UNION OF INDIA Vs. M/S BRIGHT POWER PROJECTS(I) P.LTD.
Supreme Court of India (Full Bench (FB)- Three Judge)
Appeal (Civil), 2404 of 2004, Judgment Date: Jul 02, 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.