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Arbitrator has to abide by the contract while dealing with pendente lite interest

In GARG BUILDERS vs BHARAT HEAVY ELECTRICALS LIMITED, appeal was filed against Order of the Division Bench of the High Court of Delhi, resulting in denial of pendente lite interest on the award amount to the appellant.

The appellant as project contractors had a dispute with the Respondents which was placed before the Arbitrator. Learned Arbitrator after hearing the contentions of both the parties concluded that there is no prohibition in the contract about payment of interest for the pre­suit, pendente lite and future period. The Respondents appeal before the Delhi High Court that the learned Arbitrator being 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. The single judge concluded that As stated earlier, in terms of Section 31(7)(a) of the Act, the power of the arbitral tribunal to award pre award interest is contingent to the parties not agreeing to the contrary. Pre­award interest includes both pre­ reference interest as well as pendente lite interest. Thus, the conclusion of the Arbitrator that award of pendente lite interest was not prescribed by clause 17 of the Agreement is not sustainable. Division Bench agreed.

On appeal, the Supreme Court held that the law relating to award of pendente lite interest by Arbitrator under the 1996 Act is no longer res integra. The provisions of the 1996 Act under Section 31(7)(a), give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre­reference and pendente lite interest when the parties themselves have agreed to the contrary. If the contract prohibits pre­reference and pendente lite interest, the arbitrator cannot award interest for the said period.

It is pertinent to note that interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter. Section 2 (a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator. In turn, Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

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