An arbitrator is a creature of a contract and is, therefore, equally bound by it. The Supreme Court, in the recent judgement of Union of India vs. Manraj Enterprises[i], set aside an arbitral award wherein the arbitrator had awarded pendente lite and future interest on the amount awarded, inspite of a contractual bar. The Court, relying upon a catena of judgments dealing with the inherent powers of an arbitrator to award pendente lite and future interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (the 1996 Act), held that such powers are exercisable only in the absence of an agreement to the contrary.
A contract was entered into between the Union of India (Appellant) and Manraj Enterprises (Respondent). Subsequently disputes arose between the parties, and the parties were referred to arbitration.
Clause 16(2) of the contract provided that no interest will be payable upon the earnest money or the security deposit or the amounts payable to the contractor i.e., the Respondent. However, the arbitrator awarded the Respondent pre-suit, pendente lite and future interest on the award amount, barring the earnest money and the security deposit. Aggrieved, the Appellant challenged the award under Section 34 of the 1996 Act before a Single Judge of the Delhi High Court. The Ld. Single Judge’s Order, dismissing the challenge to the Award, was appealed under Section 37 of the 1996 Act before a Division Bench of the same Court. The Division Bench dismissed the appeal and confirmed the award. Accordingly, a Special Leave Petition before the Supreme Court was preferred by the Appellant against the Division Bench’s Order.
The key issue before the Supreme Court was whether the Respondent was entitled to pendente lite and future interest on “the amounts payable to the contractor”, considering the bar contained in clause 16(2) of the contract.
ARGUMENTS BY THE PARTIES
On behalf of the Appellant, it was inter-alia argued that:
- There was a contractual bar against the payment of interest on all amounts payable to the Respondent. The arbitrator is a creature of the contract and cannot traverse beyond the same. Therefore, it was not open for the arbitrator to grant interest on the amounts granted under the award.
- The expression ‘amounts payable to the contractor under the contract’ is wide enough to include every amount payable under the contract. Reliance, in this regard, was placed on the judgments of Union of India Bright Power Projects (India) (P) Ltd[ii] (where, the Appellant contended that a pari materia clause was interpreted favorably) and Garg Builders vs. Bharat Heavy Electricals Limited [iii] (where the Court had considered the expression “money due to the contractor”).
- Section 31(7)(a) of the 1996 Act entrusts an arbitral tribunal the power to award interest, unless otherwise agreed between the parties. Where the contract bars the payment of interest, parties are bound by its terms and no interest, either pendente lite or future, can be awarded.
- The principles of ejusdem generis are not applicable in the present case as the expression, ‘amounts payable to the contractor under the contractor’ has been used disjunctively with earnest money and security deposit, by the employment of the word ‘or’ in between. Reliance was also placed on the judgment of Jaiprakash Associates Ltd. Tehri Hydro Development Corporation (India) Ltd [iv] to support the proposition that if the agreement between the parties specifically prohibits grant of interest, the arbitrator cannot award pendente lite interest in such case.
- The decision of this court in Union of India Pradeep Vinod Construction Co[v] relied upon by the Respondent does not lay down any law/ legal precedent. The same was rendered prior to the judgment of Jaiprakash (supra).
On behalf of the Respondent, it was inter-alia argued that:
- Clause 16(2) specifically pertains to earnest money and security deposits and in no manner implies a bar on pendente lite
- The law laid down under the Arbitration Act, 1940 (the 1940 Act) has been codified under Section 31(7)(a) of the 1996 Act. An arbitrator has the power to award interest pendente lite when the agreement does not prohibit the grant thereof.[vi]
- The power of the arbitrator to grant interest pendente lite is inherent unless there is an express bar under the agreement.[vii]
- The arbitrator is never a party to an agreement between the disputing parties, and hence not barred from awarding pendente lite In the present case, the bar was on the parties from claiming interest and not upon the arbitrator from awarding the same. Reliance in this regard was placed on Kailash vs. Nankhu[viii].
- The High Court correctly placed reliance on the case of Pradeep Vinod Construction (supra), and after considering a clause pari materia to clause 16(2) and other judgments relied upon by the Appellant including Bright Power Projects (supra), held that no interest is awardable on earnest money and security deposit. Further, unless there was an express bar against the arbitrator to award interest pendent lite, the arbitrator is not precluded from awarding the same.
- That the case of Tehri Hyrdo (supra) is not applicable to the facts of the case, since the clause referred to therein was materially different from clause 16(2) in the present case.
- The Appellant’s claim for interest through its counter claim runs foul of its argument that no interest pendente lite is liable to be awarded by the arbitrator.
COURT’S FINDINGS & ANALYSIS
The Court held that the arbitrator erred in awarding pendente lite and future interest on the amount due and payable under the contract to the Respondent.
While interpreting the expression ‘amounts payable to the contractor under the contract’ the Court drew an analogy with and relied upon its judgment in the case of State of Karnataka vs. Shree Rameshwara Rice Mills[ix].. The Court held that although damages become payable on account of breach of conditions of the agreement, they nevertheless constitute amounts payable under the contract.
Further, the Court reiterated and relied upon the settled legal position that Section 31(7)(a) of the 1996 Act explicitly bars an arbitrator from awarding pre-reference and pendente lite interest when the contract prohibits the same[x]. The expression “unless otherwise agreed by the parties” used in Section 31(7)(a) categorically specifies that the arbitrator is bound by the terms of the contract and it cannot independently and/or on equitable grounds and/or to do justice, award pendente lite interest[xi].
Moreover, the Court also held that the expression “amounts payable under the contract” has to be read independently and disjunctively to ‘earnest money’ and ‘security deposit’ due to the usage of the he word “or” and not “and” in between. The Court relying upon the judgment of Tehri Hydro (supra), observed that ejusdem generis is a rule of construction and it is applicable when particular words pertaining to a clause, category or genus are followed by general words, which was not true for the instant case.
The Court also rejected the reliance placed by the Respondent on the decision of this Court in Pradeep Vinod Construction (supra) as (a) the said decision was delivered by a Division Bench which was contrary to of the view taken by a Full Bench of this Court in Bright Power Projects (supra); and (b) the Court while dealing with a pari materia clause, had only considered the non-award of interest on earnest money and security deposit.
Lastly, the Court held that a concession (stated to have been made by the Counsel for the Appellant before the Delhi High Court in this case) which is against the law, is not binding and there cannot be an estoppel against the law. Therefore, the Court held that the Appellant’s claim for interest under its counter claim, will not automatically entitle the Respondent to interest pendente lite.
The primary object and purpose of arbitration is the due recognition of party autonomy.
The 1940 Act, unlike the 1996 Act, did not provide for an explicit provision for the award of pendente lite interest by an arbitrator. However, the Court through various judicial pronouncements under the 1940 Act recognised the power of an arbitrator to award interest during the period prior to reference as well as during the pendency of arbitration proceedings[xii]. The Court premised its reasoning on common law principles that a person who is deprived of the use of money to which he/she is legitimately entitled to, has a right to be compensated for the deprivation thereof and, therefore, such compensation may be called interest compensation or damage.[xiii] Moreover, in the case of Reliance Cellulose Products ltd. vs. ONGC[xiv], the Court also observed that a clause which merely states that no interest shall be payable upon amounts payable under the contract would not be sufficient to bar an arbitrator from awarding pendente lite interest under the 1940 Act, which is a discretionary power of an arbitrator, governed inter-alia by the provisions of the Interest Act, 1978. However, the Court has consistently reiterated that the award of inter-alia pendente lite interest by an arbitrator is subject to the fact that the agreement between the parties does not contain an express bar regarding the same[xv].
Consequently, when the 1996 Act came into force, the aforestated discretionary power of the arbitrator was codified under Section 31(7)(a) of the 1996 Act. The decisions/ observations of this Court under the 1940 Act regarding the arbitrator having the discretion to award interest pendente lite were no longer applicable to arbitrations governed by the 1996 Act[xvi], including insofar as the power to award interest is concerned. The provisions of the 1996 Act give paramount importance to the contract entered between the parties, and Section 31(7)(a) categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves have agreed to the contrary[xvii]. As held by the Court, arbitral proceedings/ the arbitrator, being creatures of contract, have no power to award interest contrary to the terms of the contract between the parties[xviii]. It may not be out of place to point out that though the initial challenge to the award in the instant case was inter alia based on the grant of pre-suit, pendent lite and future interest on the award amount, there seems to be no discussion in the judgment, so far as pre-suit and future interest is concerned.
All in all, it is trite law that an arbitrator is equally bound by the terms of a contract (in relation to the parties). The arbitrator is neither entitled nor empowered to traverse beyond the contractual terms agreed between the parties. Any award to the contrary is liable to be set aside, subject to a challenge by the aggrieved party.
[i] 2021 SCC OnLine SC 1081
[ii] (2015) 9 SCC 695
[iii] 2021 SCC OnLine SC 855
[iv] (2019) 17 SCC 786
[v] 2017 SCC OnLine SC 2075
[vi] Secretary, Irrigation Department, State of Orissa vs. G.C. Roy; (1992) 1 SCC 508
[vii] Raveechee and Company vs. Union of India, (2018) 7 SCC 664
[viii] (2005) 4 SCC 480
[ix] (1987) 2 SCC 160
[x] Supra 3; Sayeed Ahmed and Company vs. State of Uttar Pradesh; (2009) 12 SCC 26, Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat; (2010) 8 SCC 767, Sri Chittaranjan Maity vs. Union of India, (2017) 9 SCC 611
[xi] Supra 2
[xii] Executive Engineer (Irrigation) v. Abhaduta Jena, (1988) 1 SCC 418
[xiii] Supra 6
[xiv] (2018) 9 SCC 266
[xv] Supra 11, 12
[xvi] Supra 9
[xvii] Supra 3
[xviii] Supra 1