Arbitrator Cannot Grant Pendente Lite Interest If Contract Contains A Specific Clause Expressly Barring Payment Of Interest

KEY TAKEAWAYS

• The Supreme Court observed that an arbitrator cannot grant pendentelite interest if the contract contains a clause that specifically prohibits interest payment.
• The above observation was made by a bench of Justices S. Abdul Nazeer and Krishna Murari.

BACKGROUND

• In the following case, the contract between the parties contained a clause which read as follows- “No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any money due to the contractor.”
• The arbitrator, on the other hand, granted the claimant pendentelite and future interest at a rate of 10% p.a. on the award amount from the date of filing the claim petition, i.e. 02.12.2011, until the day of realisation of the award amount.
• The other party challenged the award in the Delhi High Court under Section 34 of the 1996 Act, claiming that the Arbitrator, as a creature of the arbitration agreement, went beyond the terms of the contract by awarding pendentelite interest on the award amount, which was expressly prohibited by the contract.
• The award was set aside by the High Court, except for the grant of pendentelite interest.
• Another issue raised was whether Clause 17 of the Contract was ultra vires in terms of Section 28 of the Indian Contract Act, 1872.
• According to Section 28, a contract is void if it prohibits a party from exercising his rights in ordinary courts or limits the time within which he may do so.
• Exception I says that a contract between two or more people in which they agree that any dispute that has occurred or may develop between them in respect of any subject or class of subjects will be referred to arbitration is not prohibited, according to section I.

COURT’S OBSERVATION

• Keeping in mind the above mentioned provisions, the court observed that there is an express statutory permission for the parties to contract out of receiving interest.
• As a result, the Supreme Court upheld the Delhi High Court's decision and dismissed the appeal.

In your opinion should the arbitrator be allowed to grant pendentelite interest even if the contract contains a clause barring payment of interest? Let us know in the comments below!