Case BriefsSupreme Court

Supreme Court: The bench of SA Nazeer* and Krishna Murari, JJ has held that if the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest.

Facts

Parties entered into a contract for construction of boundary wall at 2×750 MW Pragati III Combined Cycle Power at Bawana, Delhi, which, inter alia, contained the interest barring the following clause:

“Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.”

When the dispute arose between the parties, the appellant, apart from claiming various amounts under different heads, inter alia claimed pre-reference, pendente lite and future interest at the rate of 24% on the value of the award.

The Arbitrator concluded that there is no prohibition in the contract about payment of interest for the pre-suit, pendente lite and future period.  Therefore, he awarded pendente lite and future interest at the rate of 10% p.a. to the appellant on the award amount from the date of filing of the claim petition i.e. 02.12.2011 till the date of realization of the award amount.

Analysis

Interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter.

  • Section 2 (a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator.
  • Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

Further, the provisions of the Arbitration and Conciliation Act, 1996 give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente  lite  interest when the parties themselves have agreed to the contrary.

Section 31(7)(a) of the 1996 Act which deals with the payment of interest is as under :

“31(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.”

The provision makes it clear that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period.

In the present case, clause barring interest is very clear and categorical. It uses the expression “any moneys due to the contractor” by the employer which includes the amount awarded by the arbitrator.

Hence, it was held that when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest.

Important rulings

Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26

A provision has been made under Section 31(7)(a) of the 1996 Act in relation to the power of the arbitrator to award interest.  As per this section, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award.

Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), (2010) 8 SCC 767

here the parties had agreed that the interest shall not be payable, the Arbitral Tribunal cannot award interest between the date on which the cause of action arose to the date of the award.

Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611

If a contract prohibits award of interest for pre-award period, the arbitrator cannot award interest for the said period.

[Garg Builders v. Bharat Heavy Electricals Ltd., 2021 SCC OnLine SC 855, decided on 04.10.2021]

_______________________________________________

Counsels:

For appellant: Advocate Sanjay Bansal

For respondent: Advocate Pallav Kumar


*Judgment by: Justice SA Nazeer

Know Thy Judge | Justice S. Abdul Nazeer

Case BriefsSupreme Court

Supreme Court: Deciding the question whether interest is payable on the differential excise duty with retrospective effect that become payable on the basis of escalation clause under Section 11AB of the Central Excise Act, 1944, the 3-judge bench of Ranjan Gogoi, CJ and UU Lalit and KM Joseph, JJ held,

“It may be true that the differential duty becomes crystalised only after the escalation is finalized under the escalation clause but it is not a case where escalation is to have only prospective operation. It is to have retrospective operation admittedly. This means the value of the goods which was only admittedly provisional at the time of clearing the goods is finally determined and it is on the said differential value that admittedly that differential duty is paid.”

The bench was called upon to decide the correctness of 2-judge bench decisions in CCE v. SKF India Ltd. 2009 (13) SCC 461 and CCE v. International Auto Ltd. 2010 (2) SCC 672. Concurring with the aforementioned decisions, the bench said,

“the reasoning of this Court in the order referring the cases to us (to this Bench) that for the purpose of Section 11AB, the expression “ought to have been paid” would mean the time when the price was agreed upon by the seller and the buyer does not square with our understanding of the clear words used in Section 11AB and as the rules proclaim otherwise and it provides for the duty to be paid for every removal of goods on or before the 6th day of the succeeding month.”

The Court explained that when an assessee in similar circumstances resorts to provisional assessment upon a final determination of the value consequently, the duty and interest dates back to the month “for which” the duty is determined. Duty and interest is not paid with reference to the month in which final assessment is made. It said,

“any other interpretation placed on Rule 8 would not only be opposed to the plain meaning of the words used but also defeat the clear object underlining the provisions.”

It was further explained that upon the true value, in a case of retrospective escalation of price though later agreed being received and consequential differential duty being admittedly payable, it would result in Section 11A read with Section 11AB applying.

[Steel Authority of India v. Commissioner of Central Excise, 2019 SCC OnLine SC 674, decided on 08.05.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai: The Bench Tarun Agarwala, Presiding Officer and Dr C.K.G. Nair, Member disposed of the appeal with a direction that the appellant made a representation before SEBI in a matter where the interest on an amount was held for 13 years. 

The facts of the case are that SEBI floated Securities and Exchange Board of India (Interest Liability Regularization) Scheme, 2004 wherein stockbrokers having outstanding fee liabilities could pay the entire outstanding amount of principal along with 20% of the outstanding interest in which case they would not be liable for payment of the balance 80% of the outstanding interest. Based on the scheme, SEBI issued a fee liability statement in October 2004. As per the statement, the appellant was required to pay a sum of Rs 3,32,016. The appellant paid a sum of Rs 2,12,921 towards the entire outstanding amount of principal along with 20% interest. Thereafter the appellant filed an appeal before the Tribunal seeking relief for setting aside the impugned fee liability statement issued by SEBI. The Tribunal by an order disposed of the appeal directing SEBI to take a final decision after taking into account the payment made by the appellant and if the adjustment was required then SEBI was required to do so. In the meanwhile, during the pendency of the appeal, the appellant paid an amount of Rs 3,14,497 under protest pursuant to the fee liability statement dated March 16, 2005. The contention of the appellant was that the respondent had unlawfully withheld the amount of Rs 3,14,497 without any authority of law for a period of 13 years and, therefore, was entitled to interest as well as costs of litigation which the appellant had incurred.

The Tribunal held that before approaching the Tribunal for payment of interest and costs, it would be appropriate for the appellant to approach SEBI for the said relief. The appeal was thus disposed of with such direction. [MLB Financial Services Ltd. v. SEBI, Appeal No. 313 of 2018, Order dated 01-02-2019]

National Consumer Disputes Redressal Commission
Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): “Since prayer of interest under the scheme to institutions was prohibited, failure to pay interest to the Complainant in that case could not be construed as a case of deficiency in service in terms of Section 2(1)(g) of the Consumer Protection Act,” observed NCDRC and allowed an appeal filed by the Superintendent Of Post Offices, Kolhapur, Maharashtra challenging an order of Maharashtra State Consumer Commission vide which the Department of Posts was directed to refund Rs 60.71 lakh, along with Rs 25,000 as costs to Ichalkaranji Municipal Council in Kolhapur district for alleged deficiency in services.

Earlier, Ichalkaranji Municipal Council (IMC), deposited the amount accumulated in Staff Salary Reserve Fund with Head Post Office at Ichalkarnaji, District Kolhapur, under its Time Deposit Scheme for a period of five years, commencing 13.08.2002.  The interest payable was @ 8.5%/7.5% p.a. According to IMC, at the time of accepting the deposits, it was never informed that such accounts could not be opened by the Council. On the amounts deposited, IMC received interim interest, however, Post Master, Head Post Office, Ichalkarnaji, later informed IMC that in light of the Audit objection, the Time Deposits made in an official capacity in contravention of the Rules, were required to be closed immediately without payment of interest and by recovering the interest already paid. The postmaster’s letter to IMC followed an amendment to the Post Office Savings Account Rules of 1981 that came into effect on July 27, 2005. Prior to the amendment, the Department of Posts, New Delhi, had issued a general statutory rule on March 8, 1995, barring opening of time deposit accounts by institutions. Consequently, the Post Office refunded the amount deposited in the Time Deposits after deducting the interest paid thereon. While alleging the said action to be illegal and arbitrary, IMC filed complaint before the State Commission. The State Commission partly allowed the complaint on the ground that there was deficiency in service on the part of authorities of Postal Department as they made IMC to believe that the Scheme was to continue, without bringing to its notice the change of the Rules from 1995 itself.

The National Commission perused the material on record and heard both the parties at length. While relying on the judgment of Supreme Court in Arulmighu Dhandayudhapaniswamy Thirukoil v. Department of Posts, (2011) 13 SCC 220, NCDRC noted, “In view of the statutory prohibition, the complainant (IMC) was not entitled to any interest and, therefore, there was no deficiency in service on the part of the appellant (senior superintendent of post offices, Kolhapur) in deducting the amount of interest, periodically paid to the complainant on the time deposits in questions.” [Superintendent of Post Offices v. Ichalkaranji Municipal Council, 2016 SCC OnLine NCDRC 1466, decided on November 3, 2016]