2025 INSC 429
SUPREME COURT OF INDIA
(HON’BLE
PAMIDIGHANTAM SRI NARASIMHA, J. AND HON’BLE JOYMALYA BAGCHI, JJ.)
M/S FERRO CONCRETE
CONSTRUCTION
Petitioner
VERSUS
STATE OF RAJASTHAN
Respondent
Civil Appeal No. OF 2025 Arising Out
Of Slp (C) No. 7851 OF 2023-Decided on 02-04-2025
Arbitration
Arbitration Act, 1940 –
Arbitration - Grant of pendente lite interest - Whether the contractual clause
that bars the appellant/contractor from claiming any interest on any payment,
arrears or balance due to it amounts to an express bar on the arbitrator’s
power to grant pendente lite interest as per the law under the Act,
1940? – Held that the arbitrator’s power to grant interest would depend on
the contractual clause in each case, and whether it expressly takes away the
arbitrator’s power to grant pendente lite interest - This would have to be
determined based on the phraseology of the agreement, clauses conferring powers
relating to arbitration, the nature of claim and dispute referred to the
arbitrator, and on what items the power to award interest is contractually
barred and for which period - Further, a bar on award of interest for delayed
payment would not be readily inferred as an express bar to the award of
pendente lite interest by the arbitrator - Clause 22 prohibits the appellant
(contractor) from claiming interest on any payment, arrears or balance, which
may be found due to him at any time - Applying the above-stated law, find that
this clause does not expressly bar the award of pendente lite interest in the
event of disputes, differences, or misunderstandings between the parties, or on
delayed payment, or in any other respect whatsoever - Under the 1940 Act, this
Court has not readily inferred a bar on the arbitrator from clauses that merely
bar the contractor from claiming interest, and the same will apply to this case
as well - Impugned judgment of the High Court liable to be set aside -
Considering that the arbitrator entered reference in 1991 and the award was
made in 1995, along with the passage of time in litigation as well as the
amounts already paid by the respondent including post-award interest @ 9%, deem
it appropriate to grant 9% pendente lite interest, instead of 15% as granted by
the arbitral tribunal, from 18.12.1991 till 07.03.1995 (date of the arbitral
award) within a period of 60 days.
(Para
13 to 16)
JUDGMENT
Pamidighantam Sri
Narasimha, J. :-Leave granted.
2.
It is just as necessary to follow a precedent as it is to make a precedent.
3.
The short issue arising for consideration in this appeal is whether the
contractual clause that bars the appellant/contractor from claiming any
interest on any payment, arrears or balance due to it amounts to an express bar
on the arbitrator’s power to grant pendente lite interest as per the law under
the Arbitration Act, 1940 [Hereinafter
“1940 Act”.]. While the arbitrator granted 15% pendente lite interest, the same was set
aside by the District Judge while deciding objections against the award, and
upheld by the High Court by order dated 06.01.2023, which is impugned herein.
By relying on settled case- law on the grant of interest under the 1940 Act and
the interpretation of contractual clauses barring payment of interest, we have
allowed the present appeal and have directed payment of pendente lite interest
on the arbitral sum.
4.
The relevant facts are that the appellant was awarded a works contract by the
respondent, and they entered into an agreement dated 06.02.1988 that contains
the following clause barring the appellant from claiming interest on any
payment or arrears or balance due to him at any time:
“22. Payments :-
(i) Payments will be
made to the contractor within one month of the issuing of the corresponding
bills. The contractor shall comply with the procedure that may be prescribed
for all operations from the recording of progress measurements upto payment of
bills.
(ii) All materials and
work for which payment is made in part or full shall become the sole property
of the Govt, but this provision shall not relieve the contractor of his
responsibility for the care and protection of the materials and works at his
own cost nor his liability to make good the damage if any unless and until the
whole work has been deemed to have been completed and handed over to the
Government.
The contractor shall not be entitled to claim
any interest upon any payment, any arrears or upon any balance, which may be
found due to him at any time.”
(emphasis supplied)
5.
When disputes arose under the contract, the appellant invoked arbitration and
filed its claim, resulting in arbitral award dated 07.03.1995 for a sum of Rs.
1,78,17,146 in its favour. The arbitrator also
directed payment of 15% interest p.a. on all dues payable from 18.12.1991 (when
the arbitrator entered reference) till payment or the date of decree, whichever
is earlier. The respondent filed an application to set aside the award, which
was decided by the District Judge’s order dated 16.08.2005 that only set aside
the interest awarded by the arbitrator, and instead granted 9% simple interest
on the principal sum from that date till the date of payment. The other
objections against the award were rejected and the rest of the award was
upheld. It was held that the arbitrator did not consider that Clause 22 of the
contract is widely worded and prohibits the appellant from claiming interest at
any time. Both parties preferred appeals against this order, which were dismissed
by the High Court by order dated 06.01.2023, impugned herein.
6.
While issuing notice on 24.04.2023 in the present special leave petition
converted to a civil appeal, this Court passed the following order:
“1. Learned counsel
appearing on behalf of the petitioner relies upon paragraph 24 of the decision
of this Court in Reliance Cellulose Products Ltd Vs Oil and Natural Gas
Corporation Limited[(2018) 9 SCC 266.].
He urges that Clause 22 of the agreement does not specifically exclude either
the power of the arbitrator to grant pendente lite interest or rule out the
claimant from claiming interest pendente lite in the course of arbitration.
2.
Issue notice returnable in four weeks.”
7.
We have heard Mr. Vinayak Mehrotra, learned counsel for the appellant,
and Ms. Sansriti Pathak, learned Additional Advocate General for the respondent
State on the issue of whether Clause 22 amounts to a bar on the arbitrator from
awarding pendente lite interest under the 1940 Act.
7.1
Mr. Mehrotra submits that the present issue is covered by this Court’s decision
in Reliance Cellulose (supra). He submits that the contractual clause
in the present case does not clearly and expressly bar the arbitrator from
awarding interest on the arbitral sum. He has also referred to this Court’s
decision in Pam Developments Private Limited v.
State of West Bengal [(2024) 10 SCC
715, para 23.] in support of his argument.
7.2
On the other hand, Ms. Pathak has made detailed submissions regarding the
interpretation of the contractual clause, which are as follows: First, the
interpretation of an ouster clause is the same under the 1940 Act and the
Arbitration and Conciliation Act, 1996 [Hereinafter
“1996 Act”.]. Under both statutes, the arbitrator can award interest unless
the agreement provides otherwise. The key difference between the statutes is
that the 1996 Act contains an express statutory provision for the grant of
interest in Section 31(7), but this is based on the principle in G.C. Roy [Secretary, Irrigation Department,
Government of Orissa v. G.C. Roy, (1992) 1 SCC 508.] that recognised the arbitrator’s power to award interest
under the 1940 Act. Further, that Section 31(7)(a) of
the 1996 Act does not differentiate pre-reference and pendente lite interest.
However, these differences do not have any bearing on the interpretation of
contractual clauses. Second, by referring to various decisions of this Court,
she submits that narrower contractual clauses have been treated as ouster clauses
that bar the arbitrator from awarding pendente-lite interest. [Relied on M.B. Patel & Co. v. ONGC,
(2008) 8 SCC 251; Union of India v. Krafters Engg. & Leasing (P) Ltd.,
(2011) 7 SCC 279 under the 1940 Act.] Third, she submits
that paragraph 24 of Reliance Cellulose (supra), which is relied
on by the appellant, is based on this Court’s decision in Board of
Trustees For The Port of Calcutta v. Engineers-De-Space-Age [(1996) 1 SCC 516.], which has been
doubted in several cases. A 3-judge bench of this Court
in Union of India v. Ambica Construction [(2016) 6 SCC 36.] (First Ambica case) held that the
observations in Engineers-De-Space-Age (supra) cannot be considered
as general observations and each contractual clause barring payment of interest
must be interpreted by the words used therein. Fourth, in the facts of the
present case, the respondent has already paid a sum of Rs. 4.65 crores to the
appellant, of which Rs. 2.83 crores is the interest component. Hence, a further
award of pendente lite interest is not warranted in the present case.
8.
The position of law on the grant of interest under the 1940 Act and the 1996
Act is well-settled. The constitution bench decisions of this Court in GC
Roy (supra) and NC Budharaj[Executive Engineer,
Dhenkanal Minor Irrigation Division v. N.C. Budharaj, (2001) 2 SCC 721.]
recognised the arbitrator’s power to grant
pre-reference, pendente lite, and post-award interest on an arbitral award made
under the 1940 Act unless there is a contractual bar. [GC Roy (supra), para 45.]
The question that falls for our consideration is whether the contractual bar in
the present case prohibits the arbitrator from granting pendente lite
interest, which necessarily entails an interpretation of the clause.
9.
This Court has, on multiple occasions, noted that a contractual clause which
bars the payment of interest is interpreted differently under the 1940 Act and
the 1996 Act. In fact, while deciding cases under the 1996 Act, this Court has
been slow to rely on the principles laid down under the 1940 Act, considering
the legislative incorporation of the arbitrator’s power to grant interest
through Section 31(7) of the 1996 Act. [Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26, para 24;
Sree Kamatchi Amman Constructions v. Railways, (2010) 8 SCC 767, paras
18-19; Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9
SCC 695, paras 17-19; Chittaranjan Maity v. Union of India, (2017) 9 SCC
611, para 16; Garg Builders v. BHEL, (2022) 11 SCC 697, para 17.] The
difference in the interpretative approach has been expounded by this Court
in Reliance Cellulose (supra) as follows:
“24. A conspectus of
the decisions that have been referred to above would show that under
the 1940 Act, an arbitrator has power to grant pre-reference interest under
the Interest Act, 1978 as well as pendente lite and future interest.
However, he is constricted only by the fact that an agreement between the
parties may contain an express bar to the award of pre-reference and/or
pendente lite interest. Since interest is compensatory in nature and is
parasitic upon a principal sum not having been paid in time, this Court has
frowned upon clauses that bar the payment of interest. It has therefore
evolved the test of strict construction of such clauses, and has gone on to
state that unless there is a clear and express bar to the payment of interest
that can be awarded by an arbitrator, clauses which do not refer to claims
before the arbitrators or disputes between parties
and clearly bar payment of interest, cannot stand in the way of an arbitrator
awarding pre-reference or pendente lite interest. Thus, when
one contrasts a clause such as the clause in Second Ambica
Construction case with the clause in Tehri Hydro Development Corpn.
Ltd., it becomes clear that unless a contractor agrees that no claim for
interest will either be entertained or payable by the other party owing to
dispute, difference, or misunderstandings between the parties or in respect of
delay on the part of the engineer or in any other respect whatsoever, leading
the Court to find an express bar against payment of interest, a clause which
merely states that no interest will be payable upon amounts payable to the
contractor under the contract would not be sufficient to bar an arbitrator from
awarding pendente lite interest under the 1940 Act. As has been held
in First Ambica Construction case, the grant of pendente lite
interest depends upon the phraseology used in the agreement, clauses conferring
power relating to arbitration, the nature of claim and dispute referred to the
arbitrator, and on what items the power to award interest has been taken away
and for which period. We hasten to add that the position as has been explained
in some of the judgments above 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.”
(emphasis supplied)
10.
The difference in the interpretative approach can be stated as follows. Under
the 1940 Act, a stricter approach is followed that requires a clear and express
clause against the payment of interest in case of difference, dispute, or
misunderstanding, in case of delay of payment, or any other case whatsoever, to
constitute a bar on the arbitrator from granting interest. A clause that
only provides that interest shall not be granted on amounts payable under the
contract would not be sufficient. On the other hand, under the 1996 Act
wherein Section 31(7)(a) sanctifies party
autonomy, interest is not payable the moment the contract provides otherwise.
This distinction has been reiterated by us in a recent decision in Pam
Developments (supra), which summarised the position of law as follows:
“23. 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 following
propositions can be summarised from a survey of these cases:
23.1. 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.
23.2. 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 arbitrator.
23.3. 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 clause (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. Clause (b) provides that unless the award directs otherwise, the sum
directed to be paid by an arbitral award shall carry interest @ 2% higher than
the current rate of interest, from the date of the award to the date of
payment.
23.4. The wording
of Section 31(7)(a) marks a departure from
the 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.
23.5. 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.
23.6. 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.”
(emphasis supplied)
11.
At this stage, we find it necessary to deal with Ms. Pathak’s submission
that Reliance Cellulose (supra) relies
on Engineers-De- Space-Age (supra), which was later read down
and clarified by a 3- judge bench in the First Ambica case. Upon
reading Reliance Cellulose (supra), it is clear that this Court
undertook a comprehensive survey of the case-law on the issue of payment of
interest on arbitral awards, including a detailed discussion of the First
Ambica case, [Reliance Cellulose (supra),
paras 19-21.] before formulating the legal position extracted hereinabove.
12. In
the First Ambica case (supra), the issue before this Court was
whether Engineers-De-Space-Age (supra) and Madnani Construction [Madnani Construction Corpn. (P) Ltd. v. Union of India, (2010) 1 SCC 549.] were correctly decided. [First Ambica case (supra), para 1.]
After taking note of the interpretation of various contractual clauses barring
payment of interest in this Court’s decisions under the 1940 Act and the 1996
Act, it summarised their rulings as follows:
“28. It is apparent
from various decisions referred to above that in G.C. Roy the
Constitution Bench of this Court has laid down that where the agreement
expressly provides that no interest pendente lite shall be payable on amount
due, the arbitrator has no power to award interest. In N.C. Budharaj a
Constitution Bench has observed that in case there is nothing in the
arbitration agreement to exclude jurisdiction of the arbitrator to entertaining
claim for interest, the jurisdiction of the arbitrator to consider and award
interest in respect to all periods is subject to Section 29 of the
Act. In Hindustan Construction Co. Ltd. this Court has followed the
decision in G.C. Roy and laid down that on
the basis of principles of Section 34 the arbitrator would have the
power to award pendente lite interest also. In B.N. Agarwalla, this Court has
again followed G.C. Roy and Hindustan Construction Co. Ltd. with respect to the
power of the arbitrator to award pendente lite interest and it was held that
the arbitrator has the power to award interest. In Harish Chandra this Court
interpreted Clause 1.9 which provided that no claim for interest or damages
will be entertained by the Government in respect to any monies or balances
which may be lying with the Government. It was held that there was no provision
which could be culled out against the contractor not to claim interest by way
of damages before the arbitrator on the relevant items placed for adjudication.
In Ferro Concrete Construction (P) Ltd. this Court considered Clause 4
containing a stipulation that no interest was payable on amount withheld under
the agreement. It was held that Clause 4, which dealt with rates, material and
workmanship, did not bar award of interest by the arbitrator on claims of the
contractor made in the said case. In Sayeed Ahmed this Court has emphasised
that award of interest would depend upon nature of the clause in the agreement.
In Bright Power Projects (India) (P) Ltd. this Court has considered the
expression “unless otherwise agreed by parties” employed in Section 31(7)(a) of the 1996 Act and laid down that in case
contract bars claim of interest the contractor could not have claimed interest.
The provision of Section 31(7)(a) of the
1996 Act is binding upon the arbitrator. In Sree Kamatchi Amman
Constructions similar view has been taken.”
The Court then took
note of the doubts expressed regarding the correctness
of Engineers-De-Space-Age (supra) and Madnani
Construction (supra) in Sayeed Ahmed (supra) and Tehri
Hydro Development Corpn. Ltd. v. Jai Prakash Associates
Ltd. [(2012) 12 SCC 10.], on the
ground that they allow the arbitrator to grant interest by ignoring an express
bar in the contract. [First Ambica case (supra), paras 29-31.] In order to
resolve the discordant note, this Court in the First Ambica case
(supra) held as follows:
“32. In para 4 in
Engineers-De-Space-Age this Court has observed that bar under the contract will
not be applicable to the arbitrator cannot be said to be observation of general
application. In our opinion, it would depend upon the stipulation in the
contract in each case whether the power of the arbitrator to grant pendente
lite interest is expressly taken away. If answer is “yes” then the arbitrator
would have no power to award pendente lite interest.
33. The decision in
Madnani Construction Corpn. has followed the decision
in Engineers-De-Space-Age. The same is also required to be diluted to the
extent that express stipulation under contract may debar the arbitrator from
awarding interest pendente lite. Grant of pendente lite interest may depend
upon several factors such as phraseology used in the agreement, clauses
conferring power relating to arbitration, nature of claim and dispute referred
to arbitrator and on what items power to award interest has been taken away and
for which period.
34. Thus, our answer to
the reference is that if the contract expressly bars the award of interest
pendente lite, the same cannot be awarded by the arbitrator. We also make it
clear that the bar to award interest on delayed payment by itself will not be
readily inferred as express bar to award interest pendente lite by the Arbitral
Tribunal, as ouster of power of the arbitrator has to be considered on various
relevant aspects referred to in the decisions of this Court, it would be
for the Division Bench to consider the case on merits.”
(emphasis supplied)
13.
From the above extracted paragraphs, the decision of the 3- judge bench in
the First Ambica case (supra) can be stated as follows. The
arbitrator’s power to grant interest would depend on the contractual clause in
each case, and whether it expressly takes away the arbitrator’s power to grant
pendente lite interest. This would have to be determined based on the
phraseology of the agreement, clauses conferring powers relating to
arbitration, the nature of claim and dispute referred to the arbitrator, and on
what items the power to award interest is contractually barred and for which
period. Further, a bar on award of interest for delayed payment would not be
readily inferred as an express bar to the award of pendente lite interest by
the arbitrator.
14.
We find that the position of law laid down in paragraph 24
of Reliance Cellulose (supra) is in line with the position of
law laid down in the First Ambica case. Both decisions
emphasise the need for an express contractual bar on the payment of pendente
lite interest to create a bar on the arbitrator from awarding interest. They
also emphasise that a bar on the arbitrator’s power would depend on the
phraseology of the contractual clause in that case. In this light,
Ms. Pathak’s submission regarding the correctness of Reliance
Cellulose (supra) ought to be rejected. We do not find any reason to
unsettle the position of law, when it has been clearly enunciated and followed.
It is not sufficient to lay down a precedent, but it is equally important to
follow and apply them as well.
15.
Now that we have stated the law applicable to this case, we will consider the
terms of Clause 22 of the contract to determine whether it bars the arbitrator
from awarding pendente lite interest on the arbitral award. Clause 22 prohibits
the appellant (contractor) from claiming interest on any payment, arrears or
balance, which may be found due to him at any time. Applying the above-stated
law, we find that this clause does not expressly bar the award of pendente lite
interest in the event of disputes, differences, or misunderstandings between
the parties, or on delayed payment, or in any other respect whatsoever. Under
the 1940 Act, this Court has not readily inferred a bar on the arbitrator from
clauses that merely bar the contractor from claiming interest, and the same
will apply to this case as well.
16.
In view of the above discussion, we allow the present appeal and set aside the
impugned judgment of the High Court in SBCMA No. 3175/2006 dated
06.01.2023. Considering that the arbitrator entered reference in 1991 and the
award was made in 1995, along with the passage of time in litigation as well as
the amounts already paid by the respondent including post-award interest @ 9%,
we deem it appropriate to grant 9% pendente lite interest, instead of 15% as
granted by the arbitral tribunal, from 18.12.1991 till 07.03.1995 (date of the
arbitral award) within a period of 60 days. 17
17.
No order as to costs.
18.
Pending applications, if any, stand disposed of.
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