The Supreme Court has ruled that an arbitrator cannot award pre-reference and pendente lite interest when the contract itself shuts the door on interest claims through a wide, catch-all phrase like “or otherwise”. A Bench of Justice Aravind Kumar and Justice Vipul M. Pancholi dismissed the appeal filed by MS Sharma Enterprises against National Building Construction Corporation.
Background
The dispute goes back to 1991, when NBCC gave Sharma Enterprises a sub-contract for flooring and cladding work at the Vashi Railway Station-cum-Commercial Complex in Navi Mumbai. The contract was worth over Rs 9.5 crore. NBCC terminated it in September 1992 and encashed the bank guarantees. After years of litigation, the Supreme Court appointed an arbitrator in 2011.
The July 2016 award found the termination wrongful, allowed several claims and granted 10% interest from September 22, 1992. The Delhi High Court’s Single Judge upheld the award on merits but set aside pre-reference and pendente lite interest, and the Division Bench agreed.
Senior Advocate Siddhartha Dave, for the appellant, argued that “or otherwise” must be read along with the earlier words of Clause 26, which dealt only with delayed payments. Counsel for NBCC argued that the phrase was a residuary expression, and that Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 gives priority to what the parties agreed.
The Court first noted that interest for the period before the award is allowed only “unless otherwise agreed by the parties”. It then examined Clause 26, which says:
“No claim for interest will be entertained by the corporation in respect of any balance payments or any deposit which may be held up with the corporation due to any dispute between the Corporation and sub-contractor or in respect of any delay on the part of the corporation in making monthly or final payments or otherwise.”
Rejecting the rule of ejusdem generis (where general words take colour from the specific words before them), the Court held that the clause listed separate events joined by “or”. It said:
“On careful consideration, it can be inferred that the preceding terms of the phrase ‘or otherwise’ do not constitute a single, narrow genus restricted to delayed running payments and also include balance payments, withheld deposits and amounts withheld due to disputes. Consequently, the expression ‘or otherwise’ is residuary in nature and has been consciously incorporated with wide amplitude to encompass every other conceivable circumstance under which a claim for interest might be asserted against the Corporation.”
The Court distinguished ONGC v. G&T Beckfield Drilling Services, where the clause had no residuary words. It treated “or otherwise” as being on the same footing as “any other respect whatsoever” in Sayeed Ahmed and Jaiprakash Associates. It also noted that post-award interest under Section 31(7)(b) is not subject to the contract.
Dismissing the appeal, the Bench concluded:
“In light of the aforesaid analysis and discussion, the learned Arbitrator, being a creature of the contract, acted beyond his jurisdiction in granting pre-reference and pendente lite interest in contravention of Clause 26 of the SCC, which attracts Section 31(7)(a) of the 1996 Act.”
The High Court’s order was upheld. The substantive claims and post-award interest in the appellant’s favour remain intact.
