2011 (7) TMI 1296 - SC - Indian Laws

Pendente lite interest - Whether an arbitrator has jurisdiction to grant interest despite the agreement prohibiting the same - According to clause 1.15 of the General Conditions of the Contract between the parties, the arbitrator does not have the power to award interest pendente lite. the appellant challenged his case with regard to interest that was granted by the arbitrator and confirmed by the High Court. HELD THAT - In view of the specific prohibition of contract contained in Clause 1.15, the arbitrator ceases to have the power to grant interest. We also clarify that the Arbitration Act, 1940 does not contain any specific provision relating to the power of arbitrator to award interest. However, in the Arbitration Conciliation Act, 1996, there is a specific provision with regard to award of interest by the arbitrator. The bar under clause 1.15 is absolute and interest cannot be awarded without rewriting the contract. Therefore, we set aside the award of the arbitrator granting interest in respect of the amount payable to the contractor under the contract as well as the order of the learned Single Judge and the Division Bench of the High Court confirming the same.

Issues Involved:
1. Jurisdiction of the arbitrator to grant interest despite a contractual prohibition.
2. Interpretation of Clause 1.15 of the General Conditions of the Contract.
3. Applicability of various Supreme Court precedents on the arbitrator's power to award interest.

Detailed Analysis:

1. Jurisdiction of the Arbitrator to Grant Interest Despite a Contractual Prohibition:
The primary issue in this appeal is whether the arbitrator has jurisdiction to grant interest despite an explicit prohibition in the contract. The appellant argued that Clause 1.15 of the General Conditions of the Contract explicitly prohibits the payment of interest on amounts payable to the contractor under the contract. The respondent contended that the arbitrator has the power to award interest irrespective of the contractual prohibition, relying on precedents such as *Board of Trustees for the Port of Calcutta vs. Engineers-De-Space-Age* and *Madnani Construction Corporation Private Limited vs. Union of India and Others*.

2. Interpretation of Clause 1.15 of the General Conditions of the Contract:
Clause 1.15 states: "No interest will be payable upon the Earnest Money or the Security Deposit or amounts payable to the Contractor under the Contract but Government Securities deposited in terms of clause 1.14.4 will be repayable with interest accrued thereon." The appellant argued that this clause clearly prohibits the payment of interest on any amounts payable to the contractor under the contract. The Supreme Court agreed with this interpretation, emphasizing that the words "amounts payable to the Contractor under the contract" are of paramount importance and that the arbitrator cannot grant interest if there is a prohibition in the agreement.

3. Applicability of Various Supreme Court Precedents on the Arbitrator's Power to Award Interest:
The Court examined several precedents to determine the arbitrator's power to award interest in light of a contractual prohibition. Key cases considered include:

- Secretary, Irrigation Department, Government of Orissa and Others vs. G.C. Roy: The Constitution Bench held that an arbitrator has the power to award interest pendente lite if the agreement does not prohibit it.
- Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa and Others vs. N.C Budharaj (deceased) by LRs and Others: Another Constitution Bench concluded that an arbitrator has jurisdiction to award interest for the pre-reference period in the absence of any specific stipulation or prohibition.
- Sayeed Ahmed and Company vs. State of Uttar Pradesh and Others: This case clarified that the arbitrator's discretion to award interest pendente lite is not stifled by contractual terms prohibiting interest, but this principle was doubted for cases under the new Arbitration Act, 1996.
- Union of India vs. Saraswat Trading Agency and Others: The Court held that no pre-reference or pendente lite interest was payable if the contract expressly barred it.
- Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and Others: The Court reaffirmed that the arbitrator cannot award interest if the contract explicitly prohibits it.

The Supreme Court concluded that the reliance on *Board of Trustees for the Port of Calcutta* and *Madnani Construction Corporation Private Limited* by the respondent was misplaced. These decisions were either overruled or not applicable due to the specific prohibition in the contract.

Conclusion:
The Supreme Court held that where the parties have agreed that no interest shall be payable, the arbitrator cannot award interest for amounts payable under the contract. This principle was reiterated in the Constitution Bench decisions, and the specific prohibition in Clause 1.15 of the contract was found to be absolute. Consequently, the award of the arbitrator granting interest was set aside, along with the orders of the Single Judge and Division Bench of the High Court confirming the same. The appeal was allowed with no order as to costs.

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