SUPREME COURT HOLDS THAT ARBITRATOR CAN AWARD PENDENTE LITE INTEREST IF THERE IS NO BAR UNDER CONTRACT

Recently, a two-Judge Bench of the Supreme Court comprising Justice M.R. Shah, and Justice M.M. Sundresh passed a judgment dated 22.03.2023 in Indian Railway Construction Company Limited vs M/s National Buildings Construction Corporation Limited in Civil Appeal No. CIVIL APPEAL NO. 8460/2022, and held that unless there is a specific bar under the Contract, it is always open for the Arbitrator to award pendente lite interest in view of Section 31(7)(a) of the Arbitration and Conciliation Act 1996[1] (The Arbitration  Act).

FACTS

In 1990, Indian Railway Construction Company Limited (“IRCON”) entered into an Agreement with M/s. National Buildings Construction Corporation Limited (“NBCC”) for construction of Railway Station cum Commercial Complex at Vashi, Navi Mumbai. 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 construction work in time. Accordingly, IRCON terminated the Agreement on 21.02.1994 by invoking Clause 60.1 of the same and forfeited two security deposits of NBCC. NBCC referred the dispute to arbitration. The Arbitral Tribunal passed an Award in 2011, rejecting NBCC’s claim for refund of two security deposits. 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 Tribunal also considered the counter claim of IRCON and awarded 18% p.a. pendente lite interest on special advance given by IRCON to NBCC.

NBCC challenged the Award before the High Court and the Single Judge vide Order 03.03.2017 set aside the rejection of Claim by the Arbitral Tribunal. The Single Judge held 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, by justifying forfeiture of the security deposits. The Single Judge further set aside the award of pendente lite interest on special advance, on the ground that the Agreement did not contain any clause for such interest. Under appeal, the Division Bench of the High Court vide order dated 14.08.2018 affirmed the stand taken by Single Judge.

REASONING AND ANALYSIS

Aggrieved by the aforementioned Order dated 14.08.2018 of the Delhi High Court, the Appellant moved the Supreme Court under Article 133 of the Constitution of India (Civil Appeal to the Supreme Court).

The Bench affirmed the determination done by Arbitral Tribunal with respect to the correct clause of termination and as to whether the Agreement could be rescinded by IRCON under Clause 60.1 or Clause 17.4.

“Thus, both, under Clause 17.4 and 60.1, on failure of the Contractor to complete the work, the IRCON is justified in rescinding the Contract and forfeit the security deposit. At the cost of repetition, it is observed that the learned Arbitral Tribunal on appreciation of entire evidence on record, had specifically observed that the Contractor failed to complete the work even within the stipulated extended period of time and even abandoned the work and therefore, the IRCON was justified in rescinding the Contract. Therefore, 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. We are of the opinion that the learned Single   Judge, therefore, exceeded in its jurisdiction under Section 34 of the Arbitration Act quashing and setting aside the well-reasoned award passed by the learned Arbitral Tribunal on rejecting Claim Nos.33 and 34, which the Division Bench of the High Court has wrongly affirmed.”

With respect to the setting aside u/s 34 of Arbitration Act, the Court observed that: –

“We are of the opinion that the learned Single Judge, therefore, exceeded in its jurisdiction under Section 34 of the Arbitration Act quashing and setting aside the well-reasoned award passed by the learned Arbitral Tribunal on rejecting Claim Nos. 33 and 34, which the Division Bench of the High Court has wrongly affirmed.”

Conclusion

Thus, based on the aforesaid observations, the Apex Court allowed the Appeal and quashed impugned judgment and Order passed by the learned single Judge as well as the Division Bench of the High Court, while observing that the Single Judge exceeded its jurisdiction under Section 34 of the Arbitration Act by setting aside a well-reasoned Award passed by Arbitral Tribunal, however, with a modification that there shall be paid an interest @12% pendente lite on advance for hypothecation of equipment instead of 18% as awarded by the Arbitral Tribunal.

Devashish Kakkar

Legal Associate

The Indian Lawyer

[1] Section 31(7)(a) of The Arbitration and Conciliation Act, 1996: 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, on the whole or any 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 the award is made.