Safiya Malik

The High Court of Meghalaya Division Bench of Chief Justice I.P. Mukerji and Justice B. Bhattacharjee allowed an appeal challenging the partial setting aside of an arbitral award, restoring the grant of pre-reference and pendente lite interest originally awarded by the arbitral tribunal. The court held that the contractual clause invoked to bar interest claims did not prohibit interest on all components of the award. The Division Bench further stated that the respondent, having failed to urge the bar during arbitral proceedings, had waived its right to invoke it subsequently.

The court directed that the order passed by the learned Commercial Court, East Khasi Hills, Shillong dated 15 February 2024, insofar as it set aside the interest component of the award, be set aside. The appeal was allowed without any order as to costs. The Bench clarified that only specific heads of payment tied directly to deferred contractual payments could be excluded from interest under Clause 54. The arbitral tribunal, therefore, acted within its jurisdiction in granting interest on claims beyond such exclusions.

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The appellant and the respondent entered into a contractual agreement for construction-related services. Disputes arose, which were eventually referred to arbitration. The arbitral tribunal issued an award in favor of the appellant, granting monetary reliefs on several claims. Importantly, the tribunal awarded pre-reference and pendente lite interest on the claims allowed.

The respondent challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Commercial Court, East Khasi Hills, Shillong. The Commercial Court, while upholding the substantive claims awarded to the appellant, set aside the tribunal's grant of pre-reference and pendente lite interest. The basis for this partial rejection was Clause 54 of the General Conditions of Contract (GCC) between the parties, which purportedly prohibited interest on any amount held due to disputes or delays.

Clause 54 stated: "No claims for interest or damages will be entertained by the Corporation with respect to any money or balance which may be lying with the Corporation owing to any dispute, difference or misunderstanding between the Engineer-in-Charge on the one hand and contractor on the other or with respect to any delay on the part of the Engineer-in-Charge making periodical or final payments or in any other respect whatsoever."

The appellant filed an appeal before the High Court challenging the Commercial Court's partial setting aside of the arbitral award, confining the appeal strictly to the question of pre-reference and pendente lite interest.

The court examined Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which empowers arbitral tribunals to grant interest unless expressly agreed otherwise by the parties:

"Unless otherwise agreed by the parties, where and in so far 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...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."

The court then considered judicial precedents interpreting clauses similar to Clause 54. Key among them was the Supreme Court's judgement in State of U.P. v. Harish Chandra & Co. where a similar clause was found not to bar interest on damages or payments due for work completed.

In Harish Chandra, the clause was interpreted narrowly, excluding from its scope any claim not relating to money lying with the government due to disputes or delayed payments:

"The claim for damages or claim for payment for the work done and which was not paid for would not obviously cover any money which may be said to by lying with the Government..."

In contrast, the respondent cited Sayeed Ahmed & Co. v. State of U.P. wherein the Supreme Court distinguished Harish Chandra and held that a differently worded clause imposed an absolute bar on interest. However, the High Court observed that the clause in the present case was more aligned with Harish Chandra than Sayeed Ahmed.

The court also considered the Supreme Court's position in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corp., which re-affirmed that the wording of the clause was determinative of whether an interest bar could be upheld.

Notably, the High Court observed that the respondent had not pressed the issue of interest bar under Clause 54 during the arbitration. The point was only faintly raised in initial pleadings and was not argued before the arbitrator.

In support of the appellant's claim of waiver, the court referred to Union of India v. Susaka Pvt. Ltd., where the Supreme Court held that failure to raise an interest bar before the tribunal constituted waiver.

The High Court, therefore, proceeded to assess the scope of Clause 54. It found that:

"Clause 54...states that no claim for interest would lie on any money or balance lying with the government because of (i) a dispute... (ii) delay... and (iii) 'any other respect whatsoever.'"

The court held that this clause did not cover all types of claims. Specifically, it stated that interest on amounts such as escalation in minimum wages, contractor's profit, and idle overhead charges could not be denied.

The High Court recorded: "Clause 54...is identical to the clause in Harish Chandra. If one ascribes an ordinary, literal and grammatical meaning to the clause, it states that no claim for interest would lie on any money or balance lying with the government because of (i) a dispute... (ii) delay... and (iii) any other respect whatsoever."

"Any other respect" in the clause could only refer to any other circumstance attending delayed payment... any meaning given to it as referring to other claims... would be totally absurd, and a wholly erroneous understanding..."

Regarding waiver, the court observed: "Here also similar was the situation. Therefore, the judgment in the Susaka case squarely applies and the respondent is deemed to have waived its right under clause 54 and also its defence based on this clause."

On Section 28(3) of the Act, the court recorded: "The arbitral tribunal would only be expected to consider those terms which are placed before it and not those which are not even relied upon by any party..."

"To fix the arbitrator with the duty of looking into... conditions which are not even canvassed before him would result in an award which would be perverse... it would point to misconduct on the part of the arbitrator..."

The court also distinguished the claim heads: "It did not bar the arbitral tribunal from awarding interest on payment towards escalation in minimum wages for ₹96,99,848/-, payment of 10% contractor's profit amounting to ₹55,20,000.00/- and claim on account of idle overhead charges... amounting to ₹32,17,741.00/-"

"At best interest on the head of the award against serial no.3(a)... 'payment towards unjust deductions towards reinforcement steel and refund of amount deducted' could be denied under the above clause."

The High Court issued the following directions:

"This appeal succeeds. The impugned order of the learned court below is set aside. The appeal is allowed. No order as to costs."

The court declared that the Commercial Court erred in interpreting Clause 54 as a bar to all forms of interest. It recorded:

"Clause 54 could only restrain the arbitral tribunal from granting interest on awards on specific claims and did not prohibit it from granting interest on other claims."

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The High Court upheld the authority of the arbitral tribunal to grant pre-reference and pendente lite interest on the majority of claims. It found no jurisdictional error in the arbitrator's approach: "The arbitral tribunal rightly did not consider clause 54 of the contract which was not even relied upon before it."

On waiver, the court affirmed: "The respondent is deemed to have waived its right under clause 54 and also its defence based on this clause. It could not take up this point in the appeal before us."

Therefore, the court restored the entire arbitral award, including the interest component originally granted by the tribunal.

Advocates Representing the Parties:

For the Appellant: Mr. P. Jain, Advocate with Ms. S. Nair, Advocate

For the Respondents: Mr. K. Agarwal, Senior Advocate with Mr. D. Senapati, Advocate and Dr. P. Agarwal, Advocate

Case Title: Astra Construction Pvt. Ltd. vs. North Eastern Electric Power Corporation Ltd.

Neutral Citation: 2025: MLHC:522-DB

Case Number: Arb.A.No.1/2024

Bench: Chief Justice I.P. Mukerji, Justice B. Bhattacharjee

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