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Tuesday, July 7, 2015

When parties to the contract had agreed to the fact that interest would not be awarded on the amount payable to the contractor under the contract, in our opinion, they were bound by their understanding. Having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an Arbitral Tribunal.

                                                                  REPORTABLE




                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 2404 OF 2008

    UNION OF INDIA                            ... APPELLANT


                                   VERSUS



    M/S. BRIGHT POWER
    PROJECTS (I) P.LTD.                       ... RESPONDENT






                               J U D G M E N T




    ANIL R. DAVE, J.




 1.  Being aggrieved by the judgment delivered in Appeal  (Lodging)  No.124
    of 2006 in Arbitration Petition No.321 of 2005 dated 7th August,  2006,
    delivered by the High Court of Judicature at Bombay,  this  appeal  has
    been filed wherein the issue is whether the appellant is liable to  pay
    interest to the respondent though there was a provision in the contract
    that  no  interest  should  be  paid  on  the  amount  payable  to  the
    contractor. The facts which are relevant for the  purpose  of  deciding
    the issue, in a nutshell, are as under.




 2. The appellant and the respondent had entered into  a  contract  whereby
    the respondent had to construct certain structures, which had been more
    particularly described in the agreement entered into by the parties  on
    20th January, 1997.




 3. In the course of execution  of  the  contract,  a  dispute  had  arisen
    between the appellant and the respondent contractor and  as  agreed  by
    the parties, the dispute had been referred to  the  Arbitral  Tribunal.
    After hearing the concerned parties, the Arbitral Tribunal declared  an
    award on 17th May, 2005,  whereby  it  also  awarded  interest  to  the
    respondent contractor on the amount  awarded,  from  the  date  of  the
    reference till the date of the award.




 4.  Relying  upon  the  judgment  delivered  in  the  case  of  Secretary,
    Irrigation Department, Government of Orissa and Ors. v. G.C. Roy (1992)
    1 SCC 508, the Arbitral Tribunal awarded interest on the amount of  the
    award.  In the said case, this Court had considered the  provisions  of
    Section 29 of the Arbitration Act, 1940, which dealt  with  payment  of
    interest pendente lite.   After analyzing the scheme of the  said  Act,
    various earlier decisions and after considering the  very  same  issue,
    namely, whether an arbitrator has power to award interest pendente lite
    and, if so, on what  principles,  this  Court  had  observed  that  the
    Arbitral Tribunal had power to award interest.




 5.  Being aggrieved by the Award and especially because of interest  being
    awarded by the  Arbitral  Tribunal,  the  appellant  filed  Arbitration
    Petition No.321 of 2005 in the High Court of Judicature at Bombay.  The
    said arbitration petition was dismissed on 13th December, 2005.




 6. Being aggrieved by the  dismissal  of  the  Arbitration  Petition,  the
    appellant filed an appeal which was  also  dismissed  by  the  Division
    Bench of the High Court of Judicature at Bombay on  7th  August,  2006.
    Judgment of a Division Bench of the High Court of Judicature at  Bombay
    dated 2nd July, 1997, delivered in the case of Union of India v.  Anand
    Builders was relied upon and except for stating the  above  reason,  no
    other reason was recorded  by  the  High  Court  while  dismissing  the
    appeal.

 7. According to the learned counsel appearing for the  appellant,  it  was
    not open to  the  Arbitral  Tribunal  to  award  any  interest  to  the
    contractor in view of a specific condition incorporated in the contract
    entered into between the parties that no interest would be paid to  the
    contractor.

 8. On the other hand, the learned counsel  appearing  for  the  respondent
    contractor submitted that the Division Bench  of  the  High  Court  had
    rightly upheld the order passed by the learned Single Judge as well  as
    the Arbitral Tribunal.

    9.      On the aforesaid contentions, this Court has to decide  whether
    the contract between the parties contained  an  express  bar  regarding
    award of  interest  and  if  so,  whether  the  Arbitral  Tribunal  was
    justified in awarding interest for the period commencing from the  date
    of reference till the date of the award.

    10.     Clause 13 (3) of the contract entered into between the  parties
    reads as under:

           “13(3).     No interest will be payable upon the  earnest  money
           and the security deposit or amounts payable  to  the  contractor
           under the contract, but Government Securities deposited in terms
           of sub-clause(1) of this clause will be repayable with  interest
           accrued thereon.”




    11.    Thus, it had been specifically understood  between  the  parties
    that no interest was to be paid on the earnest money, security  deposit
    and the amount payable to the contractor under the contract. So far  as
    payment of interest on Government Securities, which had been  deposited
    by the respondent contractor with the appellant is  concerned,  it  was
    specifically stated that the said amount was  to  be  returned  to  the
    contractor along with interest accrued thereon, but so far  as  payment
    of interest on the amount payable to the contractor under the  contract
    was concerned, there was a specific term that no  interest  was  to  be
    paid thereon.

    12.    When parties to  the  contract  had  agreed  to  the  fact  that
    interest would not be awarded on the amount payable to  the  contractor
    under  the  contract,  in  our  opinion,  they  were  bound  by   their
    understanding.  Having once agreed that the contractor would not  claim
    any interest on the amount to be paid under the contract, he could  not
    have claimed interest either before a civil court or before an Arbitral
    Tribunal.

    13.    Section 31(7) of the  Arbitration  and  Conciliation  Act,  1996
    (hereinafter referred to as ‘the Act’) is  clear  to  the  effect  that
    unless otherwise agreed by the parties, the Arbitral Tribunal can award
    interest at reasonable rate for a period commencing from that date when
    the cause of action arises till the date of the award.   Section  31(7)
    of the Act, reads as under:

           “31(7) (a)  Unless otherwise agreed by the parties, where and in
           so far 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.”




    14.    Section 31(7) of the Act, by using the  words "unless  otherwise
    agreed by the parties", categorically specifies that the arbitrator  is
    bound by the terms of the contract so far as award of interest from the
    date of cause of action to date of the award is concerned.   Therefore,
    where the parties had agreed that no interest  shall  be  payable,  the
    Arbitral Tribunal cannot award interest.

    15.    We may also refer to the decision  of  this  Court  in Union  of
    India v. Saraswat Trading Agency and others  (2009)16  SCC  504.   This
    Court has observed in the said case that if  there  is  a  bar  against
    payment of interest in the contract, the arbitrator  cannot  award  any
    interest for such period.  In view of the  specific  bar  under  Clause
    13(3) of the contract entered into between the parties, we are  of  the
    view that the Arbitral Tribunal was not justified in awarding  interest
    from the date of entering upon the reference to the  Arbitral  Tribunal
    till the date of the award.

    16.    The Arbitral  Tribunal  had  mainly  relied  upon  the  judgment
    delivered by this Court in G C Roy’s case (supra).  In the  said  case,
    the situation was different.  The contract between the parties did  not
    contain any condition that interest would not be paid.  In para  44  of
    the said judgment, it has been observed as under :

           “44.  Having regard to the above consideration,  we  think  that
           the following is the correct principle which should be  followed
           in this behalf:

           Where the agreement between the parties does not prohibit  grant
           of interest and where a party claims interest and  that  dispute
           (along with the claim for principal amount or independently)  is
           referred to the arbitrator, he shall have  the  power  to  award
           interest pendente lite.  This is for the reason that in  such  a
           case it must be presumed that interest was an  implied  term  of
           the agreement between the parties and therefore when the parties
           refer all their disputes – or refer the dispute as  to  interest
           as such – to the arbitrator, he shall have the  power  to  award
           interest.  This does not mean that in every case the  arbitrator
           should necessarily award interest pendente lite.  It is a matter
           within his discretion to be exercised in the light  of  all  the
           facts and circumstances of the case, keeping the ends of justice
           in view.”




    17.     Relying upon the aforestated judgment delivered by this  Court,
    the Arbitral Tribunal thought it proper to award interest on the amount
    payable to the contractor for the period commencing from  the  date  on
    which the reference was entered upon till the date of the award.    The
    Tribunal, however, failed to consider the provisions of  Section  31(7)
    of the Act and clause 13(3) of the contract before awarding interest in
    the present case.

    18.     It is also pertinent to note that G.C. Roy’s case  (supra)  had
    been decided on December 12, 1991 on the basis of the provisions of the
    Arbitration Act, 1940, which was not operative at  the  time  when  the
    dispute on hand was decided by the Arbitral Tribunal.

    19.     Section 31(7)(a) of  the  Act  ought  to  have  been  read  and
    interpreted by the Arbitral Tribunal before taking  any  decision  with
    regard  to  awarding  interest.   The  said  Section,  which  has  been
    reproduced hereinabove, gives more respect  to  the  agreement  entered
    into between the parties.  If the parties to the agreement agree not to
    pay interest to each other, the Arbitral Tribunal has no right to award
    interest pendente lite.

    20.     By relying upon the  judgments  which  pertained  to  different
    period when statutory provisions were different, the Arbitral  Tribunal
    had awarded interest on the amount payable to the  contractor  for  the
    period from the date when the reference was entered upon till the  date
    of the award and the said  view  of  the  Arbitral  Tribunal  had  been
    confirmed by the High Court.  In our opinion, the Arbitral Tribunal and
    the High Court ought to have considered the provisions of the  Act  and
    the terms of agreement entered upon by the parties.

    21.    In the aforestated circumstances, the  Arbitral  Tribunal  ought
    not to have awarded  interest  to  the  respondent  from  the  date  of
    reference till the date of the award.

    22.    For the aforestated reasons, we set aside the impugned  judgment
    and the award so far as it pertains to  payment  of  interest  pendente
    lite and direct that no interest would be paid on  the  amount  payable
    under the contract to the respondent from the  date  of  the  reference
    till the date of the award.

    23.     The appeal is allowed with no order as to costs.





                               …………………………………………………….J
                                (ANIL R. DAVE)






                               …………………………………………………….J
                                        (VIKRAMAJIT SEN)






                               …………………………………………………….J
                                          (PINAKI CHANDRA GHOSE)
    NEW DELHI;
    JULY 2, 2015.

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