Featured image for Supreme Court Judgment dated 03-07-2018 in case of petitioner name M/s Raveechee and Co. vs Union of India
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Arbitration and Interest Awards: Supreme Court Clarifies Arbitrator’s Power

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The case of M/s Raveechee and Co. vs. Union of India is a crucial ruling on the powers of an arbitrator regarding the award of interest pendente lite. The Supreme Court examined whether an arbitrator is restricted from awarding such interest due to specific contract clauses. The case primarily dealt with a contract dispute between a contractor and the Indian Railways regarding quarrying and loading stone ballast, leading to arbitration.

Background of the Case

The appellant, M/s Raveechee and Co., entered into a contract with the Union of India (Western Railway) on June 2, 1981, for quarrying, stacking, and loading stone ballast from the Udvada quarry at an estimated cost of Rs. 55,81,000. Disputes arose during the execution of the contract, leading to arbitration. The Arbitration Tribunal awarded interest pendente lite at 12% per annum on the damages awarded to the appellant. However, the Gujarat High Court partially set aside this award, specifically quashing the interest component. The appellant challenged this decision before the Supreme Court.

Legal Issues Raised

1. Arbitrator’s Power to Award Interest Pendente Lite

The key issue was whether the arbitrator had the authority to grant interest for the period of arbitration when the contract contained a clause (Clause 16(3)) stating that no interest would be payable on earnest money, security deposits, or amounts due to the contractor.

2. Interpretation of Contractual Clauses on Interest

The case also required an interpretation of Clause 16(3) of the General Conditions of Contract (GCC), which barred interest on security deposits and other contractually payable amounts.

3. High Court’s Reversal of the Arbitration Award

The Supreme Court had to determine whether the High Court was correct in setting aside the arbitrator’s interest award, despite no explicit prohibition on pendente lite interest in the contract.

Arguments by the Parties

Arguments by the Appellant (M/s Raveechee and Co.)

  • The arbitrator’s power to award interest pendente lite is inherent unless explicitly barred by the contract.
  • Clause 16(3) only restricts interest on earnest money and security deposits, but not on damages awarded through arbitration.
  • Past Supreme Court rulings confirm that arbitrators have discretion to award interest where there is no express prohibition.

Arguments by the Respondent (Union of India)

  • The contract’s Clause 16(3) barred interest on all amounts payable to the contractor, including those awarded as damages.
  • The Gujarat High Court correctly ruled that the arbitrator exceeded his powers in granting interest pendente lite.
  • The arbitrator was bound by contract terms, and the absence of an explicit clause allowing interest negated the power to grant it.

Supreme Court’s Observations

1. Arbitrator’s Authority to Award Interest

The Supreme Court ruled that arbitrators have the inherent power to grant interest unless expressly barred by contract. The judgment stated:

“An agreement that bars interest is essentially an agreement that the parties will not claim interest on specified amounts. It does not bar an arbitrator, who is never a party to the agreement, from awarding it.”

2. Clause 16(3) Does Not Restrict Pendente Lite Interest

The Court held that Clause 16(3) restricted interest on security deposits and specific contract amounts but did not bar interest on damages determined through arbitration. It observed:

“The clause in terms states that no interest will be payable on earnest money, security deposits, or on any amounts payable under the contract. However, it does not bar interest pendente lite awarded on damages determined in arbitration.”

3. High Court’s Erroneous Interpretation

The Court criticized the High Court for wrongly interpreting the contract clause as an absolute prohibition against interest awards:

“Interest pendente lite arises because the claimant has been found entitled to damages and has been kept out from those dues due to the pendency of the arbitration.”

4. Reliance on Previous Supreme Court Rulings

The Court referred to several landmark judgments, including:

  • Irrigation Deptt., State of Orissa v. G.C. Roy (1992): Held that arbitrators can award interest pendente lite unless expressly barred.
  • Board of Trustees for the Port of Calcutta v. Engineers-De-Space Age (1996): Stated that ouster clauses in contracts should be strictly construed.
  • Union of India v. Ambica Construction (2016): Confirmed that an arbitrator can grant interest unless there is a specific prohibition.

Final Judgment

The Supreme Court allowed the appeal and restored the interest component of the arbitral award. It ruled:

“We set aside the judgment of the High Court and restore the award passed by the Arbitral Tribunal in respect of Claim No. 12.”

Implications of the Judgment

This judgment has significant implications for arbitration law in India:

  • Strengthens Arbitrators’ Discretion: Confirms that arbitrators can grant interest pendente lite unless specifically restricted.
  • Clarifies Contractual Clauses: Reinforces that interest prohibition clauses must be explicit to prevent arbitrators from granting pendente lite interest.
  • Limits High Court Interference: Establishes that courts should not disturb well-reasoned arbitration awards unless clear legal violations exist.
  • Encourages Fair Compensation: Ensures claimants are not unfairly deprived of interest due to lengthy arbitration proceedings.

Conclusion

The case of M/s Raveechee and Co. vs. Union of India reaffirms the Supreme Court’s commitment to upholding arbitrators’ authority in awarding interest pendente lite. By clarifying the interpretation of contract clauses and arbitration law, this judgment strengthens confidence in India’s arbitration framework and ensures fair treatment of claimants.


Petitioner Name: M/s Raveechee and Co..
Respondent Name: Union of India.
Judgment By: Justice S.A. Bobde, Justice L. Nageswara Rao.
Place Of Incident: Udvada, Gujarat.
Judgment Date: 03-07-2018.

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