Arbitration and Conciliation Act, 1996 — Sections 28(3), 31(7)(a) — Contractual bar on interest — Clauses 16(3) and 64(5) of GCC — Award of pre-award / pendente lite interest impermissible. (Paras 31–45, 52–53, 61(A))
Clause 16(3) of the General Conditions of Contract expressly stipulated that “no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract.” Clause 64(5) barred payment of interest “till the date on which the award is made.”
Section 31(7)(a) makes the arbitral power to award interest expressly subject to party agreement. Once the contract excludes interest on amounts payable under the contract, the Arbitral Tribunal, being a creature of the contract, cannot award pre-award or pendente lite interest, even if styled as “compensation.”
The principle of ejusdem generis was held inapplicable, as the expression “amounts payable to the contractor under the contract” is disjunctive and of wide amplitude.
Ratio Decidendi: Where the contract expressly prohibits payment of interest on amounts payable under the contract, Section 31(7)(a) mandates adherence to such prohibition; the Arbitral Tribunal lacks jurisdiction to award pre-award or pendente lite interest, whether termed as interest or compensation.
Contract Interpretation — Ejusdem Generis — Inapplicability where general words are disjunctive and independent. (Paras 37–39)
The respondent’s contention that “amounts payable under the contract” should be read ejusdem generis with earnest money and security deposit was rejected. The word “or” denotes disjunction, and the clause cannot be read restrictively.
Ratio Decidendi: The rule of ejusdem generis does not apply where the contractual language is clear, disjunctive, and of independent amplitude; courts must give effect to plain meaning.
Arbitration Act, 1996 — Distinction between 1940 Act and 1996 Act — Contractual primacy under Section 31(7)(a). (Paras 44–45)
Decisions under the Arbitration Act, 1940 permitting pendente lite interest despite contractual bar were distinguished. Under the 1996 Act, Section 31(7)(a) expressly subordinates arbitral discretion to party agreement.
Ratio Decidendi: Under the Arbitration and Conciliation Act, 1996, arbitral discretion to award pre-award interest is expressly subordinate to contractual stipulation; precedents under the 1940 Act are inapplicable where statutory scheme materially differs.
Section 31(7)(b) — Post-award interest — Independent statutory regime — Not subject to contractual bar unless expressly excluded. (Paras 47–58, 61(B))
Post-award interest operates under Section 31(7)(b), which is distinct from Section 31(7)(a). Unlike clause (a), clause (b) is not subject to party autonomy except as to rate. Clause 64(5) barred interest only “till the date of award” and did not exclude post-award interest.
Therefore, post-award interest was legally sustainable notwithstanding the contractual bar on pre-award interest.
Ratio Decidendi: Post-award interest under Section 31(7)(b) is a statutory consequence and cannot be denied unless the contract expressly and unequivocally excludes it; a bar confined to pre-award interest cannot, by implication, extend to post-award interest.
Modification of Post-Award Interest — Judicial power to adjust rate — Reasonableness and proportionality. (Paras 58–60)
Although post-award interest was upheld, the rate of 12% per annum was found excessive in absence of reasoning and considering prevailing economic conditions. Exercising judicial power to modify, the rate was reduced to 8% per annum from date of award till realization.
Ratio Decidendi: Courts possess power to modify the rate of post-award interest under Section 31(7)(b) where the rate awarded is unreasonable or unsupported by reasons; modification avoids setting aside the award in entirety.
Scope of Interference under Sections 34 and 37 — Award contrary to express contractual bar — Patent illegality. (Paras 52–53, 61(C))
Failure by the Commercial Court and High Court to interfere with the award of pendente lite interest, despite clear contractual prohibition, constituted an error attracting correction even within limited supervisory jurisdiction.
Ratio Decidendi: An arbitral award granting interest contrary to an express contractual prohibition suffers from patent illegality and warrants interference under Sections 34 and 37 of the Act.
Operative Conclusion
The appeal was partly allowed.
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The Arbitral Award dated 25.12.2018 was set aside to the extent it granted pre-award / pendente lite interest or amounts in the nature of interest under Claim Nos. 1, 3 and 6.
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Post-award interest was upheld but modified from 12% per annum to 8% per annum from the date of award till realization.
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Orders of the Commercial Court and High Court were set aside to the aforesaid extent.
Pending applications disposed of.
