Does an Arbitrator have the complete power to award Interest Pendente Lite: Truth or Delusion?

Samyak Jain[1]*


Recently, Madras High Court in the case of M/s J.K. Fenner (India) Limited v. M/s Neyveli Lignite Corporation[2] (hereinafter ‘Fenner’) had an opportunity to decide whether an arbitrator can grant interest pendente lite in an arbitration proceeding seated in India. The appeal was filed under section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘Arbitration Act”) challenging the validity of the order passed by the arbitral tribunal, wherein the Court modified the award in favour of the claimant and grant interest pendente lite together with principal amount, though the terms of the contract did not prohibit the same. This decision is in conformity with the decisions of the Supreme Courts and various other High Courts in the recent past.


Introduction


Interest pendente lite is defined as the interest between the date on which the cause of action arises until the date of the award. Recently, this issue is much debated in the legal arena as this issue repeatedly arises before the judiciary. Arbitration is now the principal method in resolving commercial disputes among the parties.[3] Judiciary repeatedly tried to maintain a balance between party autonomy and arbitrator’s power to award interest in order to do justice with the party petitioning for interest. It is also accepted that arbitrator cannot award interest if the terms of the contract expressly barred the tribunal from awarding it. Here, the author first tried to discuss position under the Arbitration Act of 1940 and 1996 with judicial pronouncements and then discusses the interpretation of a single-judge bench of Madras High Court in reaching conclusion in the present case.


Position under 1940 Arbitration Act


Claimant further supported this contention by placing reliance on the judgment of the Supreme Court of constitution bench in Secretary Irrigation Department, Government of Orissa and Others v. G.C. Roy,[4] (hereinafter ‘GC Roy’) considering the question of arbitrator’s jurisdiction in awarding interest pendente lite in the absence of the contract for the same. The court answered in affirmative that in a situation where the contract does not provide for the grant of such interest nor does it prohibit such grant, or the contract is silent as to the award of interest, the arbitrator has the power to award interest pendent lite. This reasoning is based on the presumption that interest was considered to an implied term of the contract between the parties, and therefore arbitrator has the power to award interest.


Further, in Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj,[5] (hereinafter ‘NC Budharaj’), a constitution bench judgment of the Supreme Court considered the question of award of interest for the pre reference period. NC Budharaj heavily relied on the judgment of GC Roy and held that arbitrator has the power to award pre reference award as long as there is nothing in the arbitration agreement to exclude the authority of an arbitrator to entertain a claim for pre reference interest.


GC Roy and NC Budharaj are considered to be landmark cases under the 1940 Arbitration act. Under 1940 act, it is crystal clear that in absence of provision regarding the awarding of interest in a contract, then the arbitrator has the power to award interest along with principal amount as it is was considered an implied term of the contract.


Position under 1996 Arbitration Act


Section 31 (7) was added in the 1996 Arbitration Act. The law pertaining to the 1940 act has transformed after the introduction of the new act. Union of India v. Bright Power Projects,[6] states the position that as per section 31 (7) (a) of the Act, the arbitrator has the power to award interest pendente lite, “unless otherwise agreed by the parties.” It is clear from the language of section 31 (7) that it gives autonomy to the parties’ contract and the arbitrator is bound by the express terms of the contract. Therefore, where the parties agreed that no interest shall be payable, the tribunal cannot award interest.[7]


Further, a three-judge bench of Supreme Court in the case of Union of India v. M/s Ambica Construction,[8] reiterated the same principle propounded by the Supreme Court in the above-mentioned case. Furthermore, the Supreme Court, recently, had an opportunity to decide whether an arbitrator can grant interest pendente lite in arbitration proceedings seated in India. This precedential judgment was delivered in February 2019 in the case of Jaiprakash Associates Limited v. Tehri Hydro Development Corporation India Limited.[9] A three-judge bench heard the appeal filed against the judgment of the Delhi High Court wherein the Court quashed an arbitration award to the extent it granted interest to the present appellant, though being barred by the contract between the parties to grant the same.


In this case, the appellant was awarded a works contract by the respondents. The Contract contained a provision for arbitration of any dispute arising out of the concerned transaction by a panel of three arbitrators under the Arbitration Act. It is important to note that the interpretation of Clause 51 of the Contract clarifies that interest is not payable to the contractor on the money due to him. Then Court after taking into consideration precedents, statutory and common law principles answered in affirmative that arbitrator does not have the power to award interest in case if it is expressly barred by the terms of the contract. In light of the above discussion, it is necessary to discuss the facts of the Fenner case.


Factual Background


Claimant [hereinafter ‘JK Fenner’] is a company engaged in a business of designing, engineering, manufacturing, supply, testing and commissioning on turnkey basis to various infrastructure facilities like coal mines, chemical refineries, thermal power plants, airports etc. Claimant submitted their bid to a tender floated by the respondent [hereinafter ‘Neyveli Lignite Corporation’] for the design, supply and commissioning of a Lignite Handling and Storage System (LHS) on 11th April 1998. By letter of award dated 31st July 1998 and 12th August 1998, respondent accepted the claimant’s bid.


As per the terms of the contract, the claimant is required to complete whole work including successful completion of the trial operation of the installed machinery within 30 months from the date of the letter of award i.e. by 31st January 2001 in consideration of a certain amount of money. By letter dated 1st March 2004, the respondent had provisionally taken over the operation of LHS with immediate effect inclusive of the 14 months period i.e. 1st January 2003 to 29th February 2004, where claimant operated under the instructions of the respondent.

The dispute arose between the parties when a claimant sought payment for work done under various heads from the respondent. Despite sincere efforts made by the claimant, the respondent did not accept the claims of the claimant. Therefore, claimant invoked the arbitration clause of the contract by their letter dated 11th January 2007. Both parties appointed arbitrators and proceedings commenced. The arbitral tribunal passed the award on 5th October 2013 and modified the same on 5th January 2014. Tribunal awarded claims in favour of both claimant and respondent under different heads.


In particular, the author only discusses Claim I which is about the refund of retention money held by respondent along with interest. Claim I is related to the payments withheld by respondents due to the claimants on the ground that claimant failed to complete work as per the performance guarantee test within the stipulated time. Respondent denied this claim by contending that the claimant was not ready for the test on the pre-decided date, and, therefore was not entitled to the payment. Tribunal observed that the equipment was working satisfactorily from January 2003 and mere failure to issue certificate cannot allow respondent to withheld claimant’s money. Hence, the tribunal awarded principal amount but did not allow interest from the date of the takeover of LHS till paid on the ground that the amount became payable only on the date of the award. Claimant challenged the arbitral award under section 34 of the Arbitration Act before Madras High Court under various heads.


Issue Concerned


Whether denial of interest by tribunal post 1st March 2004 to the claimant as per clause 6.5.2.1 (d) of the contract is an erroneous observation or not?


Discussion


The primary purpose of arbitration is no speed, or privacy, neutrality, or economy, but rather parties have the ability to make key choices to suit their particular needs.[10] Arbitration jurisprudence is largely guided by the norm of contractarianism. This is equally applicable in cases of interest pendente lite (period commencing from the date of cause of action to the date of award). In such cases, terms of the contracts agreed by the parties are of paramount importance with regards to the payment of interest applicable to the principal amount. These terms also serve as a determinant factor in establishing arbitrator’s authority in awarding such interest claims. It is important to produce clause 6.5.2.1 (d) of the contract at this stage, which does not prohibit grant of interest.


Clause 6.5.2.1 (d): After successful completion of performance test for equipment and certification of results by the purchases/consultant – 10% to be paid. In the event of commissioning delayed beyond 6 months from the scheduled date and the delay is not attributable to the claimant, the final tranche of payment shall be released against the production and acceptance of a bank guarantee for an equal amount valid for one year or any revised scheduled date of commissioning whichever is earlier.

It was the case of the claimants that the correct interpretation of clause 6.5.2.1 (d) of the contract would not restrict the arbitrator’s authority to grant interest pendente lite interest. In other words, Claimant contended that agreement does not expressly prohibit levy of interest.


Case of Unliquidated Damages: Different from Liquidated Damages? - A New Dimension


After discussing Fenner case, it is of utmost importance to discuss the interesting position reached out by Supreme Court in the case of M/s Raveechee & Co. v. Union of India,[11] (hereinafter ‘Raveechee’) wherein the court held that the bar to award interest on the amount payable under the contract would not be sufficient to deny the payment of interest pendente lite by the arbitrator. Court went on to proceed, as a general rule, that arbitrator has the power to award interest.


Moreover, the court observed that in a case of unascertained damages, the question of interest would arise upon the ascertainment of the damages in course of the dispute. Such damages could attract pendente lite interest for the period from the commencement of the arbitration to the award. Thus, the liability for pendente lite interest does not arise from any term of the contract, or during the terms of the contract, but in the course of determination by the Arbitrators of the losses or damages that are due to the claimant. Such power was considered to be inherent in an Arbitrator who also exercises the power to do equity unless the contract expressly bars an Arbitrator from awarding interest pendente lite. An agreement which bars interest is essentially an agreement that the parties will not claim interest on specified amounts. It does not bar an Arbitrator, who is never a party to the agreement from awarding it.


Nevertheless, the reasoning given in Raveechee is different from the reasoning in Chittaranjan Maity v. Union of India,[12] (hereinafterMaity’) wherein the court held that the arbitrator does not have the power to award interest if it is expressly barred by the terms of the contract. Interestingly, both the judgments deal with the similar clauses under their respective contract which provides that no interest shall be payable upon the earnest money, security deposits or amounts payable to the contractor, but government securities deposited in the contract will be payable with interest.


In Maity’s case, the court interpreted section 31 (7) of the Arbitration Act, in which interest award is made subject to the terms of the contract between the parties. Clause 16 (2) of the GCC expressly barring an award of interest would prevail over the arbitrator’s power to award interest. Hence, parties have agreed that interest shall not be payable under the contract barring arbitral tribunal to award interest pendente lite in the present case.


On the contrary, the approach adopted by the court in Raveechee is completely different, where they held that GCC clause expressly barred interest payable upon earnest money, security deposits or amount payable to the contractor under the terms of the contract. A distinction was crafted by the court between liabilities to pay interest on the determination of unascertained damages in the course of dispute and liability to interest as per terms of the contract. Court further held that bar to award interest on the amount payable under the contract would not be sufficient to deny interest pendente lite as it would depend upon several factors such as phraseology used in the language of the contract, nature of claim and dispute referred to the tribunal.


In sufficient similar worded clauses of both Raveechee and Maity, the court interpreted differently in order to arrive at a different conclusion. Raveechee follows the path that arbitrators have the power to do justice to the parties irrespective of the terms of the contract, whereas Maity follows that arbitrators are creatures of the contract and are bound to follow the express terms of the contract.


Conclusion


The extent of power vested in an arbitral tribunal is a subject of constant judicial interpretation. Indian Judiciary has constantly tried to clarify these questions when arise. Through the recent pronouncement of Supreme Court in Jaiprakash, the court has attempted to clarify the issue of arbitrator’s power to award interest pendente lite. However, in the light of Raveechee, the issue pertaining to award interest in unascertained damages is yet to be tested. It would be interesting to observe that larger bench of the Supreme Court address this ambiguity while dealing similar clauses in the light of section 31 (7) (a) of the Arbitration Act. In the light of the above discussion, the author is of the opinion that judgment pronounced in Fenner is correct in view of Supreme Court decisions in GC Roy, Maity and Jaiprakash.



* This Article is an edited version of the 3rd Best Entry in the 1st Case Summary Writing Competition. Suggestions were made by the Editorial Team based on which changes were made by the author.

[1] Samyak Jain, student of 7th semester studying at Institute of Law, Nirma University, Ahmedabad. The author can be reached at the E-mail address- 2808.vishi@gmail.com [2] M/s J.K. Fenner (India) Limited v. M/s Neyveli Lignite Corporation, O.P. No. 252 of 2014. [3] J Martin Hunter & Alan Redfern, International Arbitration 1 (6th ed. 2015).

[4] Secretary Irrigation Department, Government of Orissa and Others v. G.C. Roy, (1992) 1 SCC 508. [5] Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj, (2001) 2 SCC 721. [6] Union of India v. Bright Power Projects, (2015) 9 SCC 695.

[7] Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors., (2010) 8 SCC 767. [8] Union of India v. M/s Ambica Construction, SLP [C] No. 11114/2009. [9] Jaiprakash Associates Limited v. Tehri Hydro Development Corporation India Limited, 2019 SCC OnLine SC 143. [10] Thomas J. Stipanowich, Arbitration: The “New Litigation,” 2010. ILL. L. REV. 1, 51 (2010). [11] M/s Raveechee & Co. v. Union of India, (2018) 7 SCC 664. [12] Chittaranjan Maity v. Union of India, (2017) 9 SCC 611.

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