Author: Aditya Marwah*
| Jurisdictions: India |
Topics: Party Autonomy Damages in Arbitration Jurisdiction and Powers of the Courts in Matters of Arbitration Generally Arbitration Awards |
The Supreme Court of India has held that an arbitral tribunal, as a creature of contract between the parties, is not empowered to award pendente lite interest or future interest when the parties had specifically agreed not to have such interest awarded in their contract.
Background
The notion of freedom of contract (more commonly referred to as “party autonomy”) is a settled principle under international arbitration. Party autonomy is not only a foundation of arbitral proceedings, but it is also considered as one of arbitration’s biggest advantages. As architects of the proceedings, the parties have liberty to freely design the procedure and structure for their future arbitration. While the arbitrators also enjoy broad autonomy with respect to how the proceedings are conducted, selecting the underlying law of the arbitration largely rests on the parties themselves. One of the challenges that has come before arbitrators and Indian courts is regarding the interest a party may be entitled to under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Indian Supreme Court in a recent division bench judgment, Union of India v. Manraj Enterprises[1] (“Judgment”), held that a party is not entitled to any interest pendente lite (pending litigation) or future interest on the amounts due and payable to it under a contract if the contract specifically prohibits them.
Issue
The Supreme Court considered the following issue in the context of an India-seated arbitration under the Arbitration Act:
- Whether the arbitrator can award a party interest pendente lite or future interest on the amounts payable other than upon the earnest money or the security deposit.
Factual Background
The appellant, Union of India, and the respondent, Manraj Enterprises, commenced arbitration to resolve a dispute arising from their contract. The sole arbitrator, who was appointed by the parties, issued an award in favor of Manraj Enterprises, and awarded pendente lite interest and future interest at the rates of 12% and 18% respectively on the entire award.
Aggrieved by the award passed by the arbitrator, the Union of India filed an appeal[2] before the High Court challenging the award challenging the pre-suit interest, pendente lite interest and future interest awarded by the arbitrator. The Single Judge of the High Court dismissed the appeal,[3] and subsequently the Division Bench of the High Court also dismissed the appeal[4] and confirmed the award made by the arbitrator. Union of India, then filed an appeal before the Supreme Court of India.
Holding
The Supreme Court in the Judgment interpreted the contract that had been entered into between the parties. The contract specifically stated as follows:
Earnest Money and Security Deposit
…
No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract…
(emphasis added)
Thus, interpreting this clause of the contract, the Supreme Court held no interest would be payable upon the earnest money or the security deposit or the amounts payable to the contractor under the contract.[5] While the Arbitration Act allows the arbitral tribunal to include “reasonable” interest in the award,[6] the Supreme Court, relying on an earlier three Judge Bench judgment[7], held that when the parties to a contract agreed that interest would not be awarded on the amount payable to a contractor under the contract, the parties are bound by the contract, and they cannot claim interest under the contract either before a civil court or before an arbitral tribunal.[8]
The Supreme Court in this Judgment further held that as the parties had agreed that no interest shall be payable under the contract, the arbitral tribunal cannot award any interest either independently or on equitable ground.[9] The court further held that an arbitrator in the arbitration proceedings is a creature of the contract and has no power to award interest that is contrary to the terms of the agreement or the contract between the parties. [10]
Thus, the Supreme Court in this case quashed and set aside the judgment of the Division Bench of the High Court and the order passed by the Singe Judge of the High Court in view of the specific bar contained in the contract between the parties, as per which a party is not entitled to any interest pendente lite or future interest on the amounts due and payable under the contract.[11]
Significance
Parties choosing to arbitrate in India should consider this Judgment as a welcome step that brings India’s arbitration approach in line with international arbitration practice. The Supreme Court in the present case has held that if the contract contains a specific clause which expressly prohibits or bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest, which is in line with earlier judgments[12] passed by the court. This is also in line with the Chartered Institute of Arbitrators Guideline[13] on dealing with the interest component in an international commercial arbitration award. Thus, by virtue of party autonomy, parties bear responsibility for making their intentions known under their contract and an arbitral tribunal cannot award interest if the contract bars payment of interest.[14]
* Aditya Marwah is a Student Editor at ARIA and an LL.M. Candidate at Columbia Law School. Prior to joining Columbia, he was working as a Senior Associate at Cyril Amarchand Mangaldas, India’s leading full-service law firm. He is currently working as a Research Assistant for Professor George A. Bermann and is a Member on the Boards of the Columbia International Arbitration Association and Columbia Law International Students Alliance.
[1] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC).
[2] Union of India filed an appeal under Section 34 of the Arbitration Act.
[3] The Single Judge of the High Court passed the order under s 34 of the Arbitration Act which deals with “Application for setting aside arbitral award”.
[4] The Division Bench of the High Court passed the order under s 37 of the Arbitration Act which deals with “Appealable orders”.
[5] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC) at 21.
[6] Section 31(7)(a) of the Arbitration Act allows the arbitral tribunal to award interest to parties on 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, unless otherwise agreed by the parties. However, in the present case, parties had expressly barred provision of interest under the contract.
[7] Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695 (India).
[8] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC) at 15.
[9] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC) at 16.
[10] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC) at 16.
[11] Union of India v. Manraj Enterprises, Unreported Judgments, Civil Appeal No. 6592 of 2021 decided on 18 November 2021 (SC) at 21.
[12] E.g., Garg Builders v. Bharat Heavy Electricals Limited, 2021 SCC OnLine SC 855 (India).
[13] Chartered Institute of Arbitrators, Drafting Arbitral Awards Part II — Interest, https://www.ciarb.org/media/4208/guideline-11-drafting-arbitral-awards-part-ii-interest-2016.pdf (last visited Nov. 22, 2021).
[14] Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26 (India).