In a recent judgment Union of India Vs. M/s. Ambica Construction, the issue raised before the Hon'ble Supreme Court was in regard to the power of the Arbitrator to award pendente lite interest when contract contains bar for grant of interest in a case covered by the Arbitration Act, 1940 . A Division Bench of this Court had doubted the correctness of the decisions in Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age (1996) and Madnani Construction Corporation (P) Ltd. v. Union of India and Others (2010).
In view of the decision of the Constitution Bench judgment in Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy (1992) and Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (D) by L.Rs. & Ors. (2001) which held that the Arbitrator had the jurisdiction and authority to award interest for pre-reference period, pendente lite and future period if there was no express bar in the contract regarding award of interest. A doubt was expressed about the correctness of the decision in Engineers-De- Space Age (supra) in Sayeed Ahmed & Co. v. State of U.P. & Ors. (2009) 12 SCC 26 and Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors. (2010). Hence the matter had been referred to a larger Bench for decision.
The only question for consideration is whether an Arbitrator has the power to award pendente lite
interest in case contract bars the same in a case covered by Act and decisions of this Court in
Engineers De-Space Age (supra) and Madnani Construction Corporation (P) Ltd. (supra) have been
correctly decided.
4. It was submitted on behalf of the Union of India that the Arbitrator is bound by the terms of the
contract and cannot award interest in case the contract bars the same. On the other hand, learned
counsel appearing on behalf of M/s. Ambica Construction has contended that in view of the decision
in Engineers-De-Space Age (supra) followed in Madnani Construction Corporation (P) Ltd. (supra)
notwithstanding the terms in the contract agreement barring the award of interest would cover the
pre-reference period and not pendente lite interest.
5. There are certain provisions which are statutorily implied in arbitration agreement unless
excluded in the agreement. Section 3 of the Act of 1940 deals with the provisions which are implied
in the arbitration agreement. Section 3 is extracted below :
3. Provisions implied in arbitration agreement.An arbitration agreement, unless a different
intention is expressed therein, shall be deemed to include the provisions set out in the First
Schedule in so far as they are applicable to the reference. The provisions of section 3 make it clear
that unless a different intention is expressed in the arbitration agreement, the agreement would
include the provisions contained in the First Schedule so far as they are applicable to the reference.
17. From the above discussions, it is crystal clear that insofar as pendente lite interest is concerned,
the observations contained in Para 43 and 44 of the judgment in G.C. Roy case (supra) will hold the
field. Though the gist of the said principle has been noticed earlier it would still be appropriate to set
out para 44 of the judgment in G.C. Roy's case (supra) which is in the following terms:
44. Having regard to the above consideration, we think that the following is the correct principle
which should be followed in this behalf. 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.
18. The provisions of the U.P. Civil Laws (Reforms and Amendment) Act amending the First
Schedule to the Arbitration Act, 1940 does not assist the respondent contractor in any manner to
sustain the claim of award of interest pendente lite, inasmuch, as Para 7-A of the First Schedule, as
amended, is only an enabling provision which will have no application to a situation where there is
an express bar to the entertainment or payment of interest on the delayed payment either of an
amount due for the work done or of an amount lying in deposit as security. The decision in B.N.
Agarwalla case (supra) on which reliance has been placed by the learned counsel for the respondent,
once again, does not assist the claim of the respondent to interest pendente lite inasmuch as in B.N.
Agarwalla case (supra) the views of the Constitution Bench in G.C. Roy case (supra) with regard to
interest pendente lite could not have been and, in fact, were not even remotely doubted. The
observation of the Bench in B.N. Agarwalla case that in G.C. Roy case (supra) the decision in Deptt.
of Irrigation v. Abhaduta Jena (1988) 1 SCC 418 was not overruled was only in the context of the
issue of award of interest for the pre- reference period. The decision in Asian Techs Limited case
(supra) also relied on by the respondent takes note of the decision in Engineers-De-Space-Age case
(supra) to come to the conclusion the prohibition on payment of interest contained in Clause 11 of
the agreement between the parties was qua the department and did not bar the arbitrator from
entertaining the claim. It has already been noticed that the correctness of the propositions laid down
in Engineers-De-Space- Age case (supra) have been doubted in the subsequent decisions of this
Court, reference to which has already been made.
19. Clauses 1.2.14 and 1.2.15, already extracted and analysed, imposed a clear bar on either
entertainment or payment of interest in any situation of non-payment or delayed payment of either
the amounts due for work done or lying in security deposit. On the basis of the discussions that have
preceded we, therefore, take the view that the grant of pendente lite interest on the claim of Rs.
10,17,461/- is not justified. The award as well as the orders of the courts below are accordingly
modified to the aforesaid extent. In para 4 in Engineers-De-Space-Age (supra) this Court has
observed that bar under the contract will not be applicable to 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 power of Arbitrator to grant pendente lite interest is expressly taken
away. If answer is yes then Arbitrator would have no power to award pendente lite interest.
23. The decision in Madnani Construction Corporation (supra) has followed decision in
Engineers-De-Space-Age (supra). 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.
24. Thus, our answer to the reference is that if contract expressly bars 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 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.
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