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CONCEPT OF PENDENTE LITE INTEREST IN ARBITRATION

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INTRODUCTION

Interest means money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. In the court of law, pendente lite is a Latin term which means “awaiting the litigation” or “pending the litigation”. This term is applicable on court orders which are in effect while the matter is pending in court. In disputes regarding money matters, where parties seek to resolve such dispute through the ways of arbitration, the concepts of interest, pendente lite interest and future interest comes into the picture. While interest retains its basic meaning, pendente lite interest means the interest that accrues to the base amount while the pendency of the suit during the arbitration proceeding. Further, a future interest refers to an interest that may be conditioned upon the occurrence or non-occurrence of an event or it may be unconditional as well.

The concept of interest is dealt with in Section 31(7) of the Arbitration and Conciliation Act, 1996.[1] The section says that in cases wherein the matter concerned is of payment of money, the arbitral tribunal may include to the award, an interest rate, to be applied for the whole or any part of the period between, the arising of the cause of action to the passing of the award, unless there is an agreement between the parties contrary to that.[2]

SUPREME COURT’S JUDGMENTS ON PENDENTE LITE INTEREST

Having regards to various decisions regarding pendente lite interest,[3] it can be stated that the position of the Supreme Court on the same is that an arbitrator would be within his jurisdiction to award pre-reference or pendente lite interest, unless there is an agreement to the contrary.  It is clear from the clause of the section “unless otherwise agreed by the parties”, that the contract between the parties has been given the deciding factor and is to be looked at carefully to discern the powers of the arbitrator. And if there is any bar contained in the arbitration clause of the contract on awarding of interest, it operates accordingly. Similarly, the Supreme Court has held that if the contract expressly bars the award of pendente lite interest, the same cannot be awarded by the arbitrator.[4] In the case of Chittaranjan Maity v. Union of India,[5]the Supreme Court reaffirmed the position of section 31(7)(a) of the Arbitration Act, 1996, and stated that when parties have agreed that pendente lite interest shall not be payable, the Arbitrator cannot award interest on the period between the date on which the cause of action and the date of passing the award. In the similar case, the court compared the position of the law that prevailed under the Arbitration Act, 1940 with the provision under Section 31(7)(a) of the 1996 Act. The Supreme Court noted that a specific provision has been created under the 1996 Act whereby if the agreement prohibits an award of interest for the pre-award period, (i.e. the pre-reference and pendente lite period) the arbitrator cannot award interest for the said period. While the Arbitration Act, 1940 did not prohibit the arbitrator from awarding interest for the pre-reference, pendente lite or post award period, the 1996 Act provides for so. Although, this view came in contrast to another recent judgment in M/s Raveechee & Co. v. Union of India, [6] where the Supreme Court held that the general bar to an award of interest on the amounts payable under the contract would not be sufficient to deny the power of the arbitrator to award pendente lite interest. In the same matter it was further held that as a matter of general rule, the Arbitrator does have the power to award interest pendente lite unless there is a clear and specific bar which prohibits grant of such interest. Thus, it would be necessary for a larger bench of the Supreme Court to address and deal with this ambiguity on the said clause and more specifically, the contrary interpretation given by the benches in both the above cases.

On 7th February 2019, in the case of Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation India Ltd,[7] the Supreme Court reaffirmed the contractual bar on the arbitrator to award pendente lite interest. The arbitral tribunal while passing the award on the claims made in the said matter also granted interest @ 10% per annum from the date when arbitration was invoked. Future interest @18% per annum till the date of payment was also awarded. This was challenged in the High Court. Both the single judge as well as the division bench quashed the award of interest based on the clauses in the agreement which provided that no interest would be payable to the contractor on any money due to him. Further the Supreme Court observed:

“…under the general law, the arbitrator is empowered to award interest for the pre-reference, pendente lite or post award period… This proposition is predicated on the principle that an arbitrator is the creature of an agreement and he is supposed to act and make his award in accordance with the general law of the land and the agreement.” 

Also, it was stated that under Section 31(7) of the Arbitration and Conciliation Act, 1996 the difference between pre-reference and pendente lite interest have been done away with and both have been merged together and has been recognized as one. It was held by the Hon’ble Court that under the Act, an arbitrator did not have the liberty to award pendente lite interest in case of any contractual bar denying the arbitrator the power to do so. Thus, the court refused to give sweeping powers to arbitrators in awarding interest and interpreted the section in a way that would respect the agreement between the arbitrating parties, thus making the contract between the parties the most powerful guiding document. According to this interpretation of the Supreme Court, it is clear that pendente lite interest can only be paid if the contract between the parties does not expressly prohibits so.

In the judgement of Vedanta Limited v. Shenzen Shandong Nuclear Power Construction Company Limited,[8] the Supreme Court laid down certain guidelines that are required to be followed by the arbitrators while awarding interest in an arbitral award pursuant to an international commercial arbitration which has its seat in India. The court in the similar matter also said that the particular provision Section 31(7) of the Act leaves the question of quantum of interest at the discretion of the arbitrator. However, it also says that such discretion must be exercised reasonably and proportionately, considering factors like loss of use of the principle sum, time period over which interest should be awarded, internationally prevailing rates of interest, rate of inflation and whether the rate of interest is commercially prudent or not.

CONCLUSION

Though the position of the grant of interest pendente lite has largely been settled by the judgments passed by the Hon’ble Supreme Court, question remains on how a particular clause in the contract will be interpreted by an Arbitrator or the Courts. Also, no deliberation has been made on the scenario where there is a conflict of clauses in the contract, wherein, one clause provides for the claiming of interest on delayed payments after the expiry of certain period from the date of raising of invoices and the other provision prohibits award of pendente lite interest.

 [1] Arbitration and Conciliation Act, 1996, Section 31(7).

 [2] Sayeed Ahmed and Co. v. State of Uttar Pradesh & Ors., (2009), 12 SCC 26.

 [3] Id., Secretary,Irrigation Department, Government of Orissa & Ors v. G.C. Roy (1992) 1 SCC 508, Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works),Palghat & Ors. (2010) 8 SCC 767, Sri Chittaranjan Maity v. Union of India (2015) 9 SCC 695, Reliance Cellulose Products Limited v. Oil and Natural Gas Corporation Limited (2018) 9 SCC 266.

[4]  Union of India v. Ambica Constructions, (2017) 14 SCC 323.

[5]  (2017) 9 SCC 611.

[6]  Civil Appeal Nos. 5964-5965 of 2018.

[7]  Civil Appeal No. 1539 of 2019.

[8]  Civil Appeal no. 10394 of 2018.

Aparajita Jha

Aparajita Jha

Author

Aparajita is a compendious and eloquent writer. She is a student of a prestigious National Law University and Judicial Academy, Assam. She loves reading books and writing on various legal issues. For any clarifications, feedback, and advice, you can reach her at [email protected]

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