Clause Barring Payment Of Interest Not Hit By Section 28 Contract Act : Supreme Court
The Supreme Court has held that a clause in an agreement barring payment of interest on amounts security deposit, earnest money deposit or any other amount will not be hit by Section 28 of the Contract Act. According to Section 28 of the Indian Contract Act, a contract is void to the extent it restricts absolutely a party from enforcing his rights by usual proceedings in ordinary courts or if...
The Supreme Court has held that a clause in an agreement barring payment of interest on amounts security deposit, earnest money deposit or any other amount will not be hit by Section 28 of the Contract Act.
According to Section 28 of the Indian Contract Act, a contract is void to the extent it restricts absolutely a party from enforcing his rights by usual proceedings in ordinary courts or if it limits the time within which he may enforce his rights. Exception I to this section contains a rule that a contract by which two or more persons agree that any dispute which has arisen or which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not illegal.
The case(Garg Builders Vs Bharat Heavy Electricals Limited LL 2021 SC 535) before the Supreme Court was related to the right of a party to seek pendente lite interest in an arbitration proceeding when the agreement had a clause barring the agreement.
An argument was raised that the clause barring interest was violative of Section 28 of the Contract Act. Answering this issue, the Court noted that the payment of interest is governed by the Interest Act, 1978. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is "barred by virtue of an express agreement".
In this backdrop, the Court held that the clause in question was not violative of Section 28.
A bench comprising Justices S Abdul Nazeer and Krishna Murari observed in the judgment as follows :
22. Thus, 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 pendent lite interest. We are of the considered opinion that Clause 17 of the contract is not ultra vires in terms of Section 28 of the Indian Contract Act, 1872".
Also from the judgment : Arbitrator Cannot Grant Pendente Lite Interest If Contract Contains A Specific Clause Expressly Barring Payment Of Interest: Supreme Court
Case name and Citation: Garg Builders Vs Bharat Heavy Electricals Limited LL 2021 SC 535
Case no. and date: CA 6216 OF 2021 | 4 October 2021
Coram: Justices S. Abdul Nazeer and Krishna Murari
Counsel: Adv Sanjay Bansal for appellant, Adv Pallav Kumar for respondent