POWER OF ARBITRATOR TO GRANT pendente lite INTEREST

[DR.MARIAPPAN GOVINDARAJAN]

Arbitration award

The Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996, which replaced the former Act provides the procedure for the conduct of arbitration proceedings and the award to be issued by the Arbitrator.  The later Act has more improvements in the procedure than the former Act.

Interest on arbitral award

Levy of interest is compensatory in nature.  The tax laws provide specific clause in the respective Acts for the levy of interest in case of delayed payment by the assessee or for the delayed refund made by the Department.  The Arbitration Act, 1940 did not contain any specific provision for awarding interest on the sum of arbitration amount.  However, through judicial pronouncements, the Supreme Court has affirmed the power of the arbitrator to grant pre-reference, pendente lite, and post-award interest on the rationale that a person who has been deprived of the use of money to which he is legitimately entitled has a right to be compensated for the same.  When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the arbitrator has the power to decide the same.

The Arbitration and Conciliation Act, 1996 gives powers to the arbitrator to grant interest under Section 31(7). This provision contains two parts-

• the arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise agreed by the parties.
• unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest @ 2% higher than the current rate of interest, from the date of the award to the date of payment.

This section is different from the Arbitration Act, 1940 in the following ways-

• it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are provided for under this sub-section;
• it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest the moment the agreement bars payment of interest, even if it is not a specific bar against the arbitrator.

The power of the arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded or does not contain a specific term that prohibits the same.

The Supreme Court, in ‘Ferro Concrete Construction (India) Private Limited v. State of Rajasthan’ 2025 (4) TMI 173 - SUPREME COURT, Supreme Court, decided on 02.04.2025, considered the issued as to whether the contractual clause that bars the appellant/contractor from claiming any interest on any payment, arrears or balance due to it amounts to an express bar on the arbitrator’s power to grant pendente lite interest as per the law under the Arbitration Act, 1940.

In the above said case, the appellant got a works contract from the State of Rajasthan on 06.02.1988. An agreement was entered into by both the parties for this purpose.  The agreement says the mode of presentation of bill by the appellant and to be paid by the respondent.  The agreement made a bar for the claim of any type of interest due to the appellant.  The said clause provides that the contractor shall not be entitled to claim any interest upon any payment, any arrears or upon any balance which may be found due to him at any time.

There raised a dispute between the parties.  The appellant invoked the arbitration clause and the arbitration proceedings was conducted.  The arbitrator made an award in favour of the appellant to the tune of Rs.1,78,17,146/- on 07.03.1995.  The arbitrator also awarded interest @ 15% from all dues payable from 18.12.1991, when the arbitrator entered reference till the date of payment or the date of decree whichever is earlier. 

The State of Rajasthan filed an application before the District Judge.  The District Judge, vide their order dated 16.08.2005, set aside the interest awarded by the Arbitrator.  Instead, the District Judge granted 9% simple interest on the principal sum from the date till the date of payment.  The other objections were rejected.  The rest of the award was upheld.  The District Judge also observed that arbitrator did not consider that Clause 22 of the contract is widely worded and prohibits the appellant from claiming interest at any time.

The appellant, as well as the State of Rajasthan filed appeals before High Court against the order of District Judge.  The High Court dismissed the appeals on 06.01.2023.  The appellant filed an SLP before the Supreme Court which was later transferred to Civil Appeal. 

The appellant submitted before the Supreme Court that the contractual clause in the present case does not clearly and expressly bar the arbitrator from awarding interest on the arbitral sum.  The State of Rajasthan submitted the following before the Supreme Court-

• the interpretation of an ouster clause is the same under the 1940 Act and the Arbitration and Conciliation Act, 1996;
• under both statutes, the arbitrator can award interest unless the agreement provides otherwise;
• the Arbitration and Conciliation Act, 1996 contains an express statutory provision for the grant of interest in Section 31(7), whereas the said power was granted to the arbitrator under the Arbitration Act, 1940 based on the principle in ‘Secretary, Irrigation Department, Government of Orissa v. G.C. Roy’ – 1991 (12) TMI 268 - SUPREME COURT;
• the respondent has already paid a sum of Rs. 4.65 crores to the appellant, of which Rs. 2.83 crores is the interest component. Hence, a further award of pendente lite interest is not warranted in the present case.

The Supreme Court considered the submissions of the parties to the appeal.  The Supreme Court considered the question - whether the contractual bar in the agreement prohibits the arbitrator from granting pendente lite interest, which necessarily entails an interpretation of the clause.

The Supreme Court relied on its previous judgments in arbitration. The Supreme Court observed that the arbitrator’s power to grant interest would depend on the contractual clause in each case.  The power of the Arbitrator to grant interest is to be determined based on the phraseology of the agreement, clauses conferring powers relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest is contractually barred and for which period.  a bar on the arbitrator’s power would depend on the phraseology of the contractual clause in that case.

In the present case, the Supreme Court observed that Clause 22 of the agreement prohibits the appellant (contractor) from claiming interest on any payment, arrears or balance, which may be found due to him at any time.  The Supreme Court found that this clause does not expressly bar the award of pendente lite interest in the event of disputes, differences, or misunderstandings between the parties, or on delayed payment, or in any other respect whatsoever.

The Supreme Court held that considering that the arbitrator entered reference in 1991 and the award was made in 1995, along with the passage of time in litigation as well as the amounts already paid by the respondent including post-award interest @ 9%, we deem it appropriate to grant 9% pendente lite interest, instead of 15% as granted by the arbitral tribunal, from 18.12.1991 till 07.03.1995.