Contractual bar on interest doesn’t only bar the parities from claiming it but also the Arbitrator from awarding it: SC

Supreme Court: The Division Bench comprising of M.R. Shah* and B.V. Nagarathna, JJ., held that where it is specifically barred in the contract, the Arbitrator cannot award any interest pendente lite or future interest on the amounts due and payable to the contractor under the contract. Rejecting the claim of the respondent that the government having claimed interest itself could not oppose the same, the Bench stated,

“Even if the government would have been awarded interest, the same also was not permissible and could have been a subject matter of challenge. In short, there cannot be an estoppel against law.”

Factual Matrix

A dispute had arisen between the parties with regard to three work contracts and both the parties went into arbitration for the resolution of the dispute. The sole arbitrator awarded an amount of Rs.78,81,553.08  along with pendente lite and future interest at the rate of 12% and 18% respectively on the entire awarded amount except for the earnest money deposit and security deposit. That the Union of India preferred an appeal challenging the award pertaining to pre-suit, pendente lite and future interest awarded on the balance due payment. The High Court dismissed the appeal and confirmed the award. By being aggrieved and dissatisfied with the impugned judgment of the Delhi High Court, the Union of India had preferred the present appeal.

The Union Government argued that as agreed between the parties and as per clause 16(2) of the General Conditions of Contract (GCC), there was a bar against payment of interest and no interest should be payable upon the earnest money or the security deposit or the amounts payable to the contractor under the contract. The government further argued that if there is an expression “agreed between the parties” governing the contract that no interest shall be payable, parties are bound by such an agreement and no interest either pendente lite or future interest on the amount due and payable under the contract shall be awarded.

Bar on the Arbitrator to award interest pendent lite

Rejecting the contention of the respondent that the bar was on the parties from claiming interest on security deposits and earnest money and not on the arbitrator from awarding it, the Bench observed, once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties herein, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract in question in this case.

Reliance was placed by the Court on Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, wherein it was held that Section 31(7) of the 1996 Act, by using the words “unless otherwise agreed by the parties” categorically specifies that the arbitrator is bound by the terms of the contract insofar as award of interest from the date of cause of action to date of the award is concerned. It was further observed and held that where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest.

Therefore, the Bench held that the contention raised by the respondent that de hors the bar under clause 16(2), the Arbitral Tribunal independently and on equitable ground and/or to do justice can award interest pendente lite or future interest had no substance and could not be accepted. The Bench stated, once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract.

Applicability of ejusdem generis

Regarding the contention of the respondent that the entire clause 16 of GCC specifically deals with to earnest money and security deposits and the same could in no way be read in a manner to imply a bar on pendente lite interest or other amounts as contended on behalf of the government, the Bench stated that it was required to be noted that clause 16(1) was with respect to earnest money/security deposit. However, clause 16(2) was specifically with respect to interest payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract. Similarly,

The words used in clause 16(2) is “or”. Therefore, the expression “amounts payable to the contractor under the contract” cannot be read in conjunction with “earnest money deposit” or “security deposit” by applying the principle of ejusdem generis.

Hence, the expression “amounts payable to the contractor under the contract” had to be read independently and disjunctively to earnest money deposit and security deposit as the word used was “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the principle of ejusdem generis was not applicable in the instant case.

Estoppel

The respondent had argued that the issue raised was covered by the judgment in Union of India v. Pradeep Vinod Construction Co., Civil Appeal No. 2099 of 2017, and therefore once it had been conceded, it was not open for the government to raise the same issue after having made a clear concession, and that the government  too had claimed interest at the rate of 18% from the respondent by way of counter-claim, hence it could not be permitted to say that no interest pendente lite was liable to be awarded by the arbitrator. The Bench opined that it was required to be noted that the concession if any which is contrary to the law laid down by this Court shall not be binding on the parties. Further, the Bench held that merely because the appellant had claimed interest, it did not imply that the contractor shall be entitled to interest pendente lite.

Verdict

Hence, the Bench held that the Arbitrator had erred in awarding pendente lite and future interest on the amount due and payable to the contractor under the contract in question and the same had been erroneously confirmed by the High Court. Accordingly, due and payable to the contractor under the contract were quashed and set aside. [Union of India v. Manraj Enterprises, 2021 SCC OnLine SC 1081, decided on 18-11-2021]


Kamini Sharma, Editorial Assistant has put this report together 


Appearance by:

For the Union of India: K.M. Nataraj, Additional Solicitor General

For the Respondent: Vikas Singh, Senior Advocate


*Judgment by: Justice M. R. Shah

Know Thy Judge | Justice M. R. Shah

 

 

 

 

 

 

 

 

 

 

 

 

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