Arbitration agreement prohibiting grant of interest

When the terms of the agreement had prohibited award of interest, the Arbitrator could not award interest for the pendente lite period.

Clause 13 (3) of the contract entered into between the parties read as under:

“13(3). No interest will be payable upon the earnest money and the security deposit or amounts payable to the contractor under the contract, but Government Securities deposited in terms of sub-clause(1) of this clause will be repayable with interest accrued thereon.”

It has been held thus:

“10. Thus, it had been specifically understood between the parties that no interest was to be paid on the earnest money, security deposit and the amount payable to the contractor under the contract. So far as payment of interest on government securities, which had been deposited by the respondent contractor with the appellant is concerned, it was specifically stated that the said amount was to be returned to the contractor along with interest accrued thereon, but so far as payment of interest on the amount payable to the contractor under the contract was concerned, there was a specific term that no interest was to be paid thereon.

11. 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.

[Source: Union of India vs. Bright Power Projects (India) Private Limited (2015) 9 SCC 695]

In another case after referring to above view, it was observed:

By relying upon the judgments which pertained to different period when statutory provisions were different, the Arbitral Tribunal had awarded interest on the amount payable to the contractor for the period from the date when the reference was entered upon till the date of the award and the said view of the Arbitral Tribunal had been confirmed by the High Court. In our opinion, the Arbitral Tribunal and the High Court ought to have considered the provisions of the Act and the terms of agreement entered upon by the parties.

21. In the aforestated circumstances, the Arbitral Tribunal ought not to have awarded interest to the respondent from the date of reference till the date of the award.

[Source: Union of India vs. Bright Power Project, decided by SC on 2 July, 2017.]
[Followed in Chittaranjan Maity vs Union Of India, decided by SC on 3 October, 2017]
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