Arbitral Tribunal Lacks Discretion to Award Interest When Prohibited by Contract

The Hon’ble High Court of Madhya Pradesh, in the case of M.P. Audyuogik Kendra Vikas Nigam Ltd and others v Mr. Ashok Kumar Jain, [2024: MPHC-JBP:58870], dated December 2, 2024, reiterated that an arbitral tribunal cannot award interest where a contract explicitly prohibits it. The decision came in response to a petition challenging the arbitral award concerning the refund of the security deposit and earnest money.

In the present case, the dispute arose from a works contract for construction of external electrification at village Pipalkhiria, District Raisen. In its award, the arbitral tribunal directed the Petitioners to pay interest at the rate of 8% on the security deposit and earnest money due to a delay of five months in refunding these amounts to the Respondent. During the arbitral proceedings, the tribunal carefully considered whether the Respondent was entitled to interest for the delay in the refund, especially in light of Clause 3 of the General Conditions of Contract, which explicitly prohibited the payment of interest on both the security deposit and earnest money.

Despite this contractual exclusion, the tribunal determined that the prohibition did not apply to the period following the filing of the reference petition, continuing until the amount was eventually paid. The tribunal reasoned that since the delay occurred during the pendency of the reference petition, the respondent was entitled to interest for this period, despite the absence of a provision explicitly allowing interest for the time beyond the contract’s original terms.

The Hon’ble High Court of Madhya Pradesh critically examined the tribunal’s reasoning in light of precedents established by the Hon’ble Supreme Court of India in Sree Kamatchi Amman Constructions vs. Divisional Railway Manager [(2010) 8 SCC 767], dated July 18, 2007, and Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation [(2022) 9 SCC 286], dated May 5, 2022. These rulings affirmed that under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, arbitral tribunals are bound by the terms of the contract, including provisions related to interest. The High Court emphasized that the legislative intent behind Section 31(7)(a) is unambiguous and that tribunals are permitted to exercise discretion regarding interest only when the contract does not expressly provide otherwise. It noted that Clause 3 of the General Conditions of Contract explicitly prohibited the payment of interest on the earnest money and security deposit. Consequently, the tribunal’s award of interest was deemed contrary to the contractual terms and unsustainable in law.

Accordingly, the court declared the entire award invalid, reiterating the binding nature of contractual provisions on arbitral proceedings. This judgment underscores the paramount importance of contractual terms in arbitration proceedings and reinforces the limits of tribunal discretion.