Law holds companies to agreements including interest

A claim for interest allows a party to recover a loss suffered by being deprived of the use of money, which is legitimately due. In India, the award of interest is primarily governed by section 34 of the Code of Civil Procedure, 1908 (CPC), and by the Interest Act, 1978 (interest act).

Interest is the easiest measure of damage that a court can grant to a party, which has been deprived of monies rightfully payable to it, and is usually granted at existing lending rates, although courts have discretion to increase or decrease them. Referring to section 34(2) of the CPC, if a decree is silent on payment of interest on the principal sum, the court shall be deemed to have refused such interest, and a separate action cannot be brought.

Where parties resolve their disputes through arbitration, interest, including continuing litigation or pendente lite interest and future interest is governed by section 31(7) of the Arbitration and Conciliation Act, 1996 (arbitration act), under which an arbitrator has jurisdiction to award pre-reference interest unless there is an agreement to the contrary. An arbitrator is bound by the contract and therefore constrained by its terms, and if the parties have expressly waived the award of interest, the arbitrator therefore cannot make such an award. In Chittaranjan Maity v Union of India, a dispute over a contract for the supply of earth for railway works, the Supreme Court affirmed that the position in arbitration is indeed the same as is set out in the interest act.

Following this line of authority, the Supreme Court in the recent case of Manraj Enterprises v Union of India held, “Once the [party] agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit, the arbitrator in the arbitration proceedings being the creature of the contract has no power to award interest”. In another judgment, the Supreme Court, in Garg Builders v Bharat Heavy Electricals Limited, held that if the contract prohibits pre-reference and continuing litigation interest, the arbitrator cannot award interest relating to those periods. The court held, “When there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the arbitrator to grant [continuing litigation] interest”. In analysing the differences between the arbitration act and its predecessor, the court held that the arbitration act emphasised party supremacy. The parties to the contract that included the reference to arbitration were free to come to whatever provision they wished, but the arbitrator was not free to act outside what the parties had agreed.

On the authority of these Supreme Court cases, it is clear that a court or an arbitrator cannot interfere with the contractual provisions agreed between the parties. An arbitrator is as equally bound by the terms of a contract as are the parties and the arbitrator cannot go beyond the contractual terms agreed between the parties.

Where any contract specifically disallows claims for continued litigation interest, the parties to the contract should be aware of the fact that they will not be granted interest during the continuation of the proceedings or for such period specifically barred by the contractual terms. This becomes even more relevant if one party adopts dilatory tactics to delay the proceedings. If there is a contractual bar on interest, the claimant will suffer greater loss and damage, as it would be unable to claim interest for such period of deliberate delay. Thus, parties should sign such contracts with restrictive clauses with full knowledge.

The usual position will not apply that a person who is deprived of the use of money to which they are legitimately entitled has a right to be compensated for the deprivation. Having said that, the party making the claim could include this head of damages in the main proceedings. The claimant would not therefore be completely without remedy. However, as that particular claim will have to be proved in the usual way, it will be more burdensome for the party advancing it compared to the much easier route of applying for continued litigation interest.

Pragya Ohri is a partner and Kanika Kumar is a senior associate at HSA Advocates.