2021 INSC 0602
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.6216 OF 2021
(Arising out of S.L.P. (C.) No. 16320 of 2018)
GARG BUILDERS      …APPELLANT(S) 
VERSUS
BHARAT HEAVY ELECTRICALS LIMITED       …RESPONDENT(S)
J U D G M E N T
S. ABDUL NAZEER, J.
Leave granted.
2. This appeal is directed against the Order of the Division Bench
of   the   High   Court   of   Delhi   dated   19.09.2017   in   FAO(OS)
(COMM)No.120/2017   whereby   it   has   upheld   the   judgment   of   the
learned   Single   Judge   in   OMP   (COMM)   No.28   of   2017   dated
10.03.2017,   resulting   in   denial   of   pendente   lite   interest   on   the
award amount to the appellant.
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3. The   respondent   floated   a   tender   for  construction   of   boundary
wall at its 2x750 MW Pragati III Combined Cycle Power at Bawana,
Delhi   (hereinafter   referred   to   as   ‘the   project’).     The   appellant
submitted   its   bid   for   the   project   which   was   accepted   by   the
respondent.     Pursuant   to   which,   the   respondent   issued   a   Letter   of
Intent   (LOI)   to   the   appellant   dated   09.09.2008.     Subsequently,   on
24.10.2008   the   parties   entered   into   a   contract   which,   inter   alia,
contained   the   interest   barring   clause   which   is   reproduced
hereunder:
“Clause 17: No interest shall be payable by BHEL on
Earnest   Money   Deposit,   Security   Deposit   or   on   any
moneys due to the contractor.”
4. The   disputes   arose   between   the   parties   with   respect   to   the
aforesaid   contract   and   subsequently   the   appellant   filed   a   petition
under  Section 11 of the Arbitration and Conciliation Act, 1996 (for
short,   “the   1996   Act”)   before   the   Delhi   High   Court   wherein   the
Court   vide   Order   dated   16.09.2011   appointed   Hon’ble   Mr.   Justice
M.A. Khan (Retd.) as the sole Arbitrator to adjudicate the disputes.
The   appellant   in   the   claim   petition,   apart   from   claiming   various
amounts   under   different   heads,   inter   alia   claimed   pre­reference,
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pendente lite   and future interest at the rate of 24% on the value of
the award.  Learned Arbitrator after hearing the contentions of both
the   parties   concluded   that   there   is   no   prohibition   in   the   contract
dated   24.10.2008   and   LOI   dated   09.09.2010   about   payment   of
interest for the pre­suit,  pendente lite  and future period.  Therefore,
he awarded  pendente lite  and future interest at the rate of 10% p.a.
to the appellant on the award amount from the date of filing of the
claim petition i.e. 02.12.2011 till the date of realization of the award
amount.
5. The respondent challenged the said award under Section 34 of
the   1996   Act   before   the   Delhi   High   Court   in   O.M.P.   (COMM.)
28/2017   on   various   grounds,   inter   alia,   on   the   ground   that   the
learned   Arbitrator   being   creature   of   the   arbitration   agreement
travelled beyond the terms of the contract in awarding  pendente lite
interest on the award amount as the same was expressly barred in
terms   of   the   contract.     The   learned   Single   Judge   vide   his   final
judgment and order dated 10.03.2017 held as under:
“The   Arbitrator   fell   in   error   in   holding   that   the
aforesaid   clause   only   prescribed   pre­reference
interest   and   not   pendente   lite   interest.   As   stated
earlier,   in   terms   of   Section   31(7)(a)   of   the   Act,   the
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power   of   the   arbitral   tribunal   to   award   pre   award
interest   is   contingent   to   the  parties   not  agreeing   to
the   contrary.   Pre­award   interest   includes   both   pre­
reference   interest   as   well   as   pendente   lite   interest.
Thus, the conclusion of the Arbitrator that award of
pendente   lite   interest   was   not   prescribed   by   clause
17 of the Agreement is not sustainable.
Accordingly, the impugned award to the extent
of   award   of   pendente   lite   interest   is   set   aside.     The
petition is disposed of. No orders as to costs.”
6. As   noticed   above,   the   Division   Bench   of   the   High   Court   has
upheld the judgment and order  of the Learned Single Judge in the
impugned order. 
7. On 03.07.2018, this Court issued notice observing as under:
“Learned   counsel   for   the   petitioner   has   placed
reliance   on   an   order   of   this   Court   in   Ambica
Construction  v.  Union of India , (2017) 14 SCC 323.”
8. We have heard learned counsel for the parties and perused the
materials   on   record.     Mr.   Sanjay   Bansal,   learned   counsel   for   the
appellant,   contended   that   the   learned   Arbitrator   had   taken   a
plausible view, in  terms of  the  Clause  17  of the  Contract  and held
that   the   said   clause   does   not   bar   the   payment   of   interest   for
pendente   lite   period.     This   argument   was   advanced   in   view   of
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judgment   of   this   Court   in   Ambica   Construction   v.   Union   of
India 1
,   wherein   the   appellant   was   entitled   for   the   payment   of
interest for the   pendente lite   period.   He has also relied on another
judgment   of   this   Court   in   Raveechee   and   Company   v.   Union   of
India 2
  in support of his contentions.  Further, it was argued by the
learned counsel that the Clause 17 of the Contract barring payment
of   interest   to   the   contractor   on   any   sum   due   to   the   contractor,   is
ultra   vires   and   against   the   provisions   of   Section   28   of   the   Indian
Contract Act, 1872.
9. On the other hand, Mr. Pallav Kumar, learned counsel for the
respondent,   submitted   that   Section   31(7)(a)   of   the   1996   Act   gives
paramount   importance   to   the   contract   entered   into   between   the
parties   and   categorically   restricts   the   power   of   an   arbitrator   to
award   pre­reference   and   pendente   lite   interest   when   the   parties
themselves   have   agreed   to   the   contrary.     He   argued   that   if   the
contract   itself   contains   a   specific   clause   which   expressly   bars   the
payment   of   interest,   then   it   is   not   open   for   the   arbitrator   to   grant
pendente   lite   interest.     It   was   further   argued   that   Ambica
1   (2017) 14 SCC 323
2   (2018) 7 SCC 664
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Construction   (supra) is not applicable to the instant case because
it was decided under the Arbitration Act, 1940 whereas the instant
case falls under the 1996 Act.  It was further argued that Section 3
of   the   Interest   Act   confers   power   on   the   Court   to   allow   interest   in
the   proceedings   for   recovery   of   any   debt   or   damages   or   in
proceedings   in  which   a  claim   for   interest  in   respect  of   any  debt  or
damages   already   paid.     However,   Section   3(3)   of   the   Interest   Act
carves   out   an   exception   and   recognizes   the   right   of   the   parties   to
contract   out   of   the   payment   of   interest   arising   out   of   any   debt   or
damages   and   sanctifies   contracts   which   bars   the   payment   of
interest arising out of debt or damages.  Therefore, Clause 17 of the
Contract is not violative of any the provisions of the Indian Contract
Act, 1872.  In light of the arguments advanced, the learned counsel
prays for dismissal of the appeal.
10. We   have   carefully   considered   the   submissions   of   the   learned
counsel   for   both   the   parties   made   at   the   Bar.     The   law   relating   to
award of   pendente  lite   interest by  Arbitrator  under  the  1996 Act is
no   longer   res   integra .     The   provisions   of   the   1996   Act   give
paramount   importance   to   the   contract   entered   into   between   the
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parties   and   categorically   restricts   the   power   of   an   arbitrator   to
award   pre­reference   and   pendente   lite   interest   when   the   parties
themselves   have   agreed   to   the   contrary.     Section   31(7)(a)   of   the
1996 Act which deals with the payment of interest is 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.”
11. It   is   clear   from   the   above   provision   that   if   the   contract
prohibits   pre­reference   and   pendente   lite   interest,   the   arbitrator
cannot   award   interest   for   the   said   period.     In   the   present   case,
clause   barring   interest   is   very   clear   and   categorical.     It   uses   the
expression   “any   moneys   due   to   the   contractor”   by   the   employer
which includes the amount awarded by the arbitrator.  
12. In  Sayeed Ahmed and Company v. State of Uttar Pradesh &
Ors. 3
    this   Court   has   held   that   a   provision   has   been   made   under
Section   31(7)(a)   of   the   1996   Act   in   relation   to   the   power   of   the
3   (2009) 12 SCC 26
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arbitrator to award interest.  As per this section, if the contract bars
payment   of   interest,   the   arbitrator   cannot   award   interest   from   the
date of cause of action till the date of award. 
13. In   Sree   Kamatchi   Amman   Constructions   v.   Divisional
Railway   Manager   (Works),   Palghat   &   Ors. 4
  it   was   held   by   this
Court 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.
14. Bharat Heavy Electricals Limited v. Globe Hi­Fabs Limited 5
is an identical case where this Court has held as under :
“16.   In the present case we noticed that the clause
barring   interest   is   very   widely   worded.     It   uses   the
words   “any   amount   due   to   the   contractor   by   the
employer”.     In   our   opinion,   these   words   cannot   be
read as ejusdem generis along with the earlier words
“earnest money” or “security deposit”.”  
15. In   Sri   Chittaranjan   Maity   v.   Union   of   India 6
  it   was
categorically   held   that   if   a   contract   prohibits   award   of   interest   for
pre­award period, the arbitrator  cannot  award interest for  the said
period.  
4   (2010) 8 SCC 767
5  ( 2015) 5 SCC 718
6   (2017) 9 SCC 611
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16. Therefore,   if   the   contract   contains   a   specific   clause   which
expressly   bars   payment   of   interest,   then   it   is   not   open   for   the
arbitrator   to   grant   pendente   lite   interest.     The   judgment   on   which
reliance   was   placed   by   the   learned   counsel   for   the   appellant   in
Ambica   Construction   (supra)   has   no   application   to   the   instant
case   because   Ambica   Construction   was   decided   under   the
Arbitration Act 1940 whereas the instant case falls under the 1996
Act.     This   has   been   clarified   in   Sri   Chittaranjan   Maity   (supra)   as
under :
“ 16.   Relying   on   a   decision   of   this   Court   in   Ambica
Construction   v.   Union   of   India,   (2017)   14   SCC   323,
the   learned   Senior   Counsel   for   the   appellant
submits   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   is   not   clear
from   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   State
of   Orissa   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   post­award   period,
whereas   the   1996   Act   contains   a   specific   provision
which says that if the agreement prohibits award of
interest   for   the   pre­award   period,   the   arbitrator
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cannot award interest for the said period. Therefore,
the   decision   in   Ambica   Construction   (supra)   cannot
be made applicable to the instant case .”
17. The decision in  Raveechee and Company  (supra) relied on by
the learned counsel for the appellant is again under the Arbitration
Act 1940 which has no application to the facts of the present case.
18. Having   regard   to   the   above,   we   are   of   the   view   that   the   High
Court   was   justified   in   rejecting   the   claim   of   the   appellant   seeking
pendente lite  interest on the award amount.
19. This takes us to the next question as to whether Clause 17 of
the   Contract   is   ultra   vires   in   terms   of   Section   28   of   the   Indian
Contract  Act,  1872.    According   to  Section  28,  a  contract  is void  to
the extent it restricts absolutely a party from enforcing his rights by
usual   proceedings   in   ordinary   courts   or   if   it   limits   the   time   within
which   he   may   enforce   his   rights.   Exception   I   to   this   section
contains a rule that a contract by which two or more persons agree
that   any   dispute   which   has   arisen   or   which   may   arise   between
them in respect of any subject or class of subjects shall be referred
to   arbitration   is  not   illegal.  The   question,   therefore,   is   whether  the
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contracts   barring   payment   of   interest   extinguish   the   rights   of   the
parties.  Exception 1 to Section 28 reads as under :
“ Exception   1:   Saving   of   contract   to   refer   to
arbitration dispute that may arise. –   This section
shall   not   render   illegal   a   contract,   by   which   two   or
more   persons   agree   that   any   dispute   which   may
arise   between   them   in   respect   of   any   subject   or
class of subjects shall be referred to arbitration, and
that   only   the   amount   awarded   in   such
arbitration shall be recoverable in respect of the
dispute so referred .” 
20. Exception   I   to   Section   28   saves   contracts   where   the   right   to
move   the   Court   for   appropriate   relief   is   restricted   but   where   the
parties   have   agreed   to   resolve   their   dispute   through   arbitration.
Thus,   a   lawful   agreement   to   refer   the   matter   to   arbitration   can   be
made   a   condition   precedent   before   going   to   courts   and   it   does   not
violate   Section   28.     No   cause   of   action   then   accrues   until   the
Arbitrator   has   made   the   award   and   the   only   amount   awarded   in
such arbitration is recoverable in respect of the dispute so referred.
Section   31(7)(a)   of   the   1996   Act   which   allows   parties   to   waive   any
claim   to   interest   including   pendente   lite   and   the   power   of   the
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Arbitrator   to   grant   interest   is   subject   to   the   agreement   of   the
parties.
21. It   is   pertinent   to   note   that   interest   payments   are   governed   in
general by the Interest Act, 1978 in addition to the specific statutes
that   govern   an   impugned   matter.     Section   2   (a)   of   the   Interest   Act
defines a “Court” which includes both a Tribunal and an Arbitrator.
In   turn,   Section   3   allows   a   “Court”   to   grant   interest   at   prevailing
interest rates in various cases. The provisions of Section 3 (3) of the
Interest   Act,   1978   explicitly   allows   the   parties   to   waive   their   claim
to   an   interest   by   virtue   of   an   agreement.     Section   3(3)(a)(ii)   states
that the Interest Act will not apply to situations where the payment
of interest is “barred by virtue of an express agreement”.
22. Thus,   when   there   is   an   express   statutory   permission   for   the
parties   to   contract   out   of   receiving   interest   and   they   have   done   so
without any vitiation of free consent, it is not open for the Arbitrator
to grant   pendent lite  interest. We are of the considered opinion that
Clause 17 of the contract is not  ultra vires  in terms of Section 28 of
the Indian Contract Act, 1872.
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23. In   the   result,   the   appeal   fails   and   is   accordingly   dismissed.
Having regard to the facts and circumstances of the case, we direct
the parties to bear their own costs.
24. Pending application, if any, shall also stand disposed of.
       
…………………………………J.
    (S. ABDUL NAZEER)
    
                              …………………………………J.
    (KRISHNA MURARI)
New Delhi;
October 4, 2021.
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