In a recent Judgment dated 4th October 2021, Supreme Court of India bench comprising of Justice Mr S Abdul Nazeer and Mr Krishna Murari upheld the legal validity and enforceability of a contract clause that barred interest payment to the contractor in the matter of Garg Builders case1 . The said bench further held that it is not open to the Arbitrator to grant pendent lite interest since interest is barred by virtue of an express agreement between the parties. The said Bench also held that the said interest barring clause is not ultra vires the Section 28 of the Indian contract Act,1872. The Bench further held that Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 and Section 3(3) of the Interest Act, 1978 provides an express permission allowing parties to waive their interest claim by way of an agreement and hence the said no interest clause is valid in law.

In the said Judgment Supreme Court of India tested the validity and enforceability of the following clause that was part of the contract between the parties.

“Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or any moneys due to the contractor.”

When disputes arose between the parties, arbitration was invoked by the Contractor for making various claims under various heads, inter alia claimed prereference, pendent lite and future interest at the rate of 24% on the value of the award. Learned arbitrator after hearing the contention of both the parties concluded that there is no prohibition in the contract about the payment of pendent lite interest and awarded Pendent lite and future interest at the rate of 10% per annum from the date of filing of the claim till the realization of the award amount.

The Employer BHEL sought to the challenge the above said award Under S.34 of the 1996 Act2 in the High Court of Delhi. The High Court of Delhi held that Arbitrator erred in holding that the said clause only prescribed pre-reference interest and not pendent lite interest. It further held that in terms of S.31(7)(a) of the Act, the power of the Arbitral Tribunal to award pre interest is contingent to the parties not agreeing to the contrary. In view of the above said finding the High Court set aside the pendent lite interest granted by the Arbitrator.

The Employer BHEL sought to the challenge the above said award Under S.34 of the 1996 Act2 in the High Court of Delhi. The High Court of Delhi held that Arbitrator erred in holding that the said clause only prescribed pre-reference interest and not pendent lite interest. It further held that in terms of S.31(7)(a) of the Act, the power of the Arbitral Tribunal to award pre interest is contingent to the parties not agreeing to the contrary. In view of the above said finding the High Court set aside the pendent lite interest granted by the Arbitrator.

The Employer BHEL made the following main submissions in support of its case (i) Section 31(7)(a) of the 1996 Act gives paramount importance to the contract entered into between the parties and categorically restricts the power of an Arbitrator to award pre-reference and pendent lite interest, when the parties themselves have agreed to the contrary. (ii) Amica Construction Judgment is not applicable because it decided the case based on Arbitration Act,1940 and not 1996 Act (iii) Interest Act, empowers the parties to contact barring interest payment, therefore clause 17 is sustainable in law.

After considering the above contentions of the parties the Supreme Court of India dismissed the Appeal and upheld the High Court Judgment with the following findings. S.31 (7) (a) of the 1996 Act & S.3(3)(a) (ii) of the interest Act,1978 is reproduced for the convenience. 

“Unless otherwise agreed by the parties, where and insofar 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 the 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 award is made”

S.3(3) Nothing in this Section,

(a) shall apply in relation to

(i)…………..

(ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement

The Court held that the above said statutory provisions clearly provide that parties can exclude the interest liability by way of an agreement, hence Clause 18 is sustainable in law . Moreover, it also held that the expression “any moneys due to the contractor” by the employer includes amount awarded by the arbitrator. The first Judgment that dealt with the difference between 1940 Act and 1996 Act relating to powers of the arbitrators to grant interest is Sayeed Ahmad case5 in which Judgment was written by Justice Mr Raveendran. The Court referred to Kamatchiamman , BHEL & Sri Chittaranjan cases also. It is important to note that Ambica Construction Judgment also does not ignore the rights of parties to bar the granting of interest, but it mandated an express bar on the arbitrator. But Garg Builders judgment has taken out the requirement of express barring for granting of interest by Arbitrator and even a general interest delayed due payment is also sufficient to restrict the powers of the Arbitrator. Still there is room for different interpretations in view of the recitals in the no intrest clause.