Can Arbitral Tribunal Award Interest On Security Deposits If the Prohibiting Clause Was Not Specifically Pleaded?

In its ruling dated November 18, 2021, in the Union of India v. Manraj Enterprises case,^[1] the Supreme Court determined that the arbitrator in the arbitration proceedings lacks the authority to award interest, which is against the terms of the parties’ contract or agreement. The Madras High Court, however, has ruled that if the aggrieved party did not plead for the restriction, the arbitral panel could still award interest even when there is a contractual prohibition.

According to the Justice Senthilkumar Ramamoorthy bench, a party could not rely on a clause under the General Conditions of Contract (GCC) to challenge the arbitral award for awarding interest in violation of the said clause if the party had not objected to the arbitral tribunal during the arbitral proceeding. The Court ruled that in an adversarial system, decisions are made based on evidence and pleadings and that a party seeking to contest a claim based on a contractual prohibition must expressly plead and introduce the relevant document as evidence; failure to do so results in the party’s objection being waived.

It further held that a contract between the parties is not a statute of which the tribunal can take cognizance independently. Therefore, it must be tendered in evidence for the tribunal to examine its content.^[2] Additionally, it was determined that a contract between the parties is not legislation over which the tribunal can independently rule. For the tribunal to review its contents, it must be submitted as evidence.

The parties to the case, The Union of India v. R.K. Constructions,^[3] agreed on October 13, 2005. The agreement was dissolved on May 15, 2007, due to disagreements. The respondent eventually issued the arbitral award on April 20, 2021, dated August 28, 2007. According to the arbitral award, the arbitrator granted the petitioner’s request for a refund of the security deposit and pendente lite interest at 12% per annum and additional claims.

The petitioner solely objected to the arbitrator’s decision to permit interest on the reimbursement of the security deposit, which was against the terms of the arbitration agreement. The General Conditions to Contract (GCC), which governs the parties, expressly forbids the award of interest on security deposits in clause 64. Accordingly, the award violates the terms of the parties contract and conflicts with Section 28(3) of the A&C Act. An objection to this effect may be made for the first time under Section 34.

The respondents argued that in light of the Supreme Court’s ruling in Union of India v. Susaka Private Limited and Others (Susaka),^[4] contractual clauses that forbid the issuance of interest could not be relied upon at this time. Any objection must be specifically pleaded, and any document cited must be submitted as supporting documentation.

According to the Court, although Clauses 16 and 64 of the GCC and Clause 3(a) of the Letter of Award forbade the grant of interest, the petitioner had not raised this objection in its pleadings. Furthermore, GCC was never presented to the arbitral tribunal as evidence. According to Section 31(7)(a) of the A&C Act, the arbitrator has the authority to grant interest on all or a portion of the award amount. According to this ruling, the arbitral tribunal’s decision cannot be considered unlawful without evidence of a contractual prohibition on the grant of interest. According to Section 28(3) of the Act, the arbitral tribunal must take into account the provisions of the parties’ contract; however, the parties must first present the contract to the tribunal, and the tribunal cannot be said to be bound by such agreements if it is not accessible on record.

An objection based on a contractual provision cannot be allowed before the Court for the first time to contest the arbitral award, in contrast to jurisdictional challenges that may be brought for the first time under Section 34 of the Act. An argument based on a contractual prohibition must be specifically pleaded and brought to the Court’s attention as evidence; otherwise, the argument is deemed waived. Adjudication is done based on pleading and evidence. As a result, the petition was rejected by the Court.

^[1]Union of India v. Manraj Enterprises, [Civil Appeal No. 6592 OF 2021]

^[2]Arbitral Tribunal Can Award Interest On Security Deposit If The Clause, https://www.livelaw.in/news-updates/madras-high-court-arbitral-tribunal-award-arbitral-proceeding-interest-212688

^[3]The Union of India v. R.K. Constructions, Arb. O.P. (Com Div) No. 148 of 2022

^[4]Union of India v. Susaka Private Limited and Others (Susaka), (2018) 2 SCC 182