Arbitrator Cannot Grant Pre-Award Interest If The Terms Of Agreement Between Parties Prohibit Payment Of Interest: SC [Read Judgment]

Relying on Section 31(7)(a) of Arbitration and Conciliation Act 1996, the Supreme Court held that arbitrator cannot grant interest for the period between the date of cause of action and date of award, if the parties by agreement had resolved that interest shall not be payable. The bench comprising Justice J. Chelameswar and Justice Abdul Nazeer was dealing with an appeal filed against the judgment of Calcutta High Court which had set aside the arbitral award.

The appellant was awarded a contract by the Railways, and dispute arose when the contract was terminated by the Railways. Arbitration was invoked by the contractor, and an arbitration award was passed determining the amount payable to the contractor along with interest for the pre-award period. The Railways filed application to set-aside the award. The single bench of the Calcutta High Court dismissed the appeal. The Division Bench, on appeal by the Railways, set aside the award holding that there was no arbitrable dispute. The Division Bench relied on a ‘no claims certificate’ issued by the contractor to reach the said conclusion.

The Supreme Court found fault with the approach of the Division Bench for accepting the plea of non-existence of arbitrable dispute for the first time. No such plea was ever raised either before the Arbitrator or before the Single Bench. Relying on Mcdermott International Inc. vs. Burn Standard Co. Ltd. and Others (2006) 11 SCC 181, it was held that the party questioning the jurisdiction of the Arbitrator has an obligation to raise the said question before the Arbitrator. Therefore, the Supreme Court held that it was not open for the High Court to consider the plea of non-arbitrability for the first time in appeal.

However, the Court also held that the appellant was not entitled to the interest amount awarded by the arbitrator for the period between date of cause of action and date of award. Section 37(1) dealing with payment of interest opened with the words “Unless otherwise agreed by the parties,”. In the instant case, clause 16 of the General Conditions of Contract between the parties stated that interest will not be payable on the amounts deposited. Therefore, the Court held that the parties by agreement had waived interest.  The decision in Secretary, Irrigation Department, Government of Orissa and Others. vs. G.C. Roy (1992) 1 SCC 508 was distinguished holding that those were cases under the Arbitration Act 1940.  Reliance was placed on Union of India vs. Bright Power Projects (India) Private Limited (2015) 9 SCC 695, and Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and Others (2010) 8 SCC 767 to hold that when terms of agreement prohibited payment of interest, arbitrator cannot award pendente lite interest.