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Synopsis

The Delhi High Court recently held that a contractual clause ousting powers of the Arbitrator to grant interest on delayed payments does not restrict him to do so under Section 31(7) of the Arbitration and Conciliation Act, 1996.

Justice Manoj Kumar Ohri, while setting aside the impugned order and upholding the award passed by the Arbitral Tribunal, observed, “A clause in a contract that prohibits payment of interest on delayed payments, does not restrict the “arbitrator” to grant interest since it does not prohibit the “arbitrator” from granting interest under Section 31(7) of the Act and is a restriction on the contracting party to claim interest on delayed payments. As stated above, since interest is compensatory in nature, the arbitrator’s powers are not curtailed by such narrow clauses in the contract.”

Reliance was placed on the Supreme Court's decision in Reliance Cellulose Products Ltd vs. ONGC, (2018) 9 SCC 266, wherein it was held that interest is compensatory in nature and is “parasitic” on the principal amount.

Brief Background

Before the High Court, an appeal was filed under Section 37 of the Arbitration and Conciliation Act, 1996 assailing judgment dated 04.07.2009 passed by the Addl. District Judge, Tis Hazari Court in Suit No. 118 of 2007 vide which objections filed by the Municipal Corporation of Delhi (MCD) under Section 34 of the Act was upheld and the decision of the Arbitral Tribunal dated 21.07.2007 was set aside.

The respondents floated tenders in the year 2000 for de-silting certain drains/Nallas in West Delhi. The appellant, contractor, participated in the said tender and was awarded the work vide order dated 12.05.2000 and 24.05.2000. The time period for the completion of the work was one month and two months, respectively. It was alleged by the contractor that despite the work being completed to the satisfaction of the respondent, and the same being recorded in the Measurement Book maintained by the MCD and the bills being approved by Engineer and Divisional Accountant, the payments were not released.

A total claim of Rs.10, 33, 253 was raised by the appellants.

MCD alleged that in the absence of any photograph or video, the contractor cannot claim that the work was satisfactorily completed by them. It was further submitted that vigilance department of the MCD had issued instructions not to release the payments in view of complaints received by it against the Contractor.

On both limitation and merits, the Arbitral Tribunal allowed the claim of the appellants with interest on the sums claimed for pre-reference, pendente-lite and future.

Case Title: M/s Mahesh Construction vs. Municipal Corporation Delhi, FAO 212/2010