GARG BUILDERSversusBHARAT HEAVY ELECTRICALS LIMITED

82                      [2021]REPORTS
              SUPREME COURT    10 S.C.R. 82               [2021] 10 S.C.R.


A                             GARG BUILDERS
                                        v.
                BHARAT HEAVY ELECTRICALS LIMITED
                        (Civil Appeal No. 6216 of 2021)
B                             OCTOBER 04, 2021
          [S. ABDUL NAZEER AND KRISHNA MURARI, JJ.]
            Arbitration and Conciliation Act, 1996: s.31(7)(a) – Pendente
     lite interest on the award amount – Interest barring clause in the
     contract – Claim for pre-reference pendente lite and future interest
C
     – Held: It is clear from s.31(7)(a) that if the contract prohibits pre-
     reference and pendente lite interest, the arbitrator cannot award
     interest for the said period – In the instant case, clause barring
     interest is very clear and categorical – It uses the expression “any
     moneys due to the contractor” by the employer – Therefore, it is not
D    open for the arbitrator to grant pendente lite interest – Interest –
     Contract Act, 1872 – s.28.
            Contract Act, 1872: s.28 – Interest barring clause – Whether
     contract barring payment of interest extinguish the rights of the
     parties and, therefore, ultravires in terms of s.28 of the Contract
E    Act, 1872 – Held: The provisions of s.3(3) of the Interest Act, 1978
     explicitly allows the parties to waive their claim to interest by virtue
     of an agreement – s.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” – Thus, when there is an express statutory
     permission for the parties to contract out of receiving interest and
F
     they have done so without any vitiation of free consent, it is not
     open for the arbitrator to grant pendente lite interest – Thus, interest
     barring clause of the contract is not ultra vires in terms of s.28 of
     the Contract Act, 1872 – Interest Act, 1978.
           Dismissing the appeal, the Court
G
           HELD: 1. The provisions of the 1996 Act give paramount
     importance to the contract entered into between the parties and
     categorically restricts the power of an arbitrator to award pre-
     reference and pendente lite interest when the parties themselves
     have agreed to the contrary. It is clear from Section 31(7)(a) that
H
                                       82
   GARG BUILDERS v. BHARAT HEAVY ELECTRICALS LIMITED                    83


if the contract prohibits pre-reference and pendente lite interest,     A
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.
[Paras 10 and 11][87-E-F, H; 88-A]
                                                                        B
       Sayeed Ahmed and Company v. State of Uttar Pradesh
       & Ors. (2009) 12 SCC 26 : [2009] 10 SCR 841; Sree
       Kamatchi Amman Constructions v. Divisional Railway
       Manager (Works), Palghat & Ors. (2010) 8 SCC 767 :
       [2010] 10 SCR 487 ; Bharat Heavy Electricals Limited
       v. Globe Hi-Fabs Limited (2015) 5 SCC 718 ; Sri                  C
       Chittaranjan Maity v. Union of India (2017) 9 SCC
       611 : [2017] 11 SCR 722 – relied on.
       Ambica Construction v. Union of India (2017) 14 SCC
       323; Raveechee and Company v. Union of India (2018)
       7 SCC 664 : [2018] 5 SCR 138 – held inapplicable.                D
       2.1 Whether Clause 17 of the Contract (Interest barring
clause) 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    E
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. Exception I to Section 28 saves contracts
where the right to move the Court for appropriate relief is             F
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
                                                                        G
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 Arbitrator to grant interest is
subject to the agreement of the parties. [Paras 19, 20][89-F-G;
90-B-C]                                                                 H
84             SUPREME COURT REPORTS                      [2021] 10 S.C.R.


A           2.2 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
B
     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”. Thus,
     when there is an express statutory permission for the parties to
C    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. [Paras 21 and 22][90-D-F]
                             Case Law Reference
     (2017) 14 SCC 323               held inapplicable     para 8
D
     [2018] 5 SCR 138                held inapplicable     para 8
     [2009] 10 SCR 841               relied on             para 12
     [2010] 10 SCR 487               relied on             para 13
     (2015) 5 SCC 718                relied on             para 14
E
     [2017] 11 SCR 722               relied on             para 15
             CIVIL APPELLATE JURISDICTION: Civil Appeal No.6216 of
     2021.
           From the Judgment and Order dated 19.09.2017 of the High Court
F    of Delhi at New Delhi in FAO (OS) (COMM) No.120 of 2017.
           Sanjay Bansal, Vineet Bhagat, Ms. Manju Bhagat, Advs. for the
     Appellant.
          Pallav Kumar, Ms. Dibya Nishant, Abhishek, Advs. for the
G    Respondent.
             The Judgment of the Court was delivered by
             S. ABDUL NAZEER, J.
             1. Leave granted.
H
   GARG BUILDERS v. BHARAT HEAVY ELECTRICALS LIMITED                         85
                  [S. ABDUL NAZEER, J.]

      2. This appeal is directed against the Order of the Division Bench     A
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.
       3. The respondent floated a tender for construction of boundary       B
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
                                                                             C
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.”
                                                                             D
       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
                                                                             E
the sole Arbitrator to adjudicate the disputes. The appellant in the claim
petition, apart from claiming various amounts under different heads, inter
alia claimed pre-reference, 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         F
of interest for the pre-suit, 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       G
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
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86               SUPREME COURT REPORTS                          [2021] 10 S.C.R.


A    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 pre-reference interest and not pendente lite
              interest. As stated earlier, in terms of Section 31(7)(a) of the Act,
B             the power of the arbitral tribunal to award pre award interest is
              contingent to the parties not agreeing to the contrary. Pre-award
              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.
C
                    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
D    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
E             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
F    bar the payment of interest for pendente lite period. This argument was
     advanced in view of judgment of this Court in Ambica Construction v.
     Union of India1, 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
G
     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.

     1
         (2017) 14 SCC 323
     2
H        (2018) 7 SCC 664
   GARG BUILDERS v. BHARAT HEAVY ELECTRICALS LIMITED                            87
                  [S. ABDUL NAZEER, J.]

        9. On the other hand, Mr. Pallav Kumar, learned counsel for the         A
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 pre-
reference and pendente lite interest when the parties themselves have
agreed to the contrary. He argued that if the contract itself contains a
                                                                                B
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 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      C
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
                                                                                D
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         E
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 parties and categorically restricts
the power of an arbitrator to award pre-reference and pendente lite
interest when the parties themselves have agreed to the contrary. Section       F
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        G
        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
pre-reference and pendente lite interest, the arbitrator cannot award           H
88             SUPREME COURT REPORTS                           [2021] 10 S.C.R.


A    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
B    & 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 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.
C          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.

D         14. Bharat Heavy Electricals Limited v. Globe Hi-Fabs
     Limited5 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
E           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 pre-
     award period, the arbitrator cannot award interest for the said period.
F           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
G
     instant case falls under the 1996 Act. This has been clarified in Sri
     Chittaranjan Maity (supra) as under :
     3
       (2009) 12 SCC 26
     4
       (2010) 8 SCC 767
     5
       (2015) 5 SCC 718
H    6
       (2017) 9 SCC 611
   GARG BUILDERS v. BHARAT HEAVY ELECTRICALS LIMITED                           89
                  [S. ABDUL NAZEER, J.]

      “16. Relying on a decision of this Court in Ambica Construction          A
      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
                                                                               B
      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         C
      from awarding interest for the pre-reference, pendente lite or post-
      award period, whereas the 1996 Act contains a specific provision
      which says that if the agreement prohibits award of interest for
      the pre-award period, the arbitrator cannot award interest for the
      said period. Therefore, the decision in Ambica Construction
                                                                               D
      (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         E
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        F
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   G
whether the 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            H
90              SUPREME COURT REPORTS                         [2021] 10 S.C.R.


A           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
B    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
C    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 Arbitrator to grant interest is subject to the agreement of
     the parties.
            21. It is pertinent to note that interest payments are governed in
D    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
E    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
F    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.
            23. In the result, the appeal fails and is accordingly dismissed.
G    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.


     Devika Gujral                                                Appeal dismissed.
H