Court’s Decision
The Meghalaya High Court allowed the appeal filed by a contractor challenging the setting aside of pre-reference and pendente lite interest awarded by an arbitral tribunal. The Court held that Clause 54 of the General Conditions of Contract did not bar the tribunal from awarding such interest on certain claims. It also ruled that the respondent had waived the contractual bar by not raising it effectively before the tribunal. The impugned order of the Commercial Court was set aside, and the arbitral award was restored in full.
Facts
The dispute arose from a contract between a contractor and a public utility company. Arbitral proceedings culminated in an award in favour of the contractor, granting various monetary claims along with pre-reference and pendente lite interest. The respondent challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Commercial Court in East Khasi Hills, which upheld the award on merits but set aside the interest component, citing Clause 54 of the contract and Section 31(7) of the Act. Aggrieved, the contractor appealed the partial setting aside.
Issues
- Whether Clause 54 of the General Conditions of Contract bars the grant of pre-reference and pendente lite interest by the arbitral tribunal?
- Whether the respondent had waived the right to invoke Clause 54 by not arguing it before the arbitral tribunal?
- Whether Section 28(3) mandates the arbitral tribunal to consider a contractual clause not even relied upon?
Petitioner’s Arguments
The appellant contended that Clause 54 did not operate as an absolute bar on the grant of interest and that the clause, when interpreted literally, only barred interest on amounts lying with the Corporation due to disputes or delays in payment. The appellant also argued that the respondent never pressed the clause before the arbitrator, thus waiving any objection. Reliance was placed on Union of India v. Susaka Pvt. Ltd. (2018) 2 SCC 182, where a similar waiver was held to preclude reliance on an interest-bar clause at the appellate stage.
Respondent’s Arguments
The respondent argued that Clause 54 constituted an express agreement under Section 31(7) of the Arbitration Act that barred interest and had to be enforced. It was submitted that a mere failure to argue the clause before the tribunal did not amount to waiver and that waiver could not override a contractual prohibition. The respondent also contended that the tribunal had a statutory obligation under Section 28(3) to consider all contract terms, including those not explicitly raised by the parties.
Analysis of the Law
The Court began by examining Section 31(7)(a) of the Arbitration and Conciliation Act, which authorises arbitrators to award interest unless “otherwise agreed by the parties.” The Court stressed that for the bar to operate, it must be express and unambiguous. Turning to Clause 54, the Court applied a literal interpretation and concluded that the clause only barred interest on amounts lying with the Corporation due to delayed payment—not on awarded claims such as escalation charges or contractor’s profit.
The Court further analysed Section 28(3), holding that arbitrators are expected to consider only those contract terms that are brought to their attention by the parties. Forcing arbitrators to account for unargued clauses would, the Court said, lead to perverse outcomes and amount to misconduct.
Precedent Analysis
The Court heavily relied on the interpretation in State of U.P. v. Harish Chandra & Co. (1999) 1 SCC 63, where a similarly worded clause was held not to bar interest on all claims. The Court distinguished Sayeed Ahmed & Co. v. State of U.P. (2009) 12 SCC 26 and Jaiprakash Associates Ltd. v. Tehri Hydro Development Corp. (2019) 17 SCC 786, holding that those clauses were different and created an absolute bar, unlike Clause 54.
The decision also cited Union of India v. Bright Power Projects (India) Pvt. Ltd. (2015) 9 SCC 695 and Reliance Cellulose Products Ltd. v. ONGC (2018) 9 SCC 266 to reaffirm that only express and complete bars to interest will be enforced.
Court’s Reasoning
The High Court held that Clause 54, when interpreted literally, barred interest only on withheld payments but not on other awarded amounts like escalation charges or idle overhead. It emphasized that extending the bar to all heads would distort the meaning of “any other respect whatsoever.”
On waiver, the Court accepted the appellant’s argument that the respondent had failed to press Clause 54 at the arbitration stage and was now estopped from invoking it. It applied the principle laid down in Susaka, where such failure was held to amount to waiver.
Lastly, the Court rejected the respondent’s reliance on Section 28(3), clarifying that arbitrators cannot be expected to consider clauses not argued or relied upon by the parties.
Conclusion
The Meghalaya High Court allowed the appeal, set aside the Commercial Court’s decision to exclude interest, and upheld the arbitral tribunal’s full award. It reiterated that waiver of contractual rights can result from conduct, and that arbitrators are bound only by those contractual provisions actively relied upon.
Implications
This judgment reinforces the interpretative principle that exclusion of interest under arbitration law must be express and specific. It underscores that parties must actively assert all contractual rights before the tribunal, or risk waiver. The decision also safeguards arbitral integrity by limiting the tribunal’s duty under Section 28(3) to argued contractual terms, thereby upholding procedural fairness.
Referred Cases and Their Relevance
- State of U.P. v. Harish Chandra & Co. (1999) 1 SCC 63: Held that similar clauses did not bar interest on claims other than those withheld.
- Sayeed Ahmed & Co. v. State of U.P. (2009) 12 SCC 26: Distinguished on the ground that the clause in that case was absolute in barring interest.
- Jaiprakash Associates v. THDC (2019) 17 SCC 786: Reaffirmed Sayeed Ahmed; found not applicable to clause 54.
- Union of India v. Susaka Pvt. Ltd. (2018) 2 SCC 182: Applied to support waiver due to non-assertion before the arbitrator.
- Reliance Cellulose Products Ltd. v. ONGC (2018) 9 SCC 266: Emphasised that only absolute bars on interest can override arbitrator’s discretion.
FAQs
Q1. Does a general clause barring interest in a contract prevent an arbitral tribunal from awarding interest?
No. The court held that unless the clause expressly bars interest on all claims, the tribunal can still award interest under Section 31(7) of the Arbitration Act.
Q2. Can a party waive its contractual rights by not raising them during arbitration?
Yes. If a party fails to assert a clause before the arbitrator, especially a bar on interest, they may be deemed to have waived that right.Q3. Is an arbitrator bound to consider contract terms not raised by the parties?
No. The arbitrator’s duty under Section 28(3) is confined to contract terms actually brought before them. They are not required to independently examine unraised clauses.
