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Synopsis

The Supreme Court has said that the power of 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 it.

A bench of Justices P S Narasimha and Pankaj Mithal pointed out that 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) of Arbitration and Conciliation Act, 1996, 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.

The court pointed out that 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. 

Dealing with an appeal filed by Pam Developments Private Limited, the bench said the High Court had no reason to interfere with the Arbitral Award with respect to grant of pre-reference interest, since the Contract between parties does not prohibit the same.

As per the facts of the case, the West Bengal government issued a notice inviting tenders on September 08, 2010, for the widening and strengthening of Egra Bajkul road under the Tamluk Highway Division in Purbo Medinipur District and accepted appellant’s offer, leading to grant of a Work Order for the project to be completed within 18 months from December 23, 2010.

The project got delayed by about five months, but the work was completed by November, 2012.

The appellant raised a bill for Rs 77,85,290 and that was in addition to seven other claims under different heads, owing to alleged delays on part of the respondent. 

As the respondent denied any liability, the dispute was referred to Arbitration for resolution. The Arbitrator gave his award on January 30, 2018, holding the respondents are liable to the tune of Rs 1,37,25,252, with interest.

The respondents challenged the award under Section 34 and it was allowed in part by the District Judge setting aside claim no 1 for loss of business, since the same had never been claimed by the appellant and was thus beyond the Arbitrator’s jurisdiction. 

Claim no 2 for uneconomic utilisation of plant and machinery was also set aside because the Arbitrator didn’t account for the loss of 135 days at the behest of the appellant while determining the alleged 200 days of ‘wasted machine’.

Aggrieved by the decision of the District Judge, the appellant filed an appeal under Section 37 of the Act against the order setting aside the award on claims 1 and 2. 

On the other hand, the respondent filed a cross appeal seeking setting aside of the rest of the claims as well. 

By the order impugned, the Calcutta High Court exercising jurisdiction under Section 37 of the Act set aside claim no 1 as well as claim nos 3 and 4, but restored the Award with respect to claim no 2. However, while retaining claim no 5 as it is, the High Court slightly modified claim no 6 relating to pre-reference interest. 

In its judgment, the apex court said, "In fact, High Court did what the Arbitrator should have done. Examine what the contract provides. This is not even a matter of interpretation. It is the duty of every Arbitral Tribunal and Court alike and without exception, for contract is the foundation of the legal relationship."

Having considered the clauses in the Contract, the apex court said, the High Court came to the conclusion that awarding any amount towards idle, machinery, etc is prohibited under the ‘Special Terms and Conditions’ of the Contract. The Arbitrator did not even refer to the contractual provisions and the District Court dismissed the objections under Section 34 with a standard phrase, it said. 

"The High Court exercising jurisdiction under Section 37 did its duty and we are of the opinion that the conclusions of the High Court are correct and cannot be interfered with," the bench said.

The conclusion of the High Court, “that it appears that the bills were paid soon after they were prepared” or that, “in that case there could not have been any claim for interest” cannot qualify as grounds for interference under Section 37, the court added. 

"Equally, the approach of the High Court in holding that the Arbitrator neither established nor discussed the questions posed by it is not a ground to set aside the Award. The reasoning of the Arbitrator is reflected in that portion of the Award and we see nothing perverse in it. Nor such conclusion is against our public policy," the bench said.

The bench also summarised propositions of law on the power of the Arbitrator to grant interest:

(I) 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.

(II) 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 from awarding interest for the dispute in question.

(III) 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 sub-section (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. Sub-section (b) provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest, from the date of the award to the date of payment.

(IV) The wording of Section 31(7)(a) marks a departure from 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 subsection; 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.