The recent ruling by the Supreme Court of India in Pam Developments Private Limited v. The State of West Bengal & Anr.[1] has reignited discussions on awarding pre-reference interest in arbitration proceedings. The case had arisen from a dispute over delays in a road construction project. Marking a significant development in the evolution of the Indian arbitration law, particularly on granting interest, the Court upheld the arbitrator’s authority to award interest on the awarded sum from the date of the cause of action until the date of the award, even when the contract was silent on the matter. While analysing the Pam Developments case, this blog delves into the nuances of pre-reference interest in light of the existing legal framework and relevant jurisprudence.
Case Background
The State of West Bengal awarded Pam Developments Private Limited a contract for a road-widening and strengthening project. Subsequent delays in the project led Pam Developments to raise claims for various losses, including interest on delayed payments. The dispute was referred to arbitration, and the arbitrator awarded Pam Developments a sum of INR 1,37,25,252 along with interest.
The State challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”), and the Ld. District Judge partly allowed the challenge, setting aside certain claims. Both parties appealed to the Calcutta High Court under Section 37 of the A&C Act, and the High Court further modified the award, setting aside the pre-reference interest component as awarded by the Arbitral Tribunal.
Pam Developments then approached the Supreme Court, challenging the High Court decision. The Supreme Court upheld the arbitrator’s power to award pre-reference interest, emphasising that such power stemmed from Section 31(7)(a) of the A&C Act and could only be restricted by a clear and unambiguous clause in the agreement between the parties explicitly prohibiting the grant of pre-reference interest. The Apex Court also clarified the distinction between the power of the Arbitral Tribunal to award interest and the right of a party to claim such interest, stating that the right to claim should be grounded in the agreement/contract, substantive law, or applicable trade usage. The Supreme Court restored the arbitrator’s award that had granted the pre-reference interest.
The Genesis of Pre-Reference Interest
Pre-reference interest is that which accrues on the awarded sum from the date the cause of action arises until the date the dispute is referred to the arbitral tribunal. The rationale behind awarding such interest is rooted in the principle of just compensation. A party deprived of its rightful dues loses not only the principal amount but also the potential interest on that amount. Pre-reference interest aims to compensate for this loss of opportunity and place the aggrieved party in the financial position it would have been in had the breach not occurred.
The legal framework governing pre-reference interest has transformed with the enactment of the A&C Act. Prior to the Act, the statute had not explicitly provided arbitrators the power to grant pre-reference interest. However, the Apex Court, through a series of landmark judgments, recognised this power based on the principles of justice and equity. It held that an arbitrator, as an alternative forum for dispute resolution, must have the power to award interest to ensure complete justice between the parties.
In a pivotal case in this regard, Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy,[2] the Constitution Bench of the Supreme Court exhaustively dealt with the power of the arbitral tribunal to grant pre-reference and pendente lite interest. It held that the general law has empowered the arbitrator to award interest for the pre-reference, pendente lite, or post-award period, drawing upon the principle that a person deprived of the use of money is entitled to compensation.
The A&C Act codified this judicial understanding by incorporating Section 31(7)(a), which explicitly empowers the Arbitral Tribunal to award interest for the pre-reference period unless the parties have agreed otherwise. This provision marked a significant shift towards recognising the arbitrator’s authority to grant interest, even in the absence of an express contractual stipulation.
The Pam Developments Case: A Watershed Moment
The Supreme Court’s decision in the Pam Developments case serves as a watershed moment in the jurisprudence on pre-reference interest, considering it reaffirmed the arbitrator’s power to award such interest, even when the contract was silent on the matter. The Court held that the power to grant interest stemmed from Section 31(7)(a) of the Act and could only be curtailed if a clear and unambiguous clause in the agreement between the parties explicitly prohibited the granting such interest. The Court relied on the principles established in Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors.[3] to emphasise the importance of party autonomy over the arbitrator’s discretion in awarding interest. It also observed that the A&C Act, unlike the Arbitration Act, 1940 (“1940 Act”), has simplified the interest period classification with the introduction of Section 31(7)(a) to recognise only two periods for the purposes of the arbitral award: the pre-award (pre-reference and pendente lite) and post-award periods.
The judgment in Pam Developments is particularly significant because it clarifies the interplay between the arbitrator’s power and the parties’ contractual freedom. It emphasises that the A&C Act empowers the arbitrator to award interest, but this power is not absolute and is subject to the parties’ right to exclude such power contractually. However, for such exclusion to be effective, it must be clear, specific, and unambiguous. The Court’s approach aligns with the principles it had laid down in Reliance Cellulose Products Ltd. v. Oil and Natural Gas Corporation Limited,[4] stressing the need for a strict construction of contractual clauses limiting the arbitrator’s power to award interest. In Reliance Cellulose (supra), the General Conditions of Contract allowed the parties to make delayed payments without any liability of interest. The Apex Court held that nothing in the clause referred to the arbitrator’s power to grant interest. It also held that clauses that do not refer to claims before the arbitrators or to disputes between parties and clearly bar payment of interest cannot obstruct an arbitrator from awarding pre-reference or pendente lite interest, unless there is a clear and express bar to the payment of interest an arbitrator can award.
In Jaiprakash Associates Limited v. Tehri Hydro Development Corporation India Limited,[5] where the contract contained clauses seemingly prohibiting the grant of interest, the Apex Court upheld the arbitrator’s power to award interest, emphasising that the power was not restricted if the agreement was silent or lacked a specific term prohibiting interest. This case further strengthened the position that unless the agreement between the parties explicitly and specifically barred or limited the granting of interest in case of a dispute, the arbitrator had inherent power to award interest.
Power vs. Right: A Critical Distinction
The Pam Developments case also brought to the fore a critical distinction between the power of the Arbitral Tribunal and the right of a party to claim interest. The Court clarified that Section 31(7)(a) confers the power on the tribunal to grant interest even as it allows the parties to restrict such power through the agreement. Parties can choose to limit their right to claim interest and the power of arbitrator to grant the same by explicitly including such bar in the arbitration agreement.
This distinction is crucial in understanding the scope and limitations of Section 31(7)(a). The provision does not operate in isolation and should be interpreted in conjunction with the contractual terms, applicable laws, and prevailing trade practices. The arbitrator’s power to award interest is not unfettered and contingent upon the existence of a right to claim such interest.
The 1940 Act vs. the A&C Act: A Paradigm Shift
The evolution of the law on pre-reference interest is also evident in the distinction between the 1940 Act and the A&C Act. Under the 1940 Act, no specific provision empowers the arbitrator to grant interest. The power was recognised through judicial pronouncements, and express contractual bars limited the arbitrator’s discretion. In a landmark case in this context, Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age,[6] the Court held that even though the contract prohibited the commissioner from paying interest, it did not stifle the arbitrator’s discretion to award pendente lite interest.
Under the 1940 Act, the Apex Court has at various times reiterated pre-reference interest as a substantive and not a procedural right. The Supreme Court in Hindustan Construction Co. Ltd. v. State of J&K[7]held that award of interest for the period prior to an arbitrator entering on the reference was a matter of substantive law. This was primarily because the 1940 Act was silent on the power to grant pre-reference interest.
The Apex Court in Dhenkanal Minor Irrigation Division v. N.C. Budharaj[8]held that 1940 Act is an “adjective or remedial law which provides the method for enforcing rights”. Reading the judgment in G.C. Roy with the preceding principle, the Court then held that as a matter of substantive law, pre-reference interest must be grounded in the agreement/contract, substantive law, or applicable trade usage. The parties would, therefore, have to actively claim the same by explicitly including it in their agreement/contract.
The A&C Act, however, brought about a paradigm shift by explicitly granting the arbitrator the power to award interest. It also strengthened the concept of party autonomy, allowing parties to exclude this power contractually. This shift was exemplified in the Sri Chittaranjan Maity v. Union of India[9] case, where the Court highlighted the significance of party autonomy in the new regime and held that under the A&C Act, the arbitrator could not award interest for the pre-award period if the agreement prohibited it.
Furthermore, the Apex Court in Union of India v. Bright Power Projects (India) Private Limited[10] reiterated that under the A&C Act, an arbitrator could award pendente lite interest if the contract had an express bar against the awarding of such interest. This further solidified the principle that party autonomy was paramount under the A&C Act and that the arbitrator’s power to award interest was subject to the parties’ agreement.
The courts have simplified the position of law under the A&C Act by granting pre-reference interest unless parties had agreed to an explicit bar on it. Rooting this in Section 31(7)(a) not only treats it as the parties’ substantive right but also a right that exists unless the parties explicitly opt out of it. This pushes parties towards greater certainty regarding the Arbitral Process under the A&C Act.
Conclusion: Charting the Course Ahead
Even as it raises some important questions, the Pam Developments case has provided a comprehensive understanding of the law on pre-reference interest in India. It has reinforced the arbitrator’s authority to grant such interest while emphasising the importance of party autonomy and the need to incorporate the claim for interest in substantive law or contractual provisions. It has also aligned with the principles established in Oriental Structural Engineers (P) Ltd. v. State of Kerala,[11] where the Court affirmed the tribunal’s power to award interest at a reasonable rate from the date of the cause of action until the date of the award, unless otherwise agreed by the parties.
Parties incorporate an arbitration agreement in their contract as a matter of precaution should a dispute arise in future, considering disputes always bring with them contests on payment of dues and interest. Judicial decisions such as that in Pam Developments provide the aggrieved parties relief in claiming interest on payment dues in an effective and convenient manner, irrespective of whether they anticipated it at the time of drafting the agreement/contract. As a matter of caution, if the parties want to bar the arbitrator from awarding any kind of pre-reference interest, they must actively incorporate such intentions in the agreement/contract.
The judgment has highlighted the need for clarity and precision in drafting arbitration agreements. Parties must be mindful of the implications of their contractual terms, particularly those concerning the exclusion of the arbitrator’s power to award interest. Ambiguous or vague clauses could lead to unintended consequences, undermining the efficiency and predictability of the arbitration process.
For further information, please contact:
Sumit Attri, Partner, Cyril Amarchand Mangaldas
sumit.attri@cyrilshroff.com
[1] 2024 SCC OnLine SC 2247
[2] (1992) 1 SCC 508
[3] (2009) 12 SCC 26
[4] (2018) 9 SCC 266
[5] (2019) 17 SCC 786
[6] (1996) 1 SCC 516
[7] (1992) 4 SCC 217
[8] (2001) 2 SCC 721
[9] (2017) 9 SCC 611
[10] (2015) 9 SCC 695
[11] (2021) 6 SCC 150
