In a recent judgment titled Chittaranjan Maity vs. Union of India and Others [Civil Appeal Number 15545-15546 of 2017], the Apex Court has laid down two broad legal propositions with reference to the Arbitration Act, 1996:
- Any dispute with respect to the existence of an arbitrable dispute has to be raised before the High Court when proceedings under section 11(6) of the Act are initiated. Whether the Single Judge deliberates upon the same or leaves it to be decided by the Arbitrator is a different issue.
- Where there is a covenant in the contract that no interest is payable on any amount payable under the contract, the Arbitrator cannot grant pre-claim or pendent elite interest.
Brief Facts:
On 20.3.1991, Respondent invited tender for the execution of balance of earth for formation of banks for laying railway line, roads, platforms and miscellaneous work in connection with new goods terminal yard of South-Eastern Railway at Sankrail in Howrah District. The Appellant’s tender dated 23.3.1991 for Rs. 61,24,159/- was accepted by issuance of Letter of Acceptance dated 17.6.1991. In this connection, an agreement was entered into between the Appellant and the Respondent on 22.8.1991. In the said agreement, General Conditions of the Contract (for short ‘GCC’) were incorporated and the parties were bound by the terms and conditions thereof.
Various disputes and differences arose between the parties regarding execution of work and its purported abandonment. The Respondent issued notice dated 24.10.1991, seeking termination of the agreement. Another notice dated 15.11.1991 was issued to the Appellant under Clause 62(1) of the GCC for rescission of thecontract. However, at the request of the Appellant through letter dated 2.4.1992, the validity of the contract was extended till 30.6.1992. The Respondent further granted extension of time to complete the work upto July1993. According to the Appellant, the delay and/or hindrances occurred due to breaches committed by the Railway Administration. The remaining work was abandoned by the Appellant w.e.f. 3.11.2003.
The Appellant raised the claim before the Respondent by his letter dated 30.10.1996. By a subsequent letter dated 22.6.1998, the Appellant demanded reference of the dispute to the arbitration. Finally, the Appellant filed an application Under Section 11(6) of the Arbitration and Conciliation Act, 1996 (for short ‘the 1996 Act’) for appointment of an Arbitrator for adjudication of the claims and disputes before the High Court of Calcutta. The Chief Justice of the High Court of Calcutta passed an order dated 6.12.2001, whereupon the General Manager, South-Eastern Railway, was directed to appoint Arbitratorsfrom their panel within four weeks from the said date. Pursuant to the saidorder, the Arbitral Tribunal was constituted which adjudicated the disputes and claims raised by the Appellant, as also the Respondent.
The Arbitral Tribunal passed an award on 20.9.2006. The Respondent moved an application, being A.P. No. 35 of 2006 under Section 34 of the 1996 Act, for setting aside the said award. The said application was dismissed by the Single Judge of the High Court. The Respondent assailed the order of the learned Single Judge by filing an appeal in A.P.O. No. 213 of 2009, wherein it was contended that the Appellant had issued a ‘No Claims Certificate’ to the Respondent, thereby forfeiting his right for any claim from the Respondent in regard to which the dispute could not be adjudicated by the Arbitral Tribunal.
Arguments advanced at the Bar and Decision:
Counsel appearing for the Appellant submitted that the Division Bench failed to appreciate the question that issuance of ‘No Claims Certificate’ by the Appellant was not urged before the Chief Justice in the proceedings Under Section 11(6) of the 1996 Act. The said plea was not even urged before the Arbitral Tribunal or before the learned Single Judge. The issue relating toexistence of any live claim or the arbitrability of the dispute ought to have been urged in the proceedings under Section 11(6) of the 1996 Act or at least before the Arbitral Tribunal. The question as to whether there was any arbitral dispute or not, could not have been entertained by the Division Bench for the first time. It was further submitted that the Tribunal has rightly passed an award and granted pre-award and pendente lite interest from 17.7.1992 till the realization of the award amount.
On the other hand, counsel appearing for the Respondent submitted that having regard to the ‘No Claims Certificate’ issued by the Appellant, the Appellant has no right to make any claim except for security deposit of Rs. 15,000/- from the Respondent. There was no arbitral dispute between the parties. Therefore, the claim itself was not maintainable. It was further argued that, at any rate, the Appellant was not entitled for any interest having regard to the terms of the contract.
In Mcdermott International Inc. v. Burn Standard Co. Ltd. and Ors.: (2006) 11 SCC 181, the Apex Court has held that the party questioning the jurisdiction of the Arbitrator has an obligation to raise the said question before the Arbitrator. It was held as under:
“After the 1996 Act came into force, under Section 16 of the Act the party questioning the jurisdiction of the arbitrator has an obligation to raise the said question before the arbitrator. Such a question of jurisdiction could be raised if it is beyond the scope of his authority. It was required to be raised during arbitration proceedings or soon after initiation thereof. The jurisdictional question is required to be determined as a preliminary ground. A decision taken thereupon by the arbitrator would be the subject-matter of challenge Under Section 34 of theAct. In the event the arbitrator opined that he had no jurisdiction in relation thereto an appeal there against was provided for Under Section 37 of the Act.”
“The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only,like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisoryrole of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”
In view of the above, it was held that the Division Bench was not justified while considering the arbitrability of the disputes for the first time, particularly, when the Respondent has not urged the issue relating to ‘No Claims Certificate’ before the Chief Justice, Arbitral Tribunal or before the learned Single Judge.
The next question for consideration is whether the Arbitral Tribunal was justified in awarding interest on the delayed payments in favour of the Appellant. The total interest awarded by the Arbitral Tribunal is Rs. 12,44,546/- which includes interest for the pre-reference period and also pendente lite interest. Section 31(7)(a) of the 1996 Act provides for payment of interest, as under:
31(7)(a) – Unless otherwise agreed by the parties, where and insofar 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.
In this Section, a specific provision has been created, whereby if the agreement prohibits award of interest for the pre-award period (i.e. pre-reference and pendente lite period), the Arbitrator cannot award interest for the said period.
Admittedly, the GCC, governing the contract between the parties, contains a Clause which bars the payment of interest, which is as under:
16(2) – No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract, but government securities deposit in terms of Sub-clause (1) of this Clause will be repayable (with) interest accrued thereon.
Though the Counsel for the Appellant had relied on a decision of the Apex Court inM/s. Ambica Construction v. Union of India: (C.A. No. 410 of 2008, ) to state that mere bar to award interest on the amounts payable under the contract would not be sufficient to deny payment on pendente lite interest. Therefore, the Arbitrator was justified in awarding the pendente lite interest. However, it was not clear from M/s. Ambica Construction (supra) as to whether it was decided under The Arbitration Act, 1940 (for short ‘the 1940 Act’) or under the 1996 Act. It has relied on a judgment of Constitution Bench in Secretary, Irrigation Department, Government of Orissa and Ors. v. G.C. Roy. (1992) 1 SCC 508. This judgment was with reference to the 1940 Act. In the 1940 Act, there was no provision which prohibited the Arbitrator from awarding interest for the pre-reference, pendente lite or post award period, whereas the 1996 Act contains a specific provision which says that if the agreement prohibits award of interest for the pre-award period, the Arbitrator cannot award interest for the said period. Therefore, the decision in M/s. Ambica Construction (supra) cannot be made applicable to the instant case.
In Sayeed Ahmed and Co. v. State of Uttar Pradesh and Ors., (2009) 12 SCC 26, the Apex Court noted that the 1940 Act did not contain any provision relating to the power of the Arbitrator to award interest. However, now a specific provision has been created Under Section 31(7)(a) of the 1996 Act. As per this Section, if the agreement bars payment of interest, the Arbitrator cannot award interest from the date of cause of action till the date of award. The Court has observed that in regard to the provision in the 1996 Act, the difference between pre-reference period and the pendente lite interest has disappearedinsofar as award of interest by the Arbitrator is concerned. Section 31(7)(a) recognizes only two periods, i.e. pre-award and post-award period.
In Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat and Ors. : (2010) 8 SCC 767, the Court was dealing with an identical case wherein Clause 16 of the GCC of Railways had required interpretation. This is the same Clause 16(2) of the GCC prohibiting grant of interest which is also applicable in the facts of the present case. The Court held that where the parties had agreed that the interest shall not be payable, the Arbitral Tribunal cannot award interest between the date on which the cause of action arose to the date of the award.
Similarly, in Union of India v. Bright Power Projects (India) Private Limited. (2015) 9 SCC 695, a three-Judge Bench of the Apex Court, after referring to the provisions of Section 31(7)(a) of the 1996 Act, held that when the terms of the agreement had prohibited award of interest, the Arbitrator could not award interest for the pendente lite period. It has been held thus:
Therefore, it was held that the Appellant is not entitled for any interest on the amount awarded by the Arbitral Tribunal.
