2009 (7) TMI 1329 - SC - Indian Laws

Arbitration Proceedings - interest upto and from the date of award - Disputes arose between the parties by reason by rejection of claims of appellant and they were referred to Arbitration - whether the Arbitrator can award interest for pre-reference period and pendente lite, when the contract prohibits the employer from entertaining any claim for interest? - Aggrieved by the deletion of interest upto the date of award and reduction of interest from the date of award to 6% per annum, the appellant has filed this appeal. HELD THAT - Clause G-1.09 makes it clear that no interest or damages will be paid by Government, in regard to (i) any money or balance which may be lying with the Government; (ii) any money which may become due owing to any dispute, difference or misunderstanding between the Engineer-in-charge on the one hand and the contractor on the other hand; (iii) any delay on the part of the Engineering Charge in making periodical or final payment; or (iv) any other respect whatsoever. The clause is comprehensive and bars interest under any head in clear and categorical terms. In view of clause (a) of sub-section (7) of section 31 of the Act, it is clear that the Arbitrator could not have awarded interest upto the date of the award, as the agreement between the parties barred payment of interest. The bar against award of interest would operate not only during the preference period that is up to 13.3.1997 but also during the pendente lite period that is from 14.3.1997 to 31.7.2001. The arbitrator awarded interest at the rate of 18% per annum on ₹ 24,18,586/-, 14% per annum on amount found due on finalisation the final bill and 12% per annum on the security deposit amount if any that has to be refunded. As noticed above, clause (b) of sub-section (7) of section 31 of the Act provides that if the award does not otherwise direct, the amount awarded shall carry interest as directed by the award and in the absence of any provision of 18% per annum. Any provision in the contract barring interest, will therefore operate only till the date of award and not thereafter. The arbitrator has awarded interest at three different rates on three different amounts which are all less than 18% per annum. The said award of interest by the arbitrator is not contrary to section 31(7)(b) of the Act. Unless the award of interest is found to be unwarranted for reasons to be recorded, the court should not alter the rate of interest awarded by the Arbitrator. The High Court has not assigned any reasons for reducing the rate of interest to 6% per annum. Therefore, such reduction cannot be sustained. We allow this appeal in part and modify the judgment of the High Court as follows (a) The Judgment of the High Court setting aside the award of interest upto the date of award is affirmed. (b) The decision of the High Court reducing the rate of interest to 6% per annum from the date of award is set aside. The rate of interest on the amounts due and payable under the award, from the date of award till date of payment shall be in terms of the award of the Arbitrator.

Issues Involved:
1. Whether the Arbitrator can award interest for pre-reference period and pendente lite when the contract prohibits the employer from entertaining any claim for interest.
2. Interpretation and applicability of clause G 1.09 of the contract.
3. Applicability of Section 31(7) of the Arbitration and Conciliation Act, 1996.
4. Validity of the High Court's judgment reducing the interest rate from the date of the award.

Issue-wise Detailed Analysis:

1. Arbitrator's Power to Award Interest Despite Contractual Prohibition
The primary issue in this appeal is whether the Arbitrator can award interest for the pre-reference period and pendente lite when the contract explicitly prohibits the employer from entertaining any claim for interest. The contract clause in question, G 1.09, states that no claim for interest or damages will be entertained by the Government regarding any money or balance lying with the Government or due owing to any dispute, delay, or other reasons.

2. Interpretation and Applicability of Clause G 1.09
Clause G 1.09 of the contract explicitly bars the payment of interest on any amount due to disputes, delays, or other issues. The Supreme Court analyzed this clause and concluded that it is comprehensive and bars interest under any head in clear and categorical terms. Therefore, the Arbitrator could not award interest up to the date of the award, as the agreement between the parties barred the payment of interest. This bar operates during both the pre-reference period and the pendente lite period.

3. Applicability of Section 31(7) of the Arbitration and Conciliation Act, 1996
Section 31(7) of the Arbitration and Conciliation Act, 1996, deals with the Arbitrator's power to award interest. Subsection (7)(a) allows the Arbitrator to award interest from the date on which the cause of action arose to the date of the award unless otherwise agreed by the parties. Subsection (7)(b) provides that the awarded sum shall carry interest at 18% per annum from the date of the award to the date of payment unless otherwise directed by the award. The Supreme Court noted that the contractual prohibition on interest applies only until the date of the award and not thereafter. Therefore, the Arbitrator's award of interest at different rates for different amounts from the date of the award is valid and not contrary to Section 31(7)(b) of the Act.

4. Validity of the High Court's Judgment Reducing the Interest Rate
The High Court had set aside the award of interest up to the date of the award and reduced the interest rate from the date of the award to 6% per annum. The Supreme Court affirmed the High Court's decision to set aside the award of interest up to the date of the award, citing the contractual prohibition. However, the Supreme Court found that the High Court did not provide any reasons for reducing the interest rate to 6% per annum from the date of the award. The Supreme Court held that unless the award of interest is found to be unwarranted for specific reasons, the court should not alter the rate of interest awarded by the Arbitrator. Therefore, the Supreme Court set aside the High Court's reduction of the interest rate and restored the interest rates as awarded by the Arbitrator.

Conclusion
The Supreme Court allowed the appeal in part and modified the High Court's judgment as follows:
- Affirmed the High Court's decision to set aside the award of interest up to the date of the award.
- Set aside the High Court's reduction of the interest rate to 6% per annum from the date of the award.
- Restored the interest rates as awarded by the Arbitrator from the date of the award till the date of payment.
- Directed that each party bear their respective costs.

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