Supreme Court on Arbitrator’s Powers to Grant Interest

A recent decision of the Indian Supreme Court considered the important question of the scope of an arbitrator’s powers to grant interest, and the extent to which this power may be limited by contract. The issue before the Court in Union of India v Krafters Engineers was fairly straightforward- when the arbitration agreement limits the powers of an arbitrator to grant interest, is it an absolute bar, or can any limitations be read into it? Given the thicket of conflicting judicial authority on this apparently simple point, the decision of the Court here is of enormous significance.

On the issue of granting interest pendent lite, relying on the Supreme Court’s decision in Government of Orissa v GC Roy, the Court held that the function of an award of interest is to compensate a party for the deprivation of money to which s/he was entitled, during the pendency of the litigation. Hence, unless the parties have otherwise agreed, an arbitrator, being an alternate forum for dispute resolution, has the power to award interest. It approved the following principle laid down in GC Roy:

Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendente lite. This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes – or refer the dispute as to interest as such – to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case, keeping the ends of justice in view.

This was reiterated by the Supreme Court in NC Budharaj, where a “specific stipulation or prohibition in the contract” was required to displace this power to grant interest. The complication in this fairly straightforward area arose as a result of the decision in Engineers-De-Space-Age, where the Court held that even an express contractual prohibition did not curtail the powers of an arbitrator to grant interest pendent lite. The Court drew a distinction between interest for the period between the cause of action and the reference, and between the reference and the award. The contractual prohibition was held to apply only to the former and not to the latter. However, the Constitution Bench in Sayeed Ahmed doubted the validity of these observations. It went further and held that even if Engineers-De-Space-Age was good law under the 1940 Act, since there was a specific provision in s 31(7) of the 1996 Act, which subjected the power of the arbitrator to the agreement between the parties, the position under the 1996 Act would be different. This was markedly different from s 29 of the 1940 Act, dealing with the grant of interest on awards, which does not contain the phrase ‘unless otherwise agreed by the parties’. Again, in Madnani Construction, considering the 1940 Act, the Court held that the contractual bar did not affect the arbitrator’s powers to grant interest pendent lite. Interestingly, Sayeed Ahmed was not cited in Madnani, which only considered the conflict between Engineers-De-Space-Age and Saraswat Trading Agency, which could be reconciled on the language of the arbitral clause. This issue was finally considered by the Court in Kamatchi Amman Constructions, which affirmed Sayeed Ahmed, and the distinction drawn there between the language of the 1940 and the 1996 Acts. However, on facts there, the issue did not arise, since the arbitrator had exercised his discretion and refused to award interest.

Thus, the Court in Krafters Engineers was called on to decide an issue on which there is much conflicting authority, which had not been conclusively decided. After discussing this conflicting authority, the Court concludes,

Reliance based on the ratio in Board of Trustees for the Port of Calcutta (supra) is unacceptable since the said view has been overruled in Sayeed Ahmed and Company (supra) and insofar as the ratio in Madnani Construction Corporation Private Limited (supra) which is also unacceptable for the reasons mentioned in the earlier paras, we reject the stand taken by the counsel for the Respondent. On the other hand, we fully accept the stand of the Union of India as rightly projected by Mr. A.S. Chandhiok, learned ASG. We reiterate that where the parties had agreed that no interest shall be payable, the arbitrator cannot award interest for the amounts payable to the contractor under the contract. Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and the said dispute is referred to the arbitrator, he shall have the power to award interest pendent elite. As observed by the Constitution Bench in G.C. Roy’s case (supra), in such a case, it must be presumed that interest was an implied term of the agreement between the parties. However, this does not mean that in every case, the arbitrator should necessarily award interest pendente lite. In the subsequent decision of the Constitution Bench, i.e., N.C. Budharaj’s case (supra), it has been reiterated that in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest, the arbitrator is free to award interest.

Thus, given a provision in the arbitration agreement that ‘No interest will be payable upon the Earnest Money or the Security Deposit or amounts payable to the Contractor under the Contract’, the Court applied s 31(7) of the 1996 Act to hold that the arbitrator did not have the power to grant interest. Another argument that is conclusively rejected is one which turned on the language of the arbitration agreement. In Engineers-De-Space-Age, it was held that a bar on one party claiming or paying interest was not necessarily a bar on the arbitrator awarding interest. This was considered “outlandish” in Sayeed Ahmed, approved in Kamatchi, and now stands affirmed in Krafters.

In sum, the position now is that under the 1996 Act, if the arbitration agreement curtails the arbitrator’s powers to grant interest, this limitation cannot be bypassed by drawing the distinction drawn in Engineers-De-Space-Age. Whether this distinction, approved in Madnani, continues to apply under the 1940 Act is still not conclusively decided, although serious doubts have been cast.