Business Laws

Courtroom: No pedente lite interest

Vasanth Rajasekaran / Harshvardhan Korada October 18 | Updated on October 18, 2021

In a recent case, the question before the Supreme Court was whether interest could be levied during the pendency of a litigation

In a recent case, Garg Builders Vs Bharat Heavy Electricals Ltd, the question before the Supreme Court was whether interest could be levied during the pendency of a litigation (pendente lite interest), when the parties had agreed in the contract to not have any interests awarded.

The question was whether the contract itself was ultra vires the (Section 28 of the) Contract Act. The arbitrator had awarded the interest; the Supreme Court struck it down, saying that the arbitrator could not award the interest when it was contractually barred by the contract.

The parties entered into a contract in 2009 which, inter alia, contained the interest-barring clause. The clause provided that no interest shall be payable by the respondent on, inter alia, any moneys due to the contractor. Disputes arose amongst the parties with respect to the aforesaid contract and subsequently, Garg Builders filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 before the High Court of Delhi.

The High Court appointed the sole arbitrator to adjudicate upon the disputes. The appellant in the claim petition, apart from claiming various amounts, claimed pre-reference, pendente lite and future interest at the rate of 24 per cent per annum on the value of the award. The arbitrator upon hearing both parties concluded that there is no prohibition in the contract on payment of interest for pre-reference period, pendente lite and future period.

Therefore, the arbitrator awarded pendente lite and future interest at the rate of 10 per cent per annum to Garg Builders on the award amount from the date of filing the claim petition to the date of realisation of the award amount. Aggrieved by the award rendered by the arbitrator, BHEL challenged the award under Section 34 of the Arbitration Act before the High Court on various grounds, inter alia, on the ground that the arbitrator being a creature of the arbitration agreement travelled beyond the terms of the contract in awarding pendente lite interest on the award amount as the same was expressly barred in terms of the contract.

Accordingly, the High Court held that the arbitrator fell in error in allowing pendente lite interest. Later, the Division Bench of the High Court upheld the judgment of the single judge in the impugned order and the matter reached the Supreme Court, which held that the interest-barring clause was not ultra vires the Contract Act.

It is now a well-established principle under the Indian arbitration regime that an arbitrator being a creature of the contract can only act within the four walls of the contract. The Supreme Court in another decision passed recently in PSA Sical Terminal Pvt Ltd Vs Board of Trustees of VO Chidambranar Trust Tuticorin and Ors observed that if an arbitrator travelled beyond the contract, he would be acting without jurisdiction.

The rationale behind limiting the powers of the arbitrator to act within the terms of the contract lies in the goal of upholding party autonomy. Thus, in the instant case, when the parties had expressly excluded the scope of payment of interests, the Apex Court rightly held that the arbitrator could not have awarded any pendente lite interest in the matter.

(The authors are from Phoenix Legal, a law firm)

Published on October 18, 2021

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