Arbitrator Cannot Ignore Contractual Interest Clauses in Invoices: Delhi High Court

The Delhi High Court has reaffirmed the sanctity of contractual agreements in arbitration, ruling that an arbitral tribunal cannot selectively ignore written interest clauses printed on business invoices. The decision, delivered by Hon'ble Ms. Justice Chandrashekharan Sudha, emphasizes that an award disregarding explicit contractual terms is patently illegal and prone to be set aside.

Case Background

The dispute arose between a registered partnership firm, M/s Khubi Ram Rajiv Kumar & Cothr Partner Ram Avtar Bansal (the Appellant), and M/s Naveen Enterprises & Ors (the Respondents). The Appellant, engaged in the commission agency business, had supplied cloth and fabrics to the Respondents on credit.

The Appellant maintained a running account, and as of April 1, 2011, approximately ₹1,92,483.46 remained outstanding. The invoices issued by the Appellant included a specific condition on the reverse side mandating interest at a rate of 1.75% per month on delayed payments. Upon the Respondents' failure to clear the dues, the Appellant invoked the arbitration clause under the rules of the Delhi Hindustani Mercantile Association . While the Arbitrator confirmed the existence of a valid arbitration agreement, he dismissed the claim for interest, terming it unjustified. The trial court later upheld this dismissal, leading to the current appeal.

Arguments Presented

The Appellant argued that the Arbitrator's rejection of interest was in direct contravention of Section 28(3) of the Arbitration and Conciliation (A&C) Act, 1996 , which requires tribunals to account for contract terms and trade usage. They contended that since the invoices were recognized as binding documents for the arbitration clause, the interest clause contained within the same document could not be disregarded.

The Court noted that the Respondents had remained ex-parte throughout the proceedings, failing to rebut the documentary evidence, including transport records and statements of account that established the debt and the agreed terms of trade.

Legal Analysis

The Court analyzed the matter under the scope of Section 34 of the A&C Act , clarifying that the Arbitrator’s failure to enforce a specific contractual clause is not a mere "re-appreciation of evidence" but a failure of legal mandate. Justice Sudha observed that by ignoring the interest clause, the Arbitrator failed to perform their primary duty of enforcing the contract.

Citing the judgment in Interstate Construction v. National Projects Construction Corporation Ltd , the Court underscored that the power to grant pre-reference and pendente lite interest is well-settled under Section 31(7) of the Act . Because the contract explicitly authorized interest, the tribunal had no justification to deny compensation for the deprivation of money.

Key Observations

The judgment offers critical guidance on how arbitrators must approach contract interpretation:

• "It is the primary duty of the arbitrator to enforce the contract between the parties and that an award passed in contravention of the terms of the contract is violative of Section 28(3) of the A&C Act and liable to be set aside."
• "Once invoices are accepted as binding contractual documents, the terms and conditions printed thereon, including the clause relating to the levy of interest cannot be selectively ignored."
• "The rate of interest was contractually stipulated, and the manner of its application flows from established trade usage. The rejection of interest on the ground of alleged ambiguity is, therefore, unsustainable."

Court's Decision

The Delhi High Court allowed the appeal, setting aside the lower court’s order and the arbitral award to the extent that they denied interest. The court ordered that the Appellant is entitled to interest at the contractual rate of 1.75% per month (21% per annum simple interest) on the outstanding principal from the date it became due (01.04.2011) until the date of the award, and 18% per annum thereafter until realization. This ruling serves as a stern reminder that arbitral tribunals must strictly adhere to the commercial reality and specific stipulations defined by parties in their agreements.