Arbitral Tribunal cannot award interest when parties to contract agreed it is not payable: Supreme Court

The Supreme Court on Thursday held that an arbitrator is bound by the terms of the arbitration agreement between parties regarding any award of interest from the date of cause of action to the date of the award (Union of India vs. Manraj Enterprises).."Where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest," the Division Bench of Justices MR Shah and BV Nagarathna observed.The Court was hearing an appeal moved by the Union of India against an order of the Delhi High Court. The High Court had upheld the award of interest by an arbitrator and dismissed the appeal of the Union..The Union government entered into a contract with a firm Manraj Enterprises with regard to three work contracts. After a dispute arose between them, both went for arbitration.The arbitrator passed an award, granting an amount of ₹78 lakh and also awarded pendente lite (pending the litigation) and future interests at the rate of 12 per cent and 18 per cent respectively, on the entire awarded amount except for the earnest money and security deposits.After the appeals before a single-judge Bench and a Division Bench of the Delhi High Court was dismissed, the Union government moved the Supreme Court..Additional Solicitor General (ASG) KM Nataraj appearing for the Union, submitted that since the parties had already agreed in terms of the contract between them regarding a bar on any payment of interest, the arbitrator itself cannot traverse beyond what has been contemplated in the contract between the parties. He argued that where there is a specific clause in the contract between the parties which expressly bars payment of interest, it is not open for the arbitrator to grant pendente lite interest.In this regard, Nataraj highlighted Section 31(7)(a) of the Arbitration and Conciliation Act 1996, to argue that if there is an expression “agreed between the parties” governing the contract stating that no interest shall be payable, parties are bound by such an agreement and no interest either pendente lite or future, on the amount due and payable under the contract, shall be awarded.Senior Advocate Vikas Singh, appearing for the respondent, submitted that the terms of the contract does not specifically bar an arbitrator to award interest pendente lite. He argued that since the arbitrator is never a party to the agreement, it does not bar the arbitrator from awarding pendente lite interest. Further, he stated that on a fair reading of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, it is clear that the bar to claim interest is on the parties and not on the arbitrator from awarding interest pendente lite on other amounts.After examining the rival contentions, the Supreme Court at the outset observed that where the parties have agreed that no interest shall be payable, the arbitrator cannot by itself award interest, In this regard, the Court adverted to its earlier decision in Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, wherein it was observed that:"When parties to the contract had agreed to the fact that interest would not be awarded on the amount payable to the contractor under the contract, in our opinion, they were bound by their understanding. Having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an Arbitral Tribunal."The Court in the present case noted that:"Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 by using the words “unless otherwise agreed by the parties” categorically specifies that the arbitrator is bound by the terms of the contract insofar as award of interest from the date of cause of action to date of the award is concerned." The Court noted that since the arbitrator in the arbitration proceedings is the creature of the contract, it has no power to award interest contrary to the terms of contract."Once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in clause 16(2) of the agreement/contract between the parties herein, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to clause 16(2) of the agreement/contract in question in this case," the Court observed.Thus, the Court allowed the appeal and held that the Union shall not be entitled to any interest pendente lite or future interest on the amounts due and payable to it, under the contract..[Read Judgment]