September 27 2011
In Union of India v Krafters Engineering and Leasing (P) Ltd,(1) the Supreme Court made an important pronouncement on whether an arbitrator had jurisdiction to grant interest, even when the agreement entered into between the parties categorically prohibited the same. The court observed that, in view of the specific prohibition of contract contained in Clause 1.15, the arbitrator did not have the power to grant interest. However, the court clarified that where an agreement between the parties does not prohibit the granting of interest, a party claimed interest and such dispute is then referred to the arbitrator, the arbitrator has the power to award interest pendente lite (ie, pending litigation).
On May 16 1988 the respondent was awarded a contract for work on the Bhusawal Division of the Central Railway. On completion of the contract, the respondent raised certain disputes before the High Court, following which the High Court directed the Central Railway to appoint an arbitrator and refer the disputes for adjudication. The appointed arbitrator could not deliberate the matter within the time limit and the respondent therefore invoked the jurisdiction of the umpire. The umpire passed an award and directed that a bank guarantee, previously granted towards a security deposit against a particular claim of the respondent, be returned.
Interestingly, Clause 1.15 of the general conditions of contract between the parties indicates that the arbitrator did not have the power to award interest pendente lite. The relevant clause read as follows:
"1.15 Interest on Amounts - 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 deposited in terms of Clause 1.14.4 will be repayable with interest accrued thereon."
Challenging the award given by the umpire, the appellant filed an arbitration petition before the High Court where the single judge dismissed its petition. The appellant appealed before the Division Bench of the High Court. The bench dismissed the appeal on similar grounds to the single judge's order. The appellant accordingly appealed to the Supreme Court, asking for clarification of whether the arbitrator had the jurisdiction to grant interest despite the agreement between the parties prohibiting the same.
The appellant contended that no interest was payable on the amount payable to the contractor under the terms of the contract. In contrast, the respondent argued that, irrespective of the bar in the contract, the arbitrator had the power to award interest.
The Supreme Court relied on two of its earlier decisions rendered under the Arbitration Act 1940, namely Secretary, Irrigation Department, Government of Orissa v GC Roy(2) and Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa v NC Budharaj.(3)
In Secretary, Irrigation Department of Orissa the court held:
"Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendente lite. This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes – or refer the dispute as to interest as such to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case, keeping the ends of justice in view."
In Executive Engineer, Dhenkanal Minor Irrigation Division it held:
"We answer the reference by holding that the arbitrator appointed with or without the intervention of the court, has jurisdiction to award interest, on the sums found due and payable, for the pre-reference period, in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest."
The court reiterated the settled principle of law that as the parties had agreed that no interest shall be payable, the arbitrator could not award interest for the amounts payable to the contractor under the contract. However, where an agreement between parties does not prohibit the granting of interest, a party claims interest and the dispute is referred to the arbitrator, the arbitrator shall have the power to award the interest pendente lite. The court concluded that, as observed in Secretary, Irrigation Department of Orissa, it must be presumed that interest was an implied term of the agreement between the parties. It clarified, however, that this did not mean that in every case the arbitrator should necessarily award interest pendente lite.
The Supreme Court was therefore of the view that in this case, in terms of the specific prohibition contained in Clause 1.15 of the general conditions of contract, the arbitrator ceased to have the power to grant interest. It was further observed that the bar under Clause 1.15 is absolute and therefore the interest could not have been awarded without rewriting the contract. In the circumstances, the court set aside the award of the arbitrator granting interest in respect of the amount payable to the contractor under the general conditions of contract, as well as the order of the learned single judge and the Division Bench of the High Court confirming the same.
This Supreme Court decision clarifies the position of law for situations where the contract entered into between the parties clearly prohibits the awarding of interest. In such cases the law provides that the arbitrator loses the discretion to grant interest. In delivering its decision, the Supreme Court also clarified the distinction between the old Arbitration Act 1940 and the new Arbitration Act 1996, by observing that while the earlier enactment contains no any specific provision relating to the power of the arbitrator to award interest, the later legislation provides a specific provision in this regard.
The Supreme Court has dealt extensively with the distinction between the old and the new legislation, across a wide range of cases. It has considered the jurisdiction and authority of the arbitrator to award interest under both versions of the act, in Shree Kamatchi Amman Constructions v Divisional Railway Manager (Works), Palghat(4) and Sayeed Ahmed & Co v State of U.(5) Relying upon the earlier decisions of the court in Secretary, Irrigation Department of Orissa, Executive Engineer, Dhenkanal Minor Irrigation Division, Bhagawati Oxygen Ltd v Hindustan Copper Ltd(6) and State of Rajasthan v Ferro Concrete Construction (P) Ltd,(7) the court has generally clarified that the arbitrator used to have the jurisdiction and authority to award interest for three distinct periods:
Interest could be applied in all such periods if there was no express bar in the contract regarding award of interest.
The court then observed that, when enacting the later Arbitration and Conciliation Act 1996, the legislature incorporated a specific provision in regard to the award of interest by arbitrators. In particular, Section 31(7) of the later act deals with the arbitrator's power to award interest. Clause (a) relates to the period between the date on which the cause of action arose and the date on which the award is made. Clause (b) relates to the period from the date of award to date of payment. The said sub-section is as follows:
"31.7(a) Unless otherwise agreed by the parties, where and in so far 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.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment."
The court thus observed that, under Section 31(7) of the new act, the difference between the pre-reference period and the pendente lite period had disappeared insofar as the awarding of interest by an arbitrator was concerned. The section as enacted under the new legislation now recognises only two periods and makes the following provisions:
"(a) In regard to the period between the date on which the cause of action arose and the date on which the award is made (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.
(b) For the period from the date of award to the date of payment the interest shall be 18% per annum if no specific order is made in regard to interest. The arbitrator may however award interest at a different rate for the period between the date of award and date of payment."
For further information on this topic please contact Manu Nair, Saanjh Purohit or Tanuj Bhushan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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