Union of India v. Larsen & Tubro Limited

12. Aggrieved by the Commercial Court Order, the appellants filed an Arbitration Appeal under Section 37 of the Act before the High Court of Judicature at Allahabad.

13. Vide the impugned judgment dated 25.05.2023, the High Court dismissed the appeal filed by the appellants and upheld the Arbitral Award passed by the AT, holding that Clause 16(3) of the GCC related only to earnest money and security deposits and Clause 64(5) of the GCC merely barred pendente lite interest, which the AT had correctly interpreted.

14. Aggrieved by the impugned judgment, the appellants have filed the present appeal. Special Leave Petition (Civil) No. 14989 of 2023) Page 8 SUBMISSIONS ON BEHALF OF THE APPELLANTS

15. Ms. Aishwarya Bhati, learned Additional Solicitor General, appearing on behalf of the appellants, contended that the contractual scheme under Clauses 16(3) and 64(5) of the GCC constitutes an absolute prohibition on the award of interest on all contract amounts.

16. It is submitted that as per the agreement between the parties, Clause 16(3) of the GCC provides that no interest shall be payable upon the earnest money or the security deposit or “the amounts payable to the contractor under the contract”. Thus, it is submitted that the aforesaid clause specifically bars the payment of interest not only on the earnest money or security deposit but also on any amounts payable to the contractor under the contract. It is submitted that the claims adjudicated by the AT arise solely from delayed payments under the contract, such as, final bill, PVC amounts, and withheld dues, and therefore, falls squarely within the contractual prohibition.

17. It is also submitted that the respondent’s submission that the interest may be granted as “compensation” is a direct attempt to violate the contractual bar, and the said position has been rejected by this Court in the case of Sree Kamatchi Amman Special Leave Petition (Civil) No. 14989 of 2023) Page 9 Constructions v. Railway Administration, (2010) 8 SCC

767.

18. It is further submitted that since the parties are governed by the contract and the AT and the arbitration proceedings are the creatures of the contract, they cannot go beyond what has been contemplated in the contract between the parties. Reliance is placed on the decision rendered by a three-judge Bench of this Court in Union of India vs. Bright Power Projects (India) (P) Limited, (2015) 9 SCC 695, wherein this Court reiterated that Section 31(7)(a) of the Act subordinates the arbitrator’s power to the terms of the contract and held that once the parties have agreed to bar interest, the arbitrator has no jurisdiction to award it under any name.

19. Further reliance is placed on the decision of this Court in Union of India vs. Manraj Enterprises, (2022) 2 SCC 331, wherein this Court observed and held that in view of the specific contract between the parties and the bar on awarding the interest, the arbitrator lacks jurisdiction to award interest of any kind including pre-reference, pendente lite, or future interest.

20. It is submitted that the reliance of the respondent on Section 73 of the Indian Contract Act, 1872, is misplaced. Section 73 deals with compensation for loss or damage caused by breach Special Leave Petition (Civil) No. 14989 of 2023) Page 10 of contract and expressly provides that “unless the contract provides otherwise”. However, in the present case, the contract expressly excluded the interest. It is therefore urged that Section 73 cannot override the agreement between the parties.

21. It is further submitted that the reliance of the respondent on the decision of this Court in the case of RP Garg vs. Chief General Manager, Telecom Department & Ors., 2024 SCC OnLine SC 2928, in support of post-award interest, is misconceived, as this decision is applicable only where the contract does not prohibit interest on the category of sums awarded. It is therefore urged that in the present case, the contractual bar applies to all amounts payable under the contract. It is also pointed out that Section 31(7)(b) of the Act is expressly subject to Section 31(7)(a) of the Act. It is therefore urged that where the parties have contractually agreed to exclude interest altogether, post-award interest cannot be awarded.

22. Lastly, it is submitted that the award of interest under Claim Nos. 1, 3 and 6 of the Arbitral Award by the AT is contrary to the contract, contrary to the referred judicial pronouncements of this Court, and thus, the Arbitral Award as well the impugned judgment is liable to be set aside. Special Leave Petition (Civil) No. 14989 of 2023) Page 11 SUBMISSIONS ON BEHALF OF THE RESPONDENT

23. Ms. Meenakshi Arora, learned senior counsel, appearing on behalf of the respondent, at the outset, submitted that the present case arises out of concurrent findings given by the Commercial Court as well as the High Court while considering the proceedings filed by the appellants under Section 34 and Section 37 of the Act, respectively.

24. Learned counsel referred to Clause 16(3) as well as Clause 64(5) of the GCC. It is contended that Clause 16(3) of the GCC would be governed by the principle of ejusdem generis, meaning thereby that, when a general word or phrase follows a list of specific persons or things, the general word or phrase will be interpreted to include only persons or things of the same type as those listed. Reliance is placed on the decision rendered by this Court in the case of Raveechee and Company vs. Union of India, (2018) 7 SCC 664, wherein this Court was dealing with a Clause exactly similar to present Clause 16(3) and interpreted the clause to mean and include only the amounts voluntarily deposited with the other contracting party in order to be refunded or forfeited depending on the performance of the contract. It is therefore urged that it is not in dispute that the Special Leave Petition (Civil) No. 14989 of 2023) Page 12 present matter does not involve any sums towards the release of the earnest money or the security deposit and hence, Clause 16(3) of the GCC has no relevance to the facts of the present case.

25. With respect to Clause 64(5) of the GCC, it is submitted that this clause specifically restricts payment of interest on the money payable under an award till the date of award. In this regard, it is further submitted that the issue of arbitration has been dealt under the heading “Settlement of Disputes” and an award would mean adjudication or determination of a matter in dispute by a person competent to adjudicate or determine the dispute, thus, in order to be adjudicated, the existence of a dispute is a must, and hence, only such sums which were in dispute can be governed by this Clause and sums which are already admitted will not be hit by this Clause. It is therefore urged that in the present matter, Claim Nos. 3 and 6 are admitted sums, and thus, will not be hit by Clause 64(5) of the GCC, and therefore, the respondent will be entitled for full interest on these admitted sums under Claim Nos. 3 and 6 from the said sums becoming due and till the date of their payment to the respondent. Special Leave Petition (Civil) No. 14989 of 2023) Page 13

26. Further, with respect to the post-award interest, reliance is placed on the decision rendered by this Court in RP Garg (supra), wherein this Court has categorically held that so far as the entitlement of the post-award interest is concerned, Section 31(7)(b) of the Act provides that the sum directed to be paid by the arbitral tribunal shall carry interest.

27. Lastly, it is submitted that the judicial pronouncements relied upon by learned ASG for the appellants would not be applicable to the facts of the present case. It is therefore urged that the AT has specifically observed that “it would be travesty of justice if this interest as compensation is not paid because principal unpaid sum is an admitted amount by the Respondent but simply not paid without any reason”.

28. Therefore, it is submitted that the present appeal filed by the appellants is liable to be dismissed as it is devoid of merit.

ANALYSIS AND FINDINGS

29. We have heard learned counsel for the parties and perused the material placed on record. The following issues are raised for our consideration:-

30. For considering the aforesaid issues raised in the present matter, at the outset, we would like to refer to the relevant provisions of GCC as well as the Act of 1996.

31. Clause 16(3) of the GCC reads as under: “no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of Sub-Clause (1) of this clause will be payable with interest accrued thereon”.

32. Clause 64(5) of the GCC provides as under: “where the arbitral award is for the payment of money, no interest shall be payable on whole or any part of the money for any period till the date on which the award is made.” Special Leave Petition (Civil) No. 14989 of 2023) Page 15

33. Section 28(3) of the Act mandates that the arbitral tribunal shall decide disputes in accordance with the terms of the contract, which reads as under:-

34. Section 31(7)(a) and 31(7)(b) further clarifies that the power of the arbitral tribunal to award interest, which reads as under:-

35. On perusal of Section 28(3) and Section 31(7)(a) of the Act, it is clear that the statutory scheme itself subordinates the Special Leave Petition (Civil) No. 14989 of 2023) Page 16 discretion of the arbitrator to the contractual provisions governing interest.

36. In the present case, Clause 16(3) of the GCC, as referred hereinabove, expressly stipulates that no interest will be payable upon earnest money and security deposits or amounts payable to the contractor under the contract.

37. Learned counsel for the respondent has sought to restrict the scope of Clause 16(3) of the GCC by invoking the principle of ejusdem generis contending that the expression “amounts payable to the contractor under the contract” must be confined to deposits akin to earnest money and security deposits.

38. This Court in the decision rendered in the case of Manraj Enterprises (supra) has considered a similar submission canvassed on behalf of the party concerned and thereafter observed and held in para 12.[1] as under: “12.1. It is required to be noted that Clause 16(1) is with respect to earnest money/security deposit. However, Clause 16(2) is specifically with respect to interest payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract. The words used in Clause 16(2) is “or”. Therefore, the expression “amounts payable to the contractor under the contract” cannot be read in conjunction with “earnest money deposit” or “security deposit” by applying the principle of ejusdem generis. The expression “amounts payable to the contractor under the contract” has to be read independently and disjunctively to earnest money deposit and security deposit as the word used is “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the Special Leave Petition (Civil) No. 14989 of 2023) Page 17 principle of ejusdem generis is not applicable in the present case.”

39. Thus, it can be said that the rule of ejusdem generis is a tool of interpretation and is applicable only where the general words follow a specific class forming a genus. The expression “amounts payable to the contractor under the contract” used in Clause 16(3) is independent, distinct and of wide amplitude, and cannot be read down to defeat its plain meaning. Thus, the submission canvassed by the learned counsel for the respondent cannot be accepted.

40. At this stage, we would also like to refer to the decision rendered by a three-judge bench of this Court in Bright Power Projects (India) (P) Ltd. (supra), wherein in para 10, 11 and 13, it was held as under:

41. In the case of Sree Kamatchi Amman Constructions (supra), this Court has held in para 19 as under:

42. At this stage, we may also refer to the decision upon which reliance has been placed by learned counsel for the respondent, i.e., in the case of Raveechee and Company (supra), this Court observed, in para 16 and 17, as under:

43. Now, at this stage, it is pertinent to observe that this Court, thereafter, in the case of Manraj Enterprises (supra) had an occasion to consider similar issues involved in the present matter and had considered all the aforementioned decisions, including the decisions rendered in the cases of Bright Power Projects (India) (P) Ltd. (supra), Raveechee and Company (supra) and Ambica Construction vs. Union of India, (2017) 14 SCC 323 (a three-judge bench judgment of this Court). After considering the aforesaid decisions as well as several other decisions referred on the issue, this Court has observed in para 8 and 11 as under: “8. After considering various decisions on award of interest pendente lite and the future interest by the arbitrator and after discussing the decisions of this Court in Ambica Construction v. Union of India [Ambica Construction v. Union of India, (2017) 14 SCC 323: (2018) 1 SCC (Civ) 257] and Raveechee & Co. [Raveechee & Co. v. Union of India, (2018) 7 SCC 664: (2018) 3 SCC (Civ) 711] and other decisions on the point, this Court has observed in paras 9 to 18 as under: (Garg Builders [Garg Builders v. BHEL, (2022) 11 SCC 697: 2021 SCC OnLine SC 855], SCC paras 9-19) Special Leave Petition (Civil) No. 14989 of 2023) Page 20 “9. On the other hand, Mr Pallav Kumar, learned counsel for the 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 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 [Ambica Construction v. Union of India, (2017) 14 SCC 323: (2018) 1 SCC (Civ) 257] 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 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 recognises the right of the parties to contract out of the payment of interest arising out of any debt or damages and sanctifies contracts which 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 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 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.

11. Section 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 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.’ Special Leave Petition (Civil) No. 14989 of 2023) Page 21

12. It is clear from the above provision that if the contract prohibits pre-reference and pendente lite interest, 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.

13. In Sayeed Ahmed & Co. v. State of U.P. [Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26: (2009) 4 SCC (Civ) 629], 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.

14. In Sree Kamatchi Amman Constructions v. Railways [Sree Kamatchi Amman Constructions v. Railways, (2010) 8 SCC 767: (2010) 3 SCC (Civ) 575], 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.

15. BHEL v. Globe Hi-Fabs Ltd. [BHEL v. Globe Hi-Fabs Ltd., (2015) 5 SCC 718: (2015) 3 SCC (Civ) 287], is an identical case where this Court has held as under: (SCC p. 723, para 16) ‘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 be read as ejusdem generis along with the earlier words “earnest money” or “security deposit”.’

16. In Chittaranjan Maity v. Union of India [Chittaranjan Maity v. Union of India, (2017) 9 SCC 611: (2017) 4 SCC (Civ) 693], 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.

17. 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 [Ambica Construction v. Union of India, (2017) 14 SCC 323: (2018)