The Supreme Court of India ruled that a party is not liable to pay interest to the other party if they have decided against paying interest on the amounts payable in the contract.
“When parties to the contract had agreed to the fact that interest would not be awarded on the amount payable to the contractor under the contract, in our opinion, they were bound by their understanding. Having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an Arbitral Tribunal”, a Large Bench of the Court said.
The Court said that Section 31(7) of the Arbitration and Conciliation Act, 1996 is clear to the effect that ‘unless otherwise agreed by the parties’, the Arbitral Tribunal can award interest at reasonable rate for a period commencing from that date when the cause of action arises till the date of the award.
“The said Section gives more respect to the agreement entered into between the parties. If the parties to the agreement agree not to pay interest to each other, the Arbitral Tribunal has no right to award interest pendente lite”, the Court observed.