GARG BUILDERS versus BHARAT HEAVY ELECTRICALS LIMITED

[2021] 10 S.C.R.

GARG BUILDERS

BHARAT HEAVY ELECTRICALS LIMITED

(Civil Appeal No. 6216 of 2021)

BOCTOBER 04, 2021

[S. ABDUL NAZEER AND KRISHNA MURARI, JJ.]

Arbitration and Conciliation Act, 1996: s.31(7)(a) – Pendentelite interest on the award amount – Interest barring clause in thecontract – Claim for pre-reference pendente lite and future interestC– Held: It is clear from s.31(7)(a) that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot awardinterest for the said period – In the instant case, clause barringinterest is very clear and categorical – It uses the expression “anymoneys due to the contractor” by the employer – Therefore, it is notDopen for the arbitrator to grant pendente lite interest – Interest –Contract Act, 1872 – s.28.

Contract Act, 1872: s.28 – Interest barring clause – Whethercontract barring payment of interest extinguish the rights of theparties and, therefore, ultravires in terms of s.28 of the ContractEAct, 1872 – Held: The provisions of s.3(3) of the Interest Act, 1978explicitly allows the parties to waive their claim to interest by virtueof an agreement – s.3(3)(a)(ii) states that the Interest Act will notapply to situations where the payment of interest is “barred by virtueof an express agreement” – Thus, when there is an express statutorypermission for the parties to contract out of receiving interest andFthey have done so without any vitiation of free consent, it is notopen for the arbitrator to grant pendente lite interest – Thus, interestbarring clause of the contract is not ultra vires in terms of s.28 ofthe Contract Act, 1872 – Interest Act, 1978.

Dismissing the appeal, the CourtG

HELD: 1. The provisions of the 1996 Act give paramountimportance to the contract entered into between the parties andcategorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselveshave agreed to the contrary. It is clear from Section 31(7)(a) that

if the contract prohibits pre-reference and pendente lite interest,the arbitrator cannot award interest for the said period. In thepresent case, clause barring interest is very clear and categorical.It uses the expression “any moneys due to the contractor” bythe employer which includes the amount awarded by the arbitrator.[Paras 10 and 11][87-E-F, H; 88-A]

Sayeed Ahmed and Company v. State of Uttar Pradesh& Ors. (2009) 12 SCC 26 : [2009] 10 SCR 841; Sree Kamatchi Amman Constructions v. Divisional RailwayManager (Works), Palghat & Ors. (2010) 8 SCC 767 :[2010] 10 SCR 487 ; Bharat Heavy Electricals Limitedv. Globe Hi-Fabs Limited (2015) 5 SCC 718 ; SriChittaranjan Maity v. Union of India (2017) 9 SCC611 : [2017] 11 SCR 722 – relied on.

Ambica Construction v. Union of India (2017) 14 SCC323; Raveechee and Company v. Union of India (2018)7 SCC 664 : [2018] 5 SCR 138 – held inapplicable.

2.1 Whether Clause 17 of the Contract (Interest barringclause) is ultra vires in terms of Section 28 of the Indian ContractAct, 1872. According to Section 28, contract is void to the extentit restricts absolutely party from enforcing his rights by usualproceedings in ordinary courts or if it limits the time within whichhe may enforce his rights. Exception I to this section contains arule that contract by which two or more persons agree that anydispute which has arisen or which may arise between them inrespect of any subject or class of subjects shall be referred toarbitration is not illegal. Exception I to Section 28 saves contractswhere the right to move the Court for appropriate relief isrestricted but where the parties have agreed to resolve theirdispute through arbitration. Thus, lawful agreement to referthe matter to arbitration can be made condition precedent beforegoing to courts and it does not violate Section 28. No cause ofaction then accrues until the Arbitrator has made the award andthe only amount awarded in such arbitration is recoverable inrespect of the dispute so referred. Section 31(7)(a) of the 1996Act which allows parties to waive any claim to interest includingpendente lite and the power of the Arbitrator to grant interest issubject to the agreement of the parties. [Paras 19, 20][89-F-G;90-B-C]

A2.2 Interest payments are governed in general by theInterest Act, 1978 in addition to the specific statutes that governan impugned matter. Section 2 (a) of the Interest Act defines a“Court” which includes both Tribunal and an Arbitrator. In turn,Section 3 allows “Court” to grant interest at prevailing interestrates in various cases. The provisions of Section 3 (3) of theBInterest Act, 1978 explicitly allows the parties to waive their claimto an interest by virtue of an agreement. Section 3(3)(a)(ii) statesthat the Interest Act will not apply to situations where the paymentof interest is “barred by virtue of an express agreement”. Thus,when there is an express statutory permission for the parties toCcontract out of receiving interest and they have done so withoutany vitiation of free consent, it is not open for the Arbitrator togrant pendent lite interest. [Paras 21 and 22][90-D-F]

Case Law Reference

From the Judgment and Order dated 19.09.2017 of the High CourtFof Delhi at New Delhi in FAO (OS) (COMM) No.120 of 2017.Sanjay Bansal, Vineet Bhagat, Ms. Manju Bhagat, Advs. for theAppellant.

Pallav Kumar, Ms. Dibya Nishant, Abhishek, Advs. for theGRespondent.

The Judgment of the Court was delivered by

S. ABDUL NAZEER, J.

1. Leave granted.

2. This appeal is directed against the Order of the Division Benchof the High Court of Delhi dated 19.09.2017 in FAO(OS)(COMM)No.120/2017 whereby it has upheld the judgment of the learned SingleJudge in OMP (COMM) No.28 of 2017 dated 10.03.2017, resulting indenial of pendente lite interest on the award amount to the appellant.

3. The respondent floated tender for construction of boundarywall at its 2x750 MW Pragati III Combined Cycle Power at Bawana,Delhi (hereinafter referred to as ‘the project’). The appellant submittedits bid for the project which was accepted by the respondent. Pursuantto which, the respondent issued Letter of Intent (LOI) to the appellantdated 09.09.2008. Subsequently, on 24.10.2008 the parties entered intoa contract which, inter alia, contained the interest barring clause whichis reproduced hereunder:

“Clause 17: No interest shall be payable by BHEL on EarnestMoney Deposit, Security Deposit or on any moneys due to thecontractor.”

4. The disputes arose between the parties with respect to theaforesaid contract and subsequently the appellant filed petition underSection 11 of the Arbitration and Conciliation Act, 1996 (for short, “the1996 Act”) before the Delhi High Court wherein the Court vide Orderdated 16.09.2011 appointed Hon’ble Mr. Justice M.A. Khan (Retd.) asthe sole Arbitrator to adjudicate the disputes. The appellant in the claimpetition, apart from claiming various amounts under different heads, interalia claimed pre-reference, pendente lite and future interest at the rateof 24% on the value of the award. Learned Arbitrator after hearing thecontentions of both the parties concluded that there is no prohibition inthe contract dated 24.10.2008 and LOI dated 09.09.2010 about paymentof 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. tothe appellant on the award amount from the date of filing of the claimpetition i.e. 02.12.2011 till the date of realization of the award amount.

5. The respondent challenged the said award under Section 34 ofthe 1996 Act before the Delhi High Court in O.M.P. (COMM.) 28/2017on various grounds, inter alia, on the ground that the learned Arbitratorbeing creature of the arbitration agreement travelled beyond the termsof the contract in awarding pendente lite interest on the award amountas the same was expressly barred in terms of the contract. The learned

ASingle Judge vide his final judgment and order dated 10.03.2017 held asunder:

“The Arbitrator fell in error in holding that the aforesaid clauseonly prescribed pre-reference interest and not pendente liteinterest. As stated earlier, in terms of Section 31(7)(a) of the Act,Bthe power of the arbitral tribunal to award pre award interest iscontingent to the parties not agreeing to the contrary. Pre-awardinterest includes both pre-reference interest as well as pendentelite interest. Thus, the conclusion of the Arbitrator that award ofpendente lite interest was not prescribed by clause 17 of theAgreement is not sustainable.C

Accordingly, the impugned award to the extent of award ofpendente lite interest is set aside. The petition is disposed of. Noorders as to costs.”

6. As noticed above, the Division Bench of the High Court hasDupheld the judgment and order of the Learned Single Judge in theimpugned order.

7. On 03.07.2018, this Court issued notice observing as under:

“Learned counsel for the petitioner has placed reliance on an orderof this Court in Ambica Constructionv. Union of India, (2017) 14ESCC 323.”

8. We have heard learned counsel for the parties and perused thematerials on record. Mr. Sanjay Bansal, learned counsel for the appellant,contended that the learned Arbitrator had taken plausible view, in termsof the Clause 17 of the Contract and held that the said clause does notFbar the payment of interest for pendente lite period. This argument wasadvanced in view of judgment of this Court in Ambica Construction v.Union of India[1], wherein the appellant was entitled for the payment ofinterest for the pendente lite period. He has also relied on anotherjudgment of this Court in Raveechee and Company v. Union of India[2]in support of his contentions. Further, it was argued by the learned counselGthat the Clause 17 of the Contract barring payment of interest to thecontractor on any sum due to the contractor, is ultra vires and againstthe provisions of Section 28 of the Indian Contract Act, 1872.

1 (2017) 14 SCC 323H2 (2018) 7 SCC 664

9. On the other hand, Mr. Pallav Kumar, learned counsel for therespondent, submitted that Section 31(7)(a) of the 1996 Act givesparamount importance to the contract entered into between the partiesand categorically restricts the power of an arbitrator to award pre-reference and pendente lite interest when the parties themselves haveagreed to the contrary. He argued that if the contract itself contains aspecific clause which expressly bars the payment of interest, then it isnot open for the arbitrator to grant pendente lite interest. It was furtherargued that Ambica Construction (supra) is not applicable to the instantcase because it was decided under the Arbitration Act, 1940 whereasthe instant case falls under the 1996 Act. It was further argued thatSection 3 of the Interest Act confers power on the Court to allow interestin the proceedings for recovery of any debt or damages or in proceedingsin which claim for interest in respect of any debt or damages alreadypaid. However, Section 3(3) of the Interest Act carves out an exceptionand recognizes the right of the parties to contract out of the payment ofinterest arising out of any debt or damages and sanctifies contracts whichbars the payment of interest arising out of debt or damages. Therefore,Clause 17 of the Contract is not violative of any the provisions of theIndian Contract Act, 1872. In light of the arguments advanced, the learnedcounsel prays for dismissal of the appeal.

10. We have carefully considered the submissions of the learnedcounsel for both the parties made at the Bar. The law relating to awardof pendente lite interest by Arbitrator under the 1996 Act is no longerres integra. The provisions of the 1996 Act give paramount importanceto the contract entered into between the parties and categorically restrictsthe power of an arbitrator to award pre-reference and pendente liteinterest when the parties themselves have agreed to the contrary. Section31(7)(a) of the 1996 Act which deals with the payment of interest is asunder :

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

11. It is clear from the above provision that if the contract prohibitspre-reference and pendente lite interest, the arbitrator cannot award

Ainterest for the said period. In the present case, clause barring interest isvery clear and categorical. It uses the expression “any moneys due tothe contractor” by the employer which includes the amount awarded bythe arbitrator.

12. In Sayeed Ahmed and Company v. State of Uttar PradeshB& Ors.[3] this Court has held that provision has been made under Section31(7)(a) of the 1996 Act in relation to the power of the arbitrator toaward interest. As per this section, if the contract bars payment of interest,the arbitrator cannot award interest from the date of cause of action tillthe date of award.C13. In Sree Kamatchi Amman Constructions v. DivisionalRailway Manager (Works), Palghat & Ors.[4] it was held by this Courtthat where the parties had agreed that the interest shall not be payable,the Arbitral Tribunal cannot award interest between the date on whichthe cause of action arose to the date of the award.

D14. Bharat Heavy Electricals Limited v. Globe Hi-FabsLimited[5 ]is an identical case where this Court has held as under :

“16. In the present case we noticed that the clause barring interestis very widely worded. It uses the words “any amount due to thecontractor by the employer”. In our opinion, these words cannotEbe read as ejusdem generis along with the earlier words “earnestmoney” or “security deposit”.”

15. In Sri Chittaranjan Maity v. Union of India[6 ]it wascategorically held that if contract prohibits award of interest for pre-award period, the arbitrator cannot award interest for the said period.F16. Therefore, if the contract contains specific clause whichexpressly bars payment of interest, then it is not open for the arbitratorto grant pendente lite interest. The judgment on which reliance wasplaced by the learned counsel for the appellant in Ambica Construction(supra) has no application to the instant case because AmbicaConstruction was decided under the Arbitration Act 1940 whereas theGinstant case falls under the 1996 Act. This has been clarified in SriChittaranjan Maity (supra) as under :

3 (2009) 12 SCC 264 (2010) 8 SCC 7675 (2015) 5 SCC 718H6 (2017) 9 SCC 611

“16. Relying on decision of this Court in Ambica Constructionv. Union of India, (2017) 14 SCC 323, the learned Senior Counselfor the appellant submits that mere bar to award interest on theamounts payable under the contract would not be sufficient todeny payment on pendente lite interest. Therefore, the arbitratorwas justified in awarding the pendente lite interest. However, it isnot clear from Ambica Construction (supra) as to whether itwas decided under the Arbitration Act, 1940 (for short “the 1940Act”) or under the 1996 Act. It has relied on judgment ofConstitution Bench in State of Orissa v. G.C. Roy, (1992) 1 SCC508. This judgment was with reference to the 1940 Act. In the1940 Act, there was no provision which prohibited the arbitratorfrom awarding interest for the pre-reference, pendente lite or post-award period, whereas the 1996 Act contains specific provisionwhich says that if the agreement prohibits award of interest forthe pre-award period, the arbitrator cannot award interest for thesaid period. Therefore, the decision in Ambica Construction(supra) cannot be made applicable to the instant case.”

17. The decision in Raveechee and Company (supra) relied onby the learned counsel for the appellant is again under the ArbitrationAct 1940 which has no application to the facts of the present case.

18. Having regard to the above, we are of the view that the HighCourt was justified in rejecting the claim of the appellant seekingpendente lite interest on the award amount.

19. This takes us to the next question as to whether Clause 17 ofthe Contract is ultra vires in terms of Section 28 of the Indian ContractAct, 1872. According to Section 28, contract is void to the extent itrestricts absolutely party from enforcing his rights by usual proceedingsin ordinary courts or if it limits the time within which he may enforce hisrights. Exception I to this section contains rule that contract by whichtwo or more persons agree that any dispute which has arisen or whichmay arise between them in respect of any subject or class of subjectsshall be referred to arbitration is not illegal. The question, therefore, iswhether the contracts barring payment of interest extinguish the rightsof the parties. Exception 1 to Section 28 reads as under :

“Exception 1:Saving of contract to refer to arbitrationdispute that may arise. – This section shall not render illegal acontract, by which two or more persons agree that any dispute

ABC

Awhich may arise between them in respect of any subject or classof subjects shall be referred to arbitration, and that only theamount awarded in such arbitration shall be recoverable inrespect of the dispute so referred.”

20. Exception I to Section 28 saves contracts where the right toBmove the Court for appropriate relief is restricted but where the partieshave agreed to resolve their dispute through arbitration. Thus, lawfulagreement to refer the matter to arbitration can be made conditionprecedent before going to courts and it does not violate Section 28. Nocause of action then accrues until the Arbitrator has made the awardand the only amount awarded in such arbitration is recoverable in respectCof the dispute so referred. Section 31(7)(a) of the 1996 Act which allowsparties to waive any claim to interest including pendente lite and thepower of the Arbitrator to grant interest is subject to the agreement ofthe parties.

21. It is pertinent to note that interest payments are governed inDgeneral by the Interest Act, 1978 in addition to the specific statutes thatgovern an impugned matter. Section 2 (a) of the Interest Act defines a“Court” which includes both Tribunal and an Arbitrator. In turn, Section3 allows “Court” to grant interest at prevailing interest rates in variouscases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitlyEallows the parties to waive their claim to an interest by virtue of anagreement. Section 3(3)(a)(ii) states that the Interest Act will not applyto situations where the payment of interest is “barred by virtue of anexpress agreement”.

22. Thus, when there is an express statutory permission for theparties to contract out of receiving interest and they have done so withoutFany vitiation of free consent, it is not open for the Arbitrator to grantpendent lite interest. We are of the considered opinion that Clause 17of the contract is not ultra vires in terms of Section 28 of the IndianContract Act, 1872.

23. In the result, the appeal fails and is accordingly dismissed.GHaving regard to the facts and circumstances of the case, we direct theparties to bear their own costs.

24. Pending application, if any, shall also stand disposed of.

Devika GujralH