Jaiprakash Associates Case: A Throwback to Judicial Interference in the Arbitral Process?

[Rishabh Malaviya is an Advocate at Arista Chambers, Bangalore]

The Supreme Court’s recent decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation India Ltd. (2019 SCC OnLine SC 143) discussed the scope of an arbitral tribunal’s power to award pendente lite interest. While the decision only reiterates the position of law laid down in several previous cases, the approach adopted by the Supreme Court left much to be desired. This post briefly analyzes the decision and its shortcomings.

Factual Background

Tehri Hydro Development Corporation India Ltd. (“THDC”) had awarded part of the construction work of its Tehri Hydro Dam Power Project to Jaiprakash Associates Ltd. (“JPA”). The contract was valued at Rs. 474,81,53,760. The contract provided for a multi-tiered dispute resolution mechanism, which ultimately allowed the contractor, JPA, to initiate arbitration proceedings. Once disputes arose between the parties, JPA initiated arbitration proceedings against THDC, claiming, inter alia, certain sums under the contract and interest at the rate of 16% per annum on the said sums.

THDC argued that, under the contract, the tribunal was enjoined from awarding pre-reference and pendente lite interest. THDC relied on clauses 50.0 and 51.0 of the General Conditions of Contract (“GCC”) which provided as follows:

Clause 50.0 Interest on money due to the contractor No omission on the part of the Engineer in charge to pay the amount due upon measurement or otherwise shall vitiate or make void the contract, nor shall the contractor be entitled to interest upon any guarantee or payments in arrears nor upon any balance which may on the final settlement of his account, be due to him.

Clause 51.0 No claim for delayed payment due to dispute etc. No claim for interest or damage will be entertained or be payable by the corporation in respect of any amount or balance which may be lying with the corporation owing to any dispute, difference or misunderstanding between the parties or in respect of any delay or omission on the part of the Engineer in charge in making intermediate or final payments or in any other respect whatsoever.

Interestingly, the tribunal concluded that clauses 50.0 and 51.0 of the GCC barred interest on payments from THDC to JPA due to disputes between the two. However, this was not considered a bar to the award of such interest by an arbitral tribunal. The tribunal relied on the Supreme Court’s decision in Board of Trustees for the Port of Calcutta v Engineers-De-Space-Age ((1996) 1 SCC 516) in coming to this conclusion.

As noted by the Supreme Court (when the matter eventually reached the Court), the tribunal had concluded that:

As seen from above, Clause 50.0 and 51.0 of the Contract deny interest on the Claimant’s dues by the Respondent due to dispute etc. However as per above quoted judgment of Hon’ble Supreme Court of India, the claim for interest can be considered by the Arbitration Tribunal.

[Emphasis supplied]

Accordingly, on allowing JPA’s claims for sums under the contract, the tribunal also awarded JPA pendente lite interest from the date of the cause of action until the expiry of sixty days from the date of the award and future interest till the date of actual payment.

The Delhi High Court’s Decision

THDC moved the Delhi High Court challenging the award under section 34 of the Arbitration and Conciliation Act, 1996, (the “1996 Act”) to the limited extent that it awarded JPA pendente lite interest. A Single Judge of the High Court upheld THDC’s arguments and ruled that the award would be set aside to the extent it awarded pendente lite interest. The Court, after extensive contractual interpretation, found that clause 51.0 of the GCC barred the arbitral tribunal from awarding pendente lite interest. The court also noted that the 1996 Act differed from the Arbitration Act, 1940 (the “1940 Act”), in that the 1996 Act contained specific provisions regarding the power of the arbitrator to award pendente lite and post award interest (whereas the 1940 Act was silent on the issue).

JPA preferred an intra-court appeal against this decision before a Division Bench of the High Court. The Division Bench observed that the Single Judge had noted:

that whereas there could be a debate under the Arbitration Act 1940 with respect to the powers of the Arbitrators to award pendente lite interest notwithstanding the contract prohibiting grant of interest, with reference to Sub Section 7 of Section 31 of the Arbitration and Conciliation Act, 1996, the learned Single Judge has found no scope for any debate, and on the premise that if a contract prohibits grant of interest with respect to any claim, the Arbitrator(s) cannot order payment of pendente lite or future interest. Thus holding, the learned Single Judge has proceeded to consider the two clauses to ascertain whether the two clauses prohibit interest to be paid on the two claims allowed.

The Division Bench disagreed with some aspects of the Single Judge’s interpretation, but found that his ultimate conclusion was correct. The Division Bench also found support in the Supreme Court’s decision in Tehri Hydro Development Corporation Ltd. & Anr. v. Jai Prakash Associates Ltd. ((2012) 12 SCC 10), which dealt with a similarly worded contract between the same parties. Accordingly, the Division Bench upheld the decision of the Single Judge and dismissed the appeal.

The Supreme Court’s Decision

The Supreme Court analyzed several prior decisions and came to the conclusion that (under the 1996 Act), “in case clauses 50 and 51 of GCC put a bar on the arbitral tribunal to award interest, the arbitral tribunal did not have any jurisdiction to do so.” Noting that the tribunal was itself of the opinion that clause 51.0 of the GCC barred such payments, the Supreme Court upheld the decision of the Delhi High Court. The Supreme Court, like the Division Bench of the Delhi High Court, also followed its previous ruling in Tehri Hydro Development Corporation Ltd. & Anr. v. Jai Prakash Associates Ltd (mentioned above).

Comment

The decision of the Supreme Court ignites little debate insofar as it found that an arbitral tribunal’s power to award pendente lite interest would depend on the terms of the agreement between the parties. The Court rightly held that if the agreement prevented the award of such interest, there would be no scope to contend that the tribunal had the jurisdiction to do so. This is in accordance with section 31(7) of the 1996 Act (which specifically stipulates the same) and previous decisions of the Supreme Court, and this also establishes and reiterates the predominance of party autonomy in this regard.

Further, the Court reiterated the distinction between the position under the 1940 Act and the 1996 Act. The court relied on its observations in Reliance Cellulose Products Limited v Oil and Natural Gas Corporation Limited ((2018) 9 SCC 266), and noted that the Court had previously held that:

…under the 1940 Act, an arbitrator has power to grant pre-reference interest under the Interest Act as well as pendente lite and future interest, however, he is constricted only by the fact that an agreement between the parties may contain an express bar to the award of pre- reference and/or pendente lite interest. Further, the Court has evolved the test of strict construction of such clauses, and unless there is a clear and express bar to the payment of interest that can be awarded by an arbitrator, clauses which do not refer to claims before the arbitrators or disputes between parties and clearly bar payment of interest, cannot stand in the way of an arbitrator awarding pre-reference or pendente lite interest … Also, the position Under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996 Act sanctifies agreements between the parties and states that the moment the agreement says otherwise, no interest becomes payable right from the date of the cause of action until the award is delivered.

Thus, under the 1996 Act, the arbitral tribunal may be prevented from awarding pendente lite interest even if the arbitration agreement does not say so expressly. General bars on payment of interest could be sufficient to prevent the tribunal from awarding pendente lite interest.

That being said, the decision of the Supreme Court was not as nuanced as one would have liked it to be. The Court, like the Delhi High Court before it, failed to even refer to the grounds on which the arbitral award was being (partly) set aside. Nor did the court make any reference to any specific sub-section of section 34 of the 1996 Act. Given the Indian judiciary’s recent pro-arbitration approach, the Court should have established how its decision to set aside the award fell within the parameters of the 1996 Act. This would have put to rest any fears that the court was overstepping its bounds and impinging on the jurisdiction of the tribunal.

Such fears are not inconceivable on a preliminary reading of the decision, since the Delhi High Court had undertaken an extensive interpretation of the contract (to assess whether payment of interest was indeed barred) before arriving at its decision. Given that contractual interpretation is within the jurisdiction of the arbitral tribunal (as are errors in contractual interpretation),[1] the decision could give one the impression that the Court was reviewing the matter on merits. Ideally, the Supreme Court should have clarified that the Delhi High Court wrongly reviewed the tribunal’s interpretation of the contract without pointing to any justification under section 34 for doing the same. The Supreme Court should have pointed out that the High Court should have either:

(a) established, with reference to section 34 of the 1996 Act, how it was competent to review the tribunal’s interpretation of the contract, or

(b) accepted the tribunal’s interpretation of the contract (which had found the contract to bar payment of pendente lite interest), and should have instead restricted itself to assailing/assessing (with reference to section 34 of the 1996 Act) the validity of the tribunal’s conclusion that such a contractual bar could not prevent the tribunal from awarding pendente lite interest.

Unfortunately, the Supreme Court failed to do so. In fact, the Court actively considered and approved certain aspects of the Delhi High Court’s interpretation of clauses 50.0 and 51.0 of the GCC, with no reference to section 34 of the 1996 Act.

Thus, although the Supreme Court arrived at the correct conclusion, it should have adopted a more nuanced approach so as to put to rest any fears about undue interference in the arbitral process.

Rishabh Malaviya

[1] See, e.g., Steel Authority of India Ltd. v Gupta Brother Steel Tubes Ltd. [(2009) 10 SCC 63], where the Supreme Court held that “An error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by Courts…”. This was followed in later cases such as Sumitomo Heavy Industries Limited v Oil and Natural Gas Commission of India [(2010) 11 SCC 296].

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