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Written by: Satyam Jain (Intern)

Edited by: Anubhav Yadav (Content Head & Developer)

The Apex Court, on October 4, observed that the Arbitrator cannot grant Pendente Lite Interest if the contrary has been agreed to in the contract. The observation came under an appeal challenging the order of a Division Bench of the Delhi High Court.

The Case

Garg Builders vs. Bharat Heavy Electricals Ltd. LL 2021 SC 535

The Facts

The contract came into being with an agreement regarding the construction of a Boundary Wall at 2×750 MV Pragati III Combined Cycle Power at Bawana, Delhi. The structure was to be constructed by Garg Builders for the Bharat Heavy Electronics Limited (BHEL). As disputes arose, the parties approached an Arbitrator to resolve the issues. Though Clause 17 of the contract prohibited payment of interest on any sort of money due to the Contractor by BHEL yet the Arbitrator awarded 10% pendente lite interest. Garg Builders had demanded 24% pre-reference pendente lite interest or future interest.

The award given by the Arbitrator was challenged in the Delhi HC, which straightaway barred the possibility of payment of any interest by BHEL. This decision was then, challenged in the Hon’ble Supreme Court of India, where, Adv Sanjay Bansal (appearing for Garg Builders) cited the Ambica Const. Case and the Raveechee Case judgments in support of his contentions. After the pleadings of Adv Pallav Kumar (appearing for BHEL), the division bench of Hon’ble Mr Justice SA Nazeer and Hon’ble Mr Justice Krishna Murari delivered the judgment.

The Judgment

The Hon’ble Justices ruled that the arbitrator cannot grant pendente lite interest if the contract contains a specific clause expressly barring payment of Interest. The Court also answered another important question while stating that “If a clause is there in the contract which bars pendente lite interest, such a clause is not in violation of Section 28 of the Indian Contract Act, 1872″. Also, the Arbitration and Conciliation Act, 1996 restricts the arbitrator to grant pendente lite interest if the contract has such a clause. Thus, the Apex Court ruled that Clause 17 of the concerned contract is not ultra vires to Section 28 of the Indian Contract Act, 1872.

The Laws

  • All the Interest payments, in general, are governed by the Interest Act, 1978. Section 3 of the 1978 Act says that the parties can waive off interest by virtue of an agreement.
  • The Arbitration and Conciliation Act, 1996 gives paramount importance to the Contract. Section 31(7)(a) categorically restricts the power of the arbitrator to award pre-reference, pendente lite interest, etc. when parties have agreed to the contrary.
  • Section 28 of the Indian Contract Act, 1872 says that an agreementby which any party thereto is restricted from enforcing his rights by the usual legal proceedings in the ordinary tribunals is void.

Relevant Judicial Precedents

  1. Sayeed Ahmed & Co. Vs. State of Uttar Pradesh (2009) –

Section 31(7) (a) of the 1996 Act was restated.

  1. Sree Kamatchi Amman Constructions Vs. Divisional Railway Manager (2010) –

SC said that Interest cannot be awarded.

  1. Sri Chittaranjan Maity Vs. UOI (2017) –

If the contract prohibits interest, then, no interest shall be granted.

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