Case Note & Summary
The appeal arose from a dispute between a contractor and Bharat Heavy Electricals Limited regarding a construction contract for a boundary wall at a power project in Delhi. The contract, dated 24.10.2008, included Clause 17 stating 'No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.' Disputes led to arbitration, where the sole arbitrator awarded pendente lite and future interest at 10% p.a. from 02.12.2011, interpreting Clause 17 as not barring such interest. The respondent challenged this under Section 34 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court, which set aside the pendente lite interest award, holding that pre-award interest includes pendente lite interest and the contractual bar applied. The Division Bench upheld this decision. The Supreme Court granted leave and considered the appeal. The appellant contended that the arbitrator's view was plausible, relying on Ambica Construction v. Union of India and Raveechee and Company v. Union of India, and argued Clause 17 was ultra vires Section 28 of the Indian Contract Act, 1872. The respondent argued that Section 31(7)(a) of the 1996 Act restricts arbitrator power when parties agree contrary, and Ambica Construction was under the 1940 Act, thus inapplicable. The court analyzed Section 31(7)(a), emphasizing contractual paramountcy, and cited precedents like Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors. and Sri Chittaranjan Maity v. Union of India to affirm that if a contract bars pre-award interest, the arbitrator cannot award pendente lite interest. It distinguished Ambica Construction and Raveechee and Company as based on the 1940 Act. On the second issue, the court held that Clause 17 does not extinguish rights but is a valid contractual term, not violating Section 28. Consequently, the appeal was dismissed, upholding the High Court's denial of pendente lite interest.
Headnote
A) Arbitration Law - Pendente Lite Interest - Contractual Bar - Arbitration and Conciliation Act, 1996, Section 31(7)(a) - Dispute arose from a construction contract containing Clause 17 barring interest on 'any moneys due to the contractor' - Arbitrator awarded pendente lite interest at 10% p.a., but High Court set it aside under Section 34 - Supreme Court held that Section 31(7)(a) gives paramount importance to contract terms, and if contract prohibits pre-award interest (including pendente lite), arbitrator cannot award it - Clause 17 was clear and categorical, thus pendente lite interest claim was rightly rejected (Paras 10-18). B) Contract Law - Validity of Interest Bar Clause - Section 28 Indian Contract Act, 1872 - Appellant argued Clause 17 barring interest was ultra vires Section 28 as it extinguishes rights - Court examined Exception 1 to Section 28, which validates arbitration agreements - Held that contractual bar on interest does not extinguish rights but is a valid term, thus Clause 17 is not void under Section 28 (Paras 19-20).
Issue of Consideration
Whether the arbitrator could award pendente lite interest despite a contractual clause barring interest, and whether such clause is ultra vires Section 28 of the Indian Contract Act, 1872.
Final Decision
Appeal dismissed; High Court's order denying pendente lite interest upheld; Clause 17 is valid and not ultra vires
Law Points
- Arbitrator's power to award pendente lite interest is restricted by contractual agreement under Section 31(7)(a) of the Arbitration and Conciliation Act
- 1996
- Interest bar clauses using 'any moneys due' are valid and enforceable
- Distinction between Arbitration Act
- 1940 and Arbitration and Conciliation Act
- 1996 regarding interest awards
- Contractual interest bar does not violate Section 28 of the Indian Contract Act
- 1872
