator has the discretion to award interest pendente lite in spite of any contractual bar against interest did not apply to arbitrations governed by the 1996 act.

The court further relied on its own judgment in Union of India v Saraswat Trading Agency,(4) wherein it was held that if the contract contains a bar against payment of interest, the arbitrator cannot award any interest for the pre-reference period or pendente lite.

The appellant contended that even if it was not entitled to interest for the pre-reference period, it was entitled to interest pendente lite, referring to the Supreme Court decisions in Board of Trustees for the Port of Calcutta v Engineers-De-Space-Age(5) and Madnani Construction Corporation Pvt Ltd v Union of India,(6) wherein it was held that the arbitrator's discretion to grant interest is not, in any manner, stifled by this term of the contract, and that the arbitrator would be entitled to consider the question of grant of interest pendente lite and award interest if he or she finds the claim to be justified.

However, the Supreme Court was of the opinion that the decisions in both Engineers-De-Space-Age and Madnani arose under the 1940 act, which did not contain a provision similar to Section 31(7)(a) of the 1996 act. Furthermore, relying on Sayeed Ahmed & Co, the court held that the decisions rendered under the 1940 act may not assist in decisions about the validity of grant of interest under the 1996 act.

It further held that by including the words "unless otherwise agreed by the parties", Section 31(7)(a) of the 1996 act categorically clarifies that the arbitrator is bound by the terms of the contract with regard to the award of interest between the date of the cause of action and the date of the award. Therefore, where the parties have agreed that no interest will be payable, the arbitral tribunal cannot award interest for the period between the date on which the cause of action arose and the date of award. Accordingly, the court dismissed the appeal.

Comment

The Supreme Court has rightly held that decisions rendered under the 1940 act may not assist in decisions about the validity of an interest grant under the 1996 act, as the 1996 act contains a specific provision by which the arbitrator is bound by the terms of the contract insofar as the award of interest is concerned. In Engineers-De-Space-Age and Madnani the arbitrator had awarded interest pendente lite. The court upheld the award of such interest under the 1940 act on the grounds that the arbitrator had the discretion to decide whether interest should be awarded pendente lite and was not bound by the contractual terms with regard to such interest. However, in the case at hand, the arbitral tribunal refused to award interest pendente lite. Where an arbitral tribunal has exercised its discretion and refused to award interest pendente lite, even if the principles upheld in the previous cases were applicable, the arbitrator's award is not open to interference.

For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (bishwajit.dubey@amarchand.com or tamal.mandal@amarchand.com).

Endnotes

(1) Civil Appeal 6815-6816/2010 (arising out of Special Leave Petition (C) 13291-13292/2008), decided on August 20 2010.

(2) Section 31(7)(a) of the 1996 act reads as follows:

"Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made."

(3) 2009 (12) SCC 26.

(4) 2009 (16) SCC 504.

(5) 1996 (1) SCC 516.

(6) 2010 (1) SCC 549.


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