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Right of Arbitration to Interpret the conditions of the contract

Court Name: The Supreme court of India

Judgment Name: Garg Builders v. Bharat Heavy Electricals Ltd.

Judgment Date: 4th October 2021

Judges/ Bench: J. Abdul Nazeer, J. Krishna Murari.


  • This judgment is an appeal directing the order against the decision of the High Court of Delhi which has denied the pendente lite interest on the award amount.
  • The dispute arose dealing with the conditions mentioned in the contract which lead to the further dealing of the Indian Contract Act, of 1872 and the Arbitration and Conciliation Act, of 1996.

Brief Facts of the Case:

  • In this case, the respondent( Bharat Heavy Electronics Limited) floated a tender for the construction of a boundary wall, and the appellant submitted his bid for the project which was accepted by the respondent.
  • In continuation, the parties entered into a contract on 24.10.2008, with an interest barring clause signed by the parties, where it says BHEL does not pay any interest for the amount deposited in the form of earnest deposits or security deposits.

Contentions of the respondent:

The respondent challenged the said award before the Delhi High Court in O.M.P. (COMM.) 28/2017 under Section 34 of the 1996 Act on various grounds, including that the learned Arbitrator, as a creature of the arbitration agreement, went beyond the terms of the contract by awarding pendente lite interest on the award amount, which was expressly barred in terms of the contract.

Contentions of the appellant:

Apart from claiming numerous sums under various headings, the appellant in the claim petition also sought pre-reference, pendente lite, and future interest at the rate of 24 percent on the value of the award.

Principles and Observations of the court:

  • The honorable court in this case happened to examine the following sections as were mentioned by the parties raising various issues, Section 11 and Section 34 of the Arbitration and Conciliation Act, Section 28 of the Hindu Marriage Act, 1872.
  • The parties for their support have taken the reference of various judgments, to mention a few,  Sri Chittaranjan Maity v. Union of India, Ambica Construction v. Union of India, Sayeed Ahmed and Company v. State of Uttar Pradesh & Ors. Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat & Ors.

Judgement  Held:

  • The appellant in the claim petition asked for 24% of the value of the award, after hearing the arguments the court held that there was no violation in the terms of the contract and granted 10% p.a., which was challenged by the respondent before the High Court of Delhi, stating that the same interest shall not be provided as mentioned under the contract and was signed.
  • The Delhi  High Court held that the Arbitration was held in error holding the difference between preference interest and non-pendente lite interest. In terms of Section 31(7), (a) the power of the arbitral tribunal to pay the interest where the parties have signed not to pay so as per the terms of the contract shall not be correct.
  • The council for the petition has taken into consideration the above-mentioned cases as a reference where clause 17 of the contract pays no bar for the arbitration for the payment of interest amount.
  • It was further argued that Section 31(7)(a) of the Act gives importance to the terms and conditions upon which the parties have agreed and signed the documents and the arbitration is not open to granting the payment of the interest amount.
  • This leads to the next question, was clause 17 ultra vires and violative of Section 28 of the Indian Contract Act, 1872, which says that there shall be no clause in the contract which bars one of the parties from using rights in the actual proceedings of the court or restricts the same.
  • The exception I to Section 28 protects contracts in which the ability to petition the Court for appropriate remedy is limited but the parties have agreed to settle their disagreement through arbitration. Thus, a legally binding agreement to send the case to arbitration can be established as a condition precedent before proceeding to court, and it does not contradict Section 28.
  • It is worth noting that interest payments are controlled in general by the Interest Act of 1978, in addition to the specific legislation that governs the contested subject. A “Court” is defined in Section 2 (a) of the Interest Act to include both a Tribunal and an Arbitrator.
  • Section 3 then permits a “Court” to grant interest at the prevailing interest rate in a variety of situations. Section 3 (3) of the Interest Act of 1978 expressly enables parties to waive their right to an interest by an agreement. The Interest Act does not apply in cases where payment of interest is “barred by virtue of an express agreement,” according to Section 3(3)(a)(ii).

My Opinion

My opinion, I agree with the decision of the court, stating that it is the duty of the parties to read and understand each and every clause of the contract and only after that enter the contract, in this case, the clause of the contract clearly mentions BHEL not being responsible to pay such interest on such deposits. Hence, the decision of the court has delivered justice to the right party.

Reported by: Manjusha Siriparapu

College: Army Institute of Law

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