Supreme Court: Unless there is Specific Bar under Contract, it is always open for Arbitrator/ Arbitral Tribunal to Award Pendente Lite Interest

Supreme Court: Unless there is Specific Bar under Contract, it is always open for Arbitrator/ Arbitral Tribunal to Award Pendente Lite Interest

The Supreme Court by its division bench comprising of Justice M.R. Shah and Justice M.M. Sundresh, while setting aside the order passed by Single judge as well as Division Bench of High Court of New Delhi observed that, unless there is a specific bar under the contract, it is always open for the arbitrator / Arbitral Tribunal to award pendente lite interest.

The brief facts of the case are that an Agreement was entered into between Indian Railway Construction Company Limited (IRCON)- Appellant and the respondent – M/s. National Buildings Construction Corporation Limited (hereinafter referred to as “NBCC”), whereby the respondent was awarded the work of construction of Railway Station cum Commercial Complex at Vashi, Navi Mumbai at a cost of Rs. 3042.91 lakh, to be constructed within a period of 30 months from 5 April, 1990.

The Clause 17.4 of the Agreement provided for termination of Agreement and forfeiture of security deposit, in case the work is not carried out by NBCC within stipulated timelines and given extensions.

Further, Clause 60.1 empowered IRCON to rescind the Agreement in case the contractor (NBCC) abandons the contract.

NBCC failed to complete the work in time. IRCON terminated the Agreement on 21.02.1994 by invoking Clause 60.1 of the same and forfeited two security deposits of NBCC.

Accordingly, NBCC referred the dispute to arbitration. The Arbitral Tribunal passed an Award in 2011, rejecting NBCC’s claim for refund of two security deposits i.e., Claim No. 33 and 34. The Tribunal held that the termination was valid in view of Clause 17.4 of the Agreement and not Clause 60.1 as pleaded by IRCON.

The Arbitral Tribunal also partly allowed Counter Claim No.3 in favor of IRCON. Counter Claim No.3 was relatable to the counter claim of IRCON for a total of Rs.3,65,38,806 towards interest on various advances given to NBCC, more particularly, with regard to two specific advances being (1) Special Advance and (2) Advance against hypothecation of equipment.

Aggrieved, NBCC challenged the Award before the High Court and the Single Judge set aside the rejection of Claim No. 33 and 34 by the Arbitral Tribunal on 03.03.2017. The Single Judge by concluding that once the Arbitral Tribunal found that the termination under Clause 60.1 was unjustified, it was not open for them to consider the termination under Clause 17.4, justifying forfeiture of the security deposits.

The Single Judge further set aside the award passed by the learned Arbitral Tribunal on Counter Claim No.3 by observing that there is no clause in the contract in particular awarding 18% interest per annum on special advance.

The judgment and order passed by the learned Single Judge was the subject matter of appeal under Section 37 of the Arbitration Act before the Division Bench of the High Court. The Division Bench of the High Court affirmed the stand taken by Single Judge.

Aggrieved by the Order dated 14 August 2018, IRCON filed an appeal before the Supreme Court, contending that even if a wrong clause is mentioned in the Termination letter, the power to terminate the contract cannot be said to be illegal.

The Supreme Court pointed out that the findings recorded by the Arbitral Tribunal on applicability of Clause 17.4 and/or rescinding of the contract under Clause 17.4 has not been set aside either by the learned Single Judge or by the Division Bench of the High Court and therefore, the findings recorded by the learned Arbitral Tribunal on applicability of Clause 17.4 has attained the finality.

The bench noted that Clause 17.4 provided that if the company (IRCON) is not satisfied that the works can be completed by the contractor and in the event of failure on the part of the contractor to complete the works within further extension of time allowed, the IRCON shall be entitled, without prejudice to any other right or remedy available in that behalf, to appropriate the contractor’s security deposits and rescind the contract, whether or not actual damage is caused by such default.

Even Clause 60.1 also provided for determination of contract owing to default of contractor. It further provides that in such a case he Project Manager on behalf of the IRCON shall be entitled to rescind the contract, in which case the security deposit shall stand forfeited to IRCON without prejudice to IRCON’s right to recover from the contractor any amount by which the cost of completing the works by any other agency shall exceed the value of the contractor.

Therefore, bench was of the view that the IRCON was absolutely justified in forfeiting the security deposits and therefore, the learned Arbitral Tribunal was absolutely justified in rejecting Claim Nos.33 and 34, which were with respect to forfeiture of security deposits by the IRCON. Both, the learned Single Judge as well as Division Bench of the High Court have seriously erred in setting aside the award passed by the learned Arbitral Tribunal rejecting Claim Nos.33 and 34.

With respect to quashing and setting aside the award passed by the Arbitral Tribunal awarding interest @ 18% on advance for the hypothecation of equipment, by the learned Single Judge confirmed by the Division Bench was concerned the Apex Court observed that, “the High Court had not at all considered Section 31(7)(a) of the Arbitration Act, which permits the arbitrator that 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, 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.”

The bench observed, “unless there is a specific bar under the contract, it is always open for the arbitrator /Arbitral Tribunal to award pendente lite interest.”

The Court opined that the advance amount was paid for hypothecation of equipment and thereafter when the Arbitral Tribunal awarded the interest on advance for hypothecation of equipment, the same was not required to be interfered with by the learned Single Judge in exercise of the powers under Section 34 of the Arbitration Act and even by the Division Bench of the High Court while exercising the powers under Section 37 of the Arbitration Act. However, at the same time to award the interest @ 18% can be said to be on a higher side.

In the facts and circumstances of the case, if the interest is awarded at 12% on advance for the hypothecation of equipment, the same was reasonable interest, stated the bench.

The orders passed by Single Judge and Division Bench of High Court were aside by the Supreme Court, while observing that the Single Judge had exceeded its jurisdiction under Section 34 of the Arbitration Act by setting aside a well-reasoned Award passed by Arbitral Tribunal.