Section 37(1) of Arbitration and & Conciliation Act - Award of interest - “unless otherwise agreed by the parties” categorically clarifies that the arbitrator is bound by the terms of the contract insofar as the award of interest from the date of cause of action to the date of award. Award of interest beyond the agreement clauses by arbitrator is not valid in law- Apex court held that In view of the aforesaid, the appeals are allowed and it is directed that the respondents shall not be entitled to any interest on the amount which was recovered by the appellant, till the date of award and thereafter till the date when the amount awarded was deposited in the High Court, i.e. from 12th July, 1997.=
By letter
dated 12th July, 1997, the railways administration informed
the respondents that the Railway Board had found that excess
payments had been made between 1989 and November, 1994 under
escalation clause for HTS wires. It was stated that the
amounts paid to the contractors were more than the prevalent
market price. Therefore, a sum of Rs. 1,80,92,462/- was
recoverable from M/s Concrete Products and Construction
Company, respondent in C.A. No. ____________ (arising out of
SLP(C) No. 5384 of 2013) and a sum of Rs.1,78,09,789/- was
recoverable from M/s. Kottukulam Engineers Private Limited,
respondent in C.A. No. ______ (arising out of SLP(C) No. 5385
of 2013). It was also pointed out that the aforesaid sums
would be recoverable from the sums due and payable to them in
the current/running contracts.=
The sole arbitrator directed the appellants to refund the
amount awarded as follows:-
“In the result I direct the Respondents to refund a sum of
Rs.1,78,09,789/- recovered from the Claimants and interest of
Rs.2,38,28,960/- and subsequent interest at 18% P.A from
1.9.2005 on Rs. 1,78,09,789/- till date of payment in Kottukulam
Engineers Pvt. Ltd. matter. Ana a sum of Rs.1,69,78,883/- and
interest of Rs.2,25,25,513/- and subsequent interest at 18% P.A
from 1.09.2005 till date of payment in m/s Concrete Product &
Construction Company Trivalam.” =
whether the contractors are
entitled to interest for the amount withheld and if so at
what rate. =
Clause 2401 provides that the railways shall be entitled to
withhold and also have a lien to retain any amount deposited
as security by the contractor to satisfy any claims arising
out of or in the contract. In such circumstances, the
railways can withhold the amount deposited by the contractors
as security and also have lien over the same pending
finalization or adjudication of the claim. In case, the
security deposit is insufficient to cover the claim of the
railways, it is entitled to withhold and have lien to the
extent of the amount claimed from any sum payable for any
works done by the contractor thereafter under the same
contract or any other contract. This withholding of the
money and the exercise of the lien is pending finalization or
adjudication of any claim. This clause further provided that
the amount withheld by the railways over which it is
exercising lien will not entitle the contractor to claim any
interest or damages for such withholding or retention under
lien by the railways.
16. Clause 2403 again provides that any sum of money due and
payable to the contractor under the contract may be withheld
or retained by way of lien by the railway authorities or the
Government in respect of payment of a sum of money arising
out of or under any other contract made by the contractor
with the railway authority or the Government.
17. Clause 2403(b) further provides that it is an agreed term of
the contract that against the sum of money withheld or
retained under lien, the contractor shall have no claim for
interest or damages whatsoever provided the claim has been
duly notified to the contractor.=
We are of the opinion that the sole arbitrator in awarding
interest to the contractors has failed to take into account
the provisions contained in the aforesaid two clauses. We
find merit in the submission made by learned Additional
Solicitor General that award of interest at-least from the
date when the amount was deposited in Court was wholly
unwarranted. Therefore, the High Court as well as the
arbitrator, in our opinion, have committed an error of
jurisdiction in this respect. This view of ours will find
support from the judgment of this Court in the case of Sayeed
Ahmed & Company (supra), wherein it has been held as follows:-
“16. In view of clause (a) of sub-section (7) of Section 31 of
the Act, it is clear that the arbitrator could not have awarded
interest up to the date of the award, as the agreement between
the parties barred payment of interest. The bar against award of
interest would operate not only during the pre-reference period,
that is, up to 13-3-1997 but also during the pendente lite
period, that is, from 14-3-1997 to 31-7-2001.”
19. This view has been reiterated by this Court in Sree Kamatchi
Amman Construction (supra), wherein it has been held as
follows:-
“19. Section 37(1) of the new Act by using the words “unless
otherwise agreed by the parties” categorically clarifies that
the arbitrator is bound by the terms of the contract insofar as
the award of interest from the date of cause of action to the
date of award. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the
date of award.”
20. From the aforesaid it becomes apparent that the arbitrator
could not have awarded any interest from the date when the
recovery was made till the award was made. However, interest
would have been payable from the date when the award was made
till the money was deposited in the High Court and thereafter
converted to fixed deposit receipts. Upon the amount being
deposited in the High Court, no further interest could be
paid to the respondents.
21. In view of the aforesaid, the appeals are allowed and it is
directed that the respondents shall not be entitled to any
interest on the amount which was recovered by the appellant,
till the date of award and thereafter till the date when the
amount awarded was deposited in the High Court, i.e. from
12th July, 1997.
2014 (March . Part) judis.nic.in/supremecourt/filename=41289
SURINDER SINGH NIJJAR, FAKKIR MOHAMED IBRAHIM KALIFULLA
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO2950-2951 OF 2014
(Arising out of SLP (C) Nos. 5384-5385 of 2013)
Union of India
…Appellant
VERSUS
M/s. Concrete Products & Const. Co. Etc. ...Respondents
J U D G M E N T
SURINDER SINGH NIJJAR, J.
1. Leave granted.
2. These appeals impugn the final judgment and decree dated 21st
March, 2012 passed by the High Court of Judicature at Madras
in OSA No. 44 & 45 of 2012 and M.P. No. 1 of 2012, whereby
the letters patent appeals of the Union of India were
dismissed. The appellant had entered into agreements with the
respondents on 30th January, 1983 and 30th March, 1984 for
supply of mono block concrete sleepers (in short “Sleepers”).
The agreements were renewed from time to time under which
the Union of India agreed to pay specified rates for supply
of each sleeper. The agreements/contracts also provided that
the rates payable shall be based on certain standard rates of
principal raw materials, such as cement, High Tensile Steel
(HTS) wires, molded steel, etc. The contracts further
provided that whenever the cost of the principal raw
materials increased or decreased, the contract price for
sleepers shall also correspondingly be increased or decreased
with effect from the date of such increase or decrease. The
agreements/contracts also provided for escalation, subject to
certain conditions prescribed under Clause 11 of the
Contract. The contracts/agreements further provided that the
respondents must exercise utmost economy in the purchase of
raw materials and that the escalation will be admitted on the
basis of actual price paid for the respective raw material.
This was subject to the ceiling on the price. As per Clause
12.2(c), ceiling was fixed “in the case of raw materials not
covered by either of the above, the lowest price (for
destination) arrived at on the basis of at least three
quotations obtained by the Contractor for each supply from
various established sources of supply of the respective raw
materials”.
3. The respondents/contractors purchased HTS wires from
established sources in terms of the various clauses of the
contract. The material was used in the manufacture of
sleepers. Payment for the sleepers was made by the
contractors at the lowest price quoted by the suppliers. The
quotation was also scrutinized alongwith the supporting
documents. The Railway authorities release the payment to
the respondent contractors only upon their satisfaction, upon
scrutiny of all the relevant documents.
4. A new contract was entered into between the parties in May,
1997. The railway administration changed the policy and
allowed the respondents/contractors to purchase the HTS
wires, subject to escalation as noticed above. By letter
dated 12th July, 1997, the railways administration informed
the respondents that the Railway Board had found that excess
payments had been made between 1989 and November, 1994 under
escalation clause for HTS wires. It was stated that the
amounts paid to the contractors were more than the prevalent
market price. Therefore, a sum of Rs. 1,80,92,462/- was
recoverable from M/s Concrete Products and Construction
Company, respondent in C.A. No. ____________ (arising out of
SLP(C) No. 5384 of 2013) and a sum of Rs.1,78,09,789/- was
recoverable from M/s. Kottukulam Engineers Private Limited,
respondent in C.A. No. ______ (arising out of SLP(C) No. 5385
of 2013). It was also pointed out that the aforesaid sums
would be recoverable from the sums due and payable to them in
the current/running contracts.
5. The contractors (respondents herein) challenged the aforesaid
recovery by filing Writ Petition No. 11805 and 10814 of 1999,
before the High Court of Madras. The railway administration
took up the preliminary objection, pleading that the writ
petition is not maintainable as the dispute has to be
referred to arbitration. The objection of the appellant was
accepted. The High Court appointed a Former Judge of the
Madras High Court as the arbitrator to adjudicate the
dispute. The contractors/respondents herein challenged the
aforesaid order of the learned Single Judge by filing
Writ Appeal Nos. 251 and 252 of 2000,
on the plea that the arbitrator had to be appointed in terms
of the agreement. By order dated 22nd March, 2000, the writ
appeals were allowed, and the order of the learned Single
Judge was set aside. The matter was remanded back to the
Single Judge for disposal in terms of the agreement.
On remand, the learned Single Judge, instead of referring
matter to arbitration in terms of the contract between the
parties allowed the writ petitions filed by the respondents
herein and directed the railway authorities to refund the sum of
Rs.1,69,78,883/- and Rs.1,78,09,789/- to the respondent firms,
respectively with interest thereon from the date of withholding
till the date the same is refunded. The order was directed to be
complied within a period of 4 week from the date of the receipt
of the order. This order was again challenged by the railway
administration by filing, first of all, Writ Appeal Nos. 2822
and 2823 of 2001. Subsequently, writ appeal miscellaneous
petition No. 21103 and 21104 of 2001 were also filed in the
aforesaid two writ appeals, seeking stay of the judgments under
appeal. On 30th April, 2004, the Division Bench dismissed the
writ appeals as well as the miscellaneous petitions.
6. The railway administration challenged the aforesaid order of
the Division Bench, before this Court by filing SLP No. 18244
and 18245 of 2004. Special leave was granted in both the
special leave petitions and the same were converted to Civil
Appeal Nos. 2999 and 3000 of 2005. By a short order passed
on 2nd May, 2005, the disputes between the parties were
referred by this court for adjudication by an Arbitration
Tribunal consisting solely of Mr. Justice K. Venkataswami, a
former Judge of this Court. This order was passed without
going into the merits of the disputes and the submissions
made by the learned Solicitor General on behalf of the
railways, that in view of the specific condition contained in
the contract, the dispute cannot be referred to an arbitrator
other than the authority referred to in the contract. This
Court directed that the matter shall be referred to Mr.
Justice Venkataswami. It was, however, made clear that the
order shall not be treated as a precedent. Pursuant to the
aforesaid order of this Court, the matter ultimately reached
the arbitrator. At the conclusion of the arbitral
proceedings, the final award was rendered on 24th June, 2006.
The sole arbitrator directed the appellants to refund the
amount awarded as follows:-
“In the result I direct the Respondents to refund a sum of
Rs.1,78,09,789/- recovered from the Claimants and interest of
Rs.2,38,28,960/- and subsequent interest at 18% P.A from
1.9.2005 on Rs. 1,78,09,789/- till date of payment in Kottukulam
Engineers Pvt. Ltd. matter. Ana a sum of Rs.1,69,78,883/- and
interest of Rs.2,25,25,513/- and subsequent interest at 18% P.A
from 1.09.2005 till date of payment in m/s Concrete Product &
Construction Company Trivalam.”
The counter claims made by the appellants were dismissed.
The railway administration challenged the common arbitration
award in O.P. No. 142 & 143 of 2007 under Section 33 of the
Arbitration and Conciliation Act, 1996 before High Court of
Madras. The learned Single Judge dismissed the arbitration
petitions filed by the railway administration by its order dated
30th November, 2010. Thereafter the contractors filed
applications before the High Court for direction to the railways
to make payments of the amount. Thereafter Application Nos.
780 & 781 of 2011 were filed in the O.P. Nos. 142 & 143 of 2007
by the contractors seeking a direction from the Court directing
that the amounts awarded by the learned Sole Arbitrator be paid
from the amount deposited by the railway administration with the
High Court along with the accrued interest as on date on the
aforesaid amount. These applications were allowed by order
dated 24th February, 2011. The High Court directed that the
awarded amount deposited by the railways in the Court for
satisfying the outcome of the original petitions which was
subsequently converted into fixed deposit receipts, be dispersed
to the respondent contractors.
7. Again the railway administration filed intra court appeals
challenging the order of the learned Single Judge principally
on the ground that the railway administration was not liable
to pay any interest for the period subsequent to the deposit
of the principal amount into Court. The appeals filed by the
railway administration were dismissed by the High Court by
the impugned order dated 21st March, 2012. The High Court
held that railway administration had not questioned the power
of the sole arbitrator to award interest. The issue with
regard to the award of interest was also not raised before
the learned Single Judge. For the first time before the
Division Bench, a plea was raised that the award of interest
was contrary to Clause No. 2401 of the Indian Railways
Standard Conditions of Contract. The Division Bench of the
High Court came to the conclusion that the aforesaid clause
has no application at all as it applies only to amounts,
which have been withheld or retained under lien. The amounts
having already been paid were sought to be illegally
recovered from the contractors. The sole arbitrator found
that such order of recovery can not be sustained in law and
the recoveries affected were illegal. The High Court,
however, concluded that Clause No. 2401 would have
application only in respect of amounts which had not been
paid to the contractors. The railway administration can not
exercise lien over the amounts already paid to the
contractors. Therefore, award of the arbitrator did not
suffer from any error apparent. It was further held that the
learned Single Judge having upheld the award, the appeals
deserve to be dismissed.
8. The appeals having been dismissed, the Union of India has
approached this Court in these Civil Appeals.
9. We have heard Mr. Mohan Jain, learned Additional Solicitor
General, appearing for the appellants.
10. It is submitted that the only question which arises for
consideration of this Court is whether the contractors are
entitled to interest for the amount withheld and if so at
what rate. The contractors had claimed interest @18 per cent
from the date of recovery till payment. Mr. Jain submitted
that the High Court has wrongly held that the appellant had
no authority to exercise lien on the current payments in
relation to the amount already released to the contractors.
It is submitted by Mr. Jain that the arbitrator had no
authority to award interest in view of the prohibition
contained under Section 31(7) of the Arbitration Act, 1996.
Learned Additional Solicitor General pointed out that the
contract entered into between the parties did not provide for
any payment of interest. Mr. Jain also pointed out that
under Clause 2403, the railway administration has a lien on
all the amounts of money that may be due to the contractors,
in praesenti or in the futuro. Therefore, when the
contractors were paid in excess of the amounts actually due,
the appellants were fully justified in recovering the amount
from the respondents by exercising the lien over the future
bills in terms of Clause No. 2403. He submits
that the sole arbitrator was wholly unjustified in awarding
interest, as under Clause No. 2403(b), it is specifically
provided that the contractors shall have no claim for
interest or damages whatsoever, for the amount so retained
even in case the arbitration award or any other legal
proceeding subsequently holds that the amount was withheld
illegally. Mr. Jain submits that the learned Single Judge
erred in holding that the award did not suffer from an error
apparent on this short ground. In support of the submission,
he relies on judgment of this Court in the case of Himachal
Pradesh Housing and Urban Development Authority & Anr. Vs.
Ranjit Singh Rana.[1]
11. Mr. Jain further submitted that the principal amount awarded
was deposited in Court in 2007. This amount was released to
the contractors on 24th April, 2011 alongwith the interest,
but 30 per cent of the amount was duly withheld. This was in
agreement with the respondents. He also pointed out that in
fact the recovery of the amount was deferred after
discussions with the respondents. In view of the agreements,
the respondents had no justification for claiming any
interest and the award granting such relief suffer from an
error apparent as it was contrary to the contract. In support
of this submission, he relies on judgment of this Court in
Sree Kamatchi Amman Construction Vs. Divisional Railway
Manager (Works), Palghat & Ors.[2] He also relied on Sayeed
Ahmed & Company Vs. State of Uttar Pradesh & Ors.[3] and
Union of India Vs. Krafters Engineering and Leasign Private
Limited[4].
12. Mr. C.S. Vaidyanathan, learned senior counsel appearing for
the respondents, on the other hand, submitted that the
payments have been made to the contractors from 1989 till
November, 1994. The High Court judgment in the writ
petitions challenging the recovery notice were set aside by
the High Court. The respondents had agreed to the deduction
of 30 per cent only because the contractors required the
money for execution of further works. He submitted that the
appellants can not possibly be permitted to claim that the
respondents had agreed to the deduction of 30 per cent of the
amount due. He pointed out that the recovery was made
against the supplies made under the agreements
of 9th December, 1991 in relation to the contracts
which were being performed in the year 1996. In such
circumstances, the appellants had no authority to exercise
lien on the amounts that accrued due to the works performed
subsequent to 9th December, 1991 under
Clause(s) 2401 or 2403 of the Contract. Mr. Vaidyanathan
emphasized that such recovery of the time barred claims is
clearly without any justification. The appellants having
failed to notify that 30 per cent of the amount due had been
withheld, the invocation of Clause No. 2401 or 2403
would be wholly illegal. Learned senior counsel further
submitted that the appellant can not justify the recovery on
the basis of the letter dated 22nd October, 1997 as it was
written without prejudice to the rights of the contractors.
The counter claims made by the appellant were clearly time
barred and hence, disallowed by the sole arbitrator. Mr.
Vaidyanathan relied on a Constitution Bench decision of this
Court in Executive Engineer, Dhenkanal Minor Irrigation
Division, Orissa & Ors. Vs. N.C. Budharaj (Deceased) by LRs.
& Ors.[5] Reliance was also placed upon Secretary, Irrigation
Department, Government of Orissa & Ors. Vs. G.C. Roy[6] in
support of the submission that a person deprived of his money
is entitled to be compensated by way of interest, therefore,
any provision in the contract which seeks to take away such a
right has to be strictly construed. The ratio in the
aforesaid judgment has been subsequently reiterated,
according to Mr. Vaidyanathan, in the case of Sree Kamatchi
Amman Construction (supra). Mr. Vaidyanathan submitted that
the railway administration had no authority either under
Clause 2401 or 2403 of the contract to recover the amounts
allegedly overpaid for the work done prior to 1991 from the
amounts due to the contractors for the works done
subsequently.
13. We have considered the submissions made by the learned
counsel for the parties.
14. Clause Nos. 2401 and 2403 are as under:-
“2401. Whenever any claim or claims for payment of a sum of
money arises out of or under the contract against the
Contractor, the Purchaser shall be entitled to withhold and also
have a lien to retain such sum or sums in whole or in part from
the security, if any, deposited by the Contractor and for the
purpose aforesaid, the Purchaser shall be entitled to withhold
the said cash security deposit or the security, if any,
furnished as the case may be and also have a lien over the same
pending finalization or adjudication of any such claim. In the
event of the security being insufficient to cover the claimed
amount or amounts or if no security has been taken from the
Contractor, the Purchaser shall be entitled to withhold and have
lien to retain to the extent of the such claimed amount or
amounts referred to supra, from any sum or sums found payable or
which at any time-thereafter may become payable to the
Contractor under the same contract or any other contract with
the Purchaser or the Government pending finalization or
adjudication of any such claim.
It is an agreed term of the contract that the sum of money or
moneys so withheld or retained under the lien referred to above,
by the Purchaser will be kept withheld or retained as such by
the Purchaser till the claim arising out of or under the
contract is determined by the Arbitrator (if the contract is
governed by the arbitration clause) or by the competent court as
prescribed under Clause 2703 hereinafter provided, as the case
may be, and that the Contractor will have no claim for interest
or damages whatsoever on any account in respect of such
withholding or retention under the lien referred to supra and
duly notified as such to the contractor.”
“2403. Lien in respect of Claims in other Contracts:
a) Any sum of money due and payable, to the Contractor
(including the security deposit, returnable to him)
under the contract may withhold or retain by way of lien
by the Purchaser or Government against any claim of the
Purchaser or Government in respect of payment of a sum
of money arising out of or under any other contract made
by the Contractor with the Purchaser or Government.
b) It is an agreed term of the contract that the sum of
money so withheld or retained under this clause by the
Purchaser or Government will be kept withheld or
retained as such by the Purchaser or Government till his
claim arising out of the same contract or any other
contract is either mutually settled or determined by the
arbitrator, if the contract is governed by the
arbitration clause or by the competent court under
Clause 2703 hereinafter provided, as the case may be,
and that the Contractor shall have no claim for interest
or damages whatsoever on this account or on any other
ground in respect of any sum of money withheld or
retained under this clause and duly notified as such to
the Contractor.”
15. Clause 2401 provides that the railways shall be entitled to
withhold and also have a lien to retain any amount deposited
as security by the contractor to satisfy any claims arising
out of or in the contract. In such circumstances, the
railways can withhold the amount deposited by the contractors
as security and also have lien over the same pending
finalization or adjudication of the claim. In case, the
security deposit is insufficient to cover the claim of the
railways, it is entitled to withhold and have lien to the
extent of the amount claimed from any sum payable for any
works done by the contractor thereafter under the same
contract or any other contract. This withholding of the
money and the exercise of the lien is pending finalization or
adjudication of any claim. This clause further provided that
the amount withheld by the railways over which it is
exercising lien will not entitle the contractor to claim any
interest or damages for such withholding or retention under
lien by the railways.
16. Clause 2403 again provides that any sum of money due and
payable to the contractor under the contract may be withheld
or retained by way of lien by the railway authorities or the
Government in respect of payment of a sum of money arising
out of or under any other contract made by the contractor
with the railway authority or the Government.
17. Clause 2403(b) further provides that it is an agreed term of
the contract that against the sum of money withheld or
retained under lien, the contractor shall have no claim for
interest or damages whatsoever provided the claim has been
duly notified to the contractor.
18. We are of the opinion that the sole arbitrator in awarding
interest to the contractors has failed to take into account
the provisions contained in the aforesaid two clauses. We
find merit in the submission made by learned Additional
Solicitor General that award of interest at-least from the
date when the amount was deposited in Court was wholly
unwarranted. Therefore, the High Court as well as the
arbitrator, in our opinion, have committed an error of
jurisdiction in this respect. This view of ours will find
support from the judgment of this Court in the case of Sayeed
Ahmed & Company (supra), wherein it has been held as follows:-
“16. In view of clause (a) of sub-section (7) of Section 31 of
the Act, it is clear that the arbitrator could not have awarded
interest up to the date of the award, as the agreement between
the parties barred payment of interest. The bar against award of
interest would operate not only during the pre-reference period,
that is, up to 13-3-1997 but also during the pendente lite
period, that is, from 14-3-1997 to 31-7-2001.”
19. This view has been reiterated by this Court in Sree Kamatchi
Amman Construction (supra), wherein it has been held as
follows:-
“19. Section 37(1) of the new Act by using the words “unless
otherwise agreed by the parties” categorically clarifies that
the arbitrator is bound by the terms of the contract insofar as
the award of interest from the date of cause of action to the
date of award. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the
date of award.”
20. From the aforesaid it becomes apparent that the arbitrator
could not have awarded any interest from the date when the
recovery was made till the award was made. However, interest
would have been payable from the date when the award was made
till the money was deposited in the High Court and thereafter
converted to fixed deposit receipts. Upon the amount being
deposited in the High Court, no further interest could be
paid to the respondents.
21. In view of the aforesaid, the appeals are allowed and it is
directed that the respondents shall not be entitled to any
interest on the amount which was recovered by the appellant,
till the date of award and thereafter till the date when the
amount awarded was deposited in the High Court, i.e. from
12th July, 1997.
22. The appeals are allowed in the aforesaid terms.
...………………….….….J.
[Surinder Singh
Nijjar]
………….……….……………………….J.
[Fakkir Mohamed Ibrahim Kalifulla]
New Delhi;
March 3, 2014.
-----------------------
[1] (2012) 4 SCC 505
[2] (2010) 8 SCC 767
[3] (2009) 12 SCC 26
[4] (2011) 7 SCC 279
[5] (2001) 2 SCC 721
[6] (1992) 1 SCC 508
-----------------------
21
By letter
dated 12th July, 1997, the railways administration informed
the respondents that the Railway Board had found that excess
payments had been made between 1989 and November, 1994 under
escalation clause for HTS wires. It was stated that the
amounts paid to the contractors were more than the prevalent
market price. Therefore, a sum of Rs. 1,80,92,462/- was
recoverable from M/s Concrete Products and Construction
Company, respondent in C.A. No. ____________ (arising out of
SLP(C) No. 5384 of 2013) and a sum of Rs.1,78,09,789/- was
recoverable from M/s. Kottukulam Engineers Private Limited,
respondent in C.A. No. ______ (arising out of SLP(C) No. 5385
of 2013). It was also pointed out that the aforesaid sums
would be recoverable from the sums due and payable to them in
the current/running contracts.=
The sole arbitrator directed the appellants to refund the
amount awarded as follows:-
“In the result I direct the Respondents to refund a sum of
Rs.1,78,09,789/- recovered from the Claimants and interest of
Rs.2,38,28,960/- and subsequent interest at 18% P.A from
1.9.2005 on Rs. 1,78,09,789/- till date of payment in Kottukulam
Engineers Pvt. Ltd. matter. Ana a sum of Rs.1,69,78,883/- and
interest of Rs.2,25,25,513/- and subsequent interest at 18% P.A
from 1.09.2005 till date of payment in m/s Concrete Product &
Construction Company Trivalam.” =
Award of interest is challenged later =
whether the contractors are
entitled to interest for the amount withheld and if so at
what rate. =
Clause 2401 provides that the railways shall be entitled to
withhold and also have a lien to retain any amount deposited
as security by the contractor to satisfy any claims arising
out of or in the contract. In such circumstances, the
railways can withhold the amount deposited by the contractors
as security and also have lien over the same pending
finalization or adjudication of the claim. In case, the
security deposit is insufficient to cover the claim of the
railways, it is entitled to withhold and have lien to the
extent of the amount claimed from any sum payable for any
works done by the contractor thereafter under the same
contract or any other contract. This withholding of the
money and the exercise of the lien is pending finalization or
adjudication of any claim. This clause further provided that
the amount withheld by the railways over which it is
exercising lien will not entitle the contractor to claim any
interest or damages for such withholding or retention under
lien by the railways.
16. Clause 2403 again provides that any sum of money due and
payable to the contractor under the contract may be withheld
or retained by way of lien by the railway authorities or the
Government in respect of payment of a sum of money arising
out of or under any other contract made by the contractor
with the railway authority or the Government.
17. Clause 2403(b) further provides that it is an agreed term of
the contract that against the sum of money withheld or
retained under lien, the contractor shall have no claim for
interest or damages whatsoever provided the claim has been
duly notified to the contractor.=
We are of the opinion that the sole arbitrator in awarding
interest to the contractors has failed to take into account
the provisions contained in the aforesaid two clauses. We
find merit in the submission made by learned Additional
Solicitor General that award of interest at-least from the
date when the amount was deposited in Court was wholly
unwarranted. Therefore, the High Court as well as the
arbitrator, in our opinion, have committed an error of
jurisdiction in this respect. This view of ours will find
support from the judgment of this Court in the case of Sayeed
Ahmed & Company (supra), wherein it has been held as follows:-
“16. In view of clause (a) of sub-section (7) of Section 31 of
the Act, it is clear that the arbitrator could not have awarded
interest up to the date of the award, as the agreement between
the parties barred payment of interest. The bar against award of
interest would operate not only during the pre-reference period,
that is, up to 13-3-1997 but also during the pendente lite
period, that is, from 14-3-1997 to 31-7-2001.”
19. This view has been reiterated by this Court in Sree Kamatchi
Amman Construction (supra), wherein it has been held as
follows:-
“19. Section 37(1) of the new Act by using the words “unless
otherwise agreed by the parties” categorically clarifies that
the arbitrator is bound by the terms of the contract insofar as
the award of interest from the date of cause of action to the
date of award. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the
date of award.”
20. From the aforesaid it becomes apparent that the arbitrator
could not have awarded any interest from the date when the
recovery was made till the award was made. However, interest
would have been payable from the date when the award was made
till the money was deposited in the High Court and thereafter
converted to fixed deposit receipts. Upon the amount being
deposited in the High Court, no further interest could be
paid to the respondents.
21. In view of the aforesaid, the appeals are allowed and it is
directed that the respondents shall not be entitled to any
interest on the amount which was recovered by the appellant,
till the date of award and thereafter till the date when the
amount awarded was deposited in the High Court, i.e. from
12th July, 1997.
2014 (March . Part) judis.nic.in/supremecourt/filename=41289
SURINDER SINGH NIJJAR, FAKKIR MOHAMED IBRAHIM KALIFULLA
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO2950-2951 OF 2014
(Arising out of SLP (C) Nos. 5384-5385 of 2013)
Union of India
…Appellant
VERSUS
M/s. Concrete Products & Const. Co. Etc. ...Respondents
J U D G M E N T
SURINDER SINGH NIJJAR, J.
1. Leave granted.
2. These appeals impugn the final judgment and decree dated 21st
March, 2012 passed by the High Court of Judicature at Madras
in OSA No. 44 & 45 of 2012 and M.P. No. 1 of 2012, whereby
the letters patent appeals of the Union of India were
dismissed. The appellant had entered into agreements with the
respondents on 30th January, 1983 and 30th March, 1984 for
supply of mono block concrete sleepers (in short “Sleepers”).
The agreements were renewed from time to time under which
the Union of India agreed to pay specified rates for supply
of each sleeper. The agreements/contracts also provided that
the rates payable shall be based on certain standard rates of
principal raw materials, such as cement, High Tensile Steel
(HTS) wires, molded steel, etc. The contracts further
provided that whenever the cost of the principal raw
materials increased or decreased, the contract price for
sleepers shall also correspondingly be increased or decreased
with effect from the date of such increase or decrease. The
agreements/contracts also provided for escalation, subject to
certain conditions prescribed under Clause 11 of the
Contract. The contracts/agreements further provided that the
respondents must exercise utmost economy in the purchase of
raw materials and that the escalation will be admitted on the
basis of actual price paid for the respective raw material.
This was subject to the ceiling on the price. As per Clause
12.2(c), ceiling was fixed “in the case of raw materials not
covered by either of the above, the lowest price (for
destination) arrived at on the basis of at least three
quotations obtained by the Contractor for each supply from
various established sources of supply of the respective raw
materials”.
3. The respondents/contractors purchased HTS wires from
established sources in terms of the various clauses of the
contract. The material was used in the manufacture of
sleepers. Payment for the sleepers was made by the
contractors at the lowest price quoted by the suppliers. The
quotation was also scrutinized alongwith the supporting
documents. The Railway authorities release the payment to
the respondent contractors only upon their satisfaction, upon
scrutiny of all the relevant documents.
4. A new contract was entered into between the parties in May,
1997. The railway administration changed the policy and
allowed the respondents/contractors to purchase the HTS
wires, subject to escalation as noticed above. By letter
dated 12th July, 1997, the railways administration informed
the respondents that the Railway Board had found that excess
payments had been made between 1989 and November, 1994 under
escalation clause for HTS wires. It was stated that the
amounts paid to the contractors were more than the prevalent
market price. Therefore, a sum of Rs. 1,80,92,462/- was
recoverable from M/s Concrete Products and Construction
Company, respondent in C.A. No. ____________ (arising out of
SLP(C) No. 5384 of 2013) and a sum of Rs.1,78,09,789/- was
recoverable from M/s. Kottukulam Engineers Private Limited,
respondent in C.A. No. ______ (arising out of SLP(C) No. 5385
of 2013). It was also pointed out that the aforesaid sums
would be recoverable from the sums due and payable to them in
the current/running contracts.
5. The contractors (respondents herein) challenged the aforesaid
recovery by filing Writ Petition No. 11805 and 10814 of 1999,
before the High Court of Madras. The railway administration
took up the preliminary objection, pleading that the writ
petition is not maintainable as the dispute has to be
referred to arbitration. The objection of the appellant was
accepted. The High Court appointed a Former Judge of the
Madras High Court as the arbitrator to adjudicate the
dispute. The contractors/respondents herein challenged the
aforesaid order of the learned Single Judge by filing
Writ Appeal Nos. 251 and 252 of 2000,
on the plea that the arbitrator had to be appointed in terms
of the agreement. By order dated 22nd March, 2000, the writ
appeals were allowed, and the order of the learned Single
Judge was set aside. The matter was remanded back to the
Single Judge for disposal in terms of the agreement.
On remand, the learned Single Judge, instead of referring
matter to arbitration in terms of the contract between the
parties allowed the writ petitions filed by the respondents
herein and directed the railway authorities to refund the sum of
Rs.1,69,78,883/- and Rs.1,78,09,789/- to the respondent firms,
respectively with interest thereon from the date of withholding
till the date the same is refunded. The order was directed to be
complied within a period of 4 week from the date of the receipt
of the order. This order was again challenged by the railway
administration by filing, first of all, Writ Appeal Nos. 2822
and 2823 of 2001. Subsequently, writ appeal miscellaneous
petition No. 21103 and 21104 of 2001 were also filed in the
aforesaid two writ appeals, seeking stay of the judgments under
appeal. On 30th April, 2004, the Division Bench dismissed the
writ appeals as well as the miscellaneous petitions.
6. The railway administration challenged the aforesaid order of
the Division Bench, before this Court by filing SLP No. 18244
and 18245 of 2004. Special leave was granted in both the
special leave petitions and the same were converted to Civil
Appeal Nos. 2999 and 3000 of 2005. By a short order passed
on 2nd May, 2005, the disputes between the parties were
referred by this court for adjudication by an Arbitration
Tribunal consisting solely of Mr. Justice K. Venkataswami, a
former Judge of this Court. This order was passed without
going into the merits of the disputes and the submissions
made by the learned Solicitor General on behalf of the
railways, that in view of the specific condition contained in
the contract, the dispute cannot be referred to an arbitrator
other than the authority referred to in the contract. This
Court directed that the matter shall be referred to Mr.
Justice Venkataswami. It was, however, made clear that the
order shall not be treated as a precedent. Pursuant to the
aforesaid order of this Court, the matter ultimately reached
the arbitrator. At the conclusion of the arbitral
proceedings, the final award was rendered on 24th June, 2006.
The sole arbitrator directed the appellants to refund the
amount awarded as follows:-
“In the result I direct the Respondents to refund a sum of
Rs.1,78,09,789/- recovered from the Claimants and interest of
Rs.2,38,28,960/- and subsequent interest at 18% P.A from
1.9.2005 on Rs. 1,78,09,789/- till date of payment in Kottukulam
Engineers Pvt. Ltd. matter. Ana a sum of Rs.1,69,78,883/- and
interest of Rs.2,25,25,513/- and subsequent interest at 18% P.A
from 1.09.2005 till date of payment in m/s Concrete Product &
Construction Company Trivalam.”
The counter claims made by the appellants were dismissed.
The railway administration challenged the common arbitration
award in O.P. No. 142 & 143 of 2007 under Section 33 of the
Arbitration and Conciliation Act, 1996 before High Court of
Madras. The learned Single Judge dismissed the arbitration
petitions filed by the railway administration by its order dated
30th November, 2010. Thereafter the contractors filed
applications before the High Court for direction to the railways
to make payments of the amount. Thereafter Application Nos.
780 & 781 of 2011 were filed in the O.P. Nos. 142 & 143 of 2007
by the contractors seeking a direction from the Court directing
that the amounts awarded by the learned Sole Arbitrator be paid
from the amount deposited by the railway administration with the
High Court along with the accrued interest as on date on the
aforesaid amount. These applications were allowed by order
dated 24th February, 2011. The High Court directed that the
awarded amount deposited by the railways in the Court for
satisfying the outcome of the original petitions which was
subsequently converted into fixed deposit receipts, be dispersed
to the respondent contractors.
7. Again the railway administration filed intra court appeals
challenging the order of the learned Single Judge principally
on the ground that the railway administration was not liable
to pay any interest for the period subsequent to the deposit
of the principal amount into Court. The appeals filed by the
railway administration were dismissed by the High Court by
the impugned order dated 21st March, 2012. The High Court
held that railway administration had not questioned the power
of the sole arbitrator to award interest. The issue with
regard to the award of interest was also not raised before
the learned Single Judge. For the first time before the
Division Bench, a plea was raised that the award of interest
was contrary to Clause No. 2401 of the Indian Railways
Standard Conditions of Contract. The Division Bench of the
High Court came to the conclusion that the aforesaid clause
has no application at all as it applies only to amounts,
which have been withheld or retained under lien. The amounts
having already been paid were sought to be illegally
recovered from the contractors. The sole arbitrator found
that such order of recovery can not be sustained in law and
the recoveries affected were illegal. The High Court,
however, concluded that Clause No. 2401 would have
application only in respect of amounts which had not been
paid to the contractors. The railway administration can not
exercise lien over the amounts already paid to the
contractors. Therefore, award of the arbitrator did not
suffer from any error apparent. It was further held that the
learned Single Judge having upheld the award, the appeals
deserve to be dismissed.
8. The appeals having been dismissed, the Union of India has
approached this Court in these Civil Appeals.
9. We have heard Mr. Mohan Jain, learned Additional Solicitor
General, appearing for the appellants.
10. It is submitted that the only question which arises for
consideration of this Court is whether the contractors are
entitled to interest for the amount withheld and if so at
what rate. The contractors had claimed interest @18 per cent
from the date of recovery till payment. Mr. Jain submitted
that the High Court has wrongly held that the appellant had
no authority to exercise lien on the current payments in
relation to the amount already released to the contractors.
It is submitted by Mr. Jain that the arbitrator had no
authority to award interest in view of the prohibition
contained under Section 31(7) of the Arbitration Act, 1996.
Learned Additional Solicitor General pointed out that the
contract entered into between the parties did not provide for
any payment of interest. Mr. Jain also pointed out that
under Clause 2403, the railway administration has a lien on
all the amounts of money that may be due to the contractors,
in praesenti or in the futuro. Therefore, when the
contractors were paid in excess of the amounts actually due,
the appellants were fully justified in recovering the amount
from the respondents by exercising the lien over the future
bills in terms of Clause No. 2403. He submits
that the sole arbitrator was wholly unjustified in awarding
interest, as under Clause No. 2403(b), it is specifically
provided that the contractors shall have no claim for
interest or damages whatsoever, for the amount so retained
even in case the arbitration award or any other legal
proceeding subsequently holds that the amount was withheld
illegally. Mr. Jain submits that the learned Single Judge
erred in holding that the award did not suffer from an error
apparent on this short ground. In support of the submission,
he relies on judgment of this Court in the case of Himachal
Pradesh Housing and Urban Development Authority & Anr. Vs.
Ranjit Singh Rana.[1]
11. Mr. Jain further submitted that the principal amount awarded
was deposited in Court in 2007. This amount was released to
the contractors on 24th April, 2011 alongwith the interest,
but 30 per cent of the amount was duly withheld. This was in
agreement with the respondents. He also pointed out that in
fact the recovery of the amount was deferred after
discussions with the respondents. In view of the agreements,
the respondents had no justification for claiming any
interest and the award granting such relief suffer from an
error apparent as it was contrary to the contract. In support
of this submission, he relies on judgment of this Court in
Sree Kamatchi Amman Construction Vs. Divisional Railway
Manager (Works), Palghat & Ors.[2] He also relied on Sayeed
Ahmed & Company Vs. State of Uttar Pradesh & Ors.[3] and
Union of India Vs. Krafters Engineering and Leasign Private
Limited[4].
12. Mr. C.S. Vaidyanathan, learned senior counsel appearing for
the respondents, on the other hand, submitted that the
payments have been made to the contractors from 1989 till
November, 1994. The High Court judgment in the writ
petitions challenging the recovery notice were set aside by
the High Court. The respondents had agreed to the deduction
of 30 per cent only because the contractors required the
money for execution of further works. He submitted that the
appellants can not possibly be permitted to claim that the
respondents had agreed to the deduction of 30 per cent of the
amount due. He pointed out that the recovery was made
against the supplies made under the agreements
of 9th December, 1991 in relation to the contracts
which were being performed in the year 1996. In such
circumstances, the appellants had no authority to exercise
lien on the amounts that accrued due to the works performed
subsequent to 9th December, 1991 under
Clause(s) 2401 or 2403 of the Contract. Mr. Vaidyanathan
emphasized that such recovery of the time barred claims is
clearly without any justification. The appellants having
failed to notify that 30 per cent of the amount due had been
withheld, the invocation of Clause No. 2401 or 2403
would be wholly illegal. Learned senior counsel further
submitted that the appellant can not justify the recovery on
the basis of the letter dated 22nd October, 1997 as it was
written without prejudice to the rights of the contractors.
The counter claims made by the appellant were clearly time
barred and hence, disallowed by the sole arbitrator. Mr.
Vaidyanathan relied on a Constitution Bench decision of this
Court in Executive Engineer, Dhenkanal Minor Irrigation
Division, Orissa & Ors. Vs. N.C. Budharaj (Deceased) by LRs.
& Ors.[5] Reliance was also placed upon Secretary, Irrigation
Department, Government of Orissa & Ors. Vs. G.C. Roy[6] in
support of the submission that a person deprived of his money
is entitled to be compensated by way of interest, therefore,
any provision in the contract which seeks to take away such a
right has to be strictly construed. The ratio in the
aforesaid judgment has been subsequently reiterated,
according to Mr. Vaidyanathan, in the case of Sree Kamatchi
Amman Construction (supra). Mr. Vaidyanathan submitted that
the railway administration had no authority either under
Clause 2401 or 2403 of the contract to recover the amounts
allegedly overpaid for the work done prior to 1991 from the
amounts due to the contractors for the works done
subsequently.
13. We have considered the submissions made by the learned
counsel for the parties.
14. Clause Nos. 2401 and 2403 are as under:-
“2401. Whenever any claim or claims for payment of a sum of
money arises out of or under the contract against the
Contractor, the Purchaser shall be entitled to withhold and also
have a lien to retain such sum or sums in whole or in part from
the security, if any, deposited by the Contractor and for the
purpose aforesaid, the Purchaser shall be entitled to withhold
the said cash security deposit or the security, if any,
furnished as the case may be and also have a lien over the same
pending finalization or adjudication of any such claim. In the
event of the security being insufficient to cover the claimed
amount or amounts or if no security has been taken from the
Contractor, the Purchaser shall be entitled to withhold and have
lien to retain to the extent of the such claimed amount or
amounts referred to supra, from any sum or sums found payable or
which at any time-thereafter may become payable to the
Contractor under the same contract or any other contract with
the Purchaser or the Government pending finalization or
adjudication of any such claim.
It is an agreed term of the contract that the sum of money or
moneys so withheld or retained under the lien referred to above,
by the Purchaser will be kept withheld or retained as such by
the Purchaser till the claim arising out of or under the
contract is determined by the Arbitrator (if the contract is
governed by the arbitration clause) or by the competent court as
prescribed under Clause 2703 hereinafter provided, as the case
may be, and that the Contractor will have no claim for interest
or damages whatsoever on any account in respect of such
withholding or retention under the lien referred to supra and
duly notified as such to the contractor.”
“2403. Lien in respect of Claims in other Contracts:
a) Any sum of money due and payable, to the Contractor
(including the security deposit, returnable to him)
under the contract may withhold or retain by way of lien
by the Purchaser or Government against any claim of the
Purchaser or Government in respect of payment of a sum
of money arising out of or under any other contract made
by the Contractor with the Purchaser or Government.
b) It is an agreed term of the contract that the sum of
money so withheld or retained under this clause by the
Purchaser or Government will be kept withheld or
retained as such by the Purchaser or Government till his
claim arising out of the same contract or any other
contract is either mutually settled or determined by the
arbitrator, if the contract is governed by the
arbitration clause or by the competent court under
Clause 2703 hereinafter provided, as the case may be,
and that the Contractor shall have no claim for interest
or damages whatsoever on this account or on any other
ground in respect of any sum of money withheld or
retained under this clause and duly notified as such to
the Contractor.”
15. Clause 2401 provides that the railways shall be entitled to
withhold and also have a lien to retain any amount deposited
as security by the contractor to satisfy any claims arising
out of or in the contract. In such circumstances, the
railways can withhold the amount deposited by the contractors
as security and also have lien over the same pending
finalization or adjudication of the claim. In case, the
security deposit is insufficient to cover the claim of the
railways, it is entitled to withhold and have lien to the
extent of the amount claimed from any sum payable for any
works done by the contractor thereafter under the same
contract or any other contract. This withholding of the
money and the exercise of the lien is pending finalization or
adjudication of any claim. This clause further provided that
the amount withheld by the railways over which it is
exercising lien will not entitle the contractor to claim any
interest or damages for such withholding or retention under
lien by the railways.
16. Clause 2403 again provides that any sum of money due and
payable to the contractor under the contract may be withheld
or retained by way of lien by the railway authorities or the
Government in respect of payment of a sum of money arising
out of or under any other contract made by the contractor
with the railway authority or the Government.
17. Clause 2403(b) further provides that it is an agreed term of
the contract that against the sum of money withheld or
retained under lien, the contractor shall have no claim for
interest or damages whatsoever provided the claim has been
duly notified to the contractor.
18. We are of the opinion that the sole arbitrator in awarding
interest to the contractors has failed to take into account
the provisions contained in the aforesaid two clauses. We
find merit in the submission made by learned Additional
Solicitor General that award of interest at-least from the
date when the amount was deposited in Court was wholly
unwarranted. Therefore, the High Court as well as the
arbitrator, in our opinion, have committed an error of
jurisdiction in this respect. This view of ours will find
support from the judgment of this Court in the case of Sayeed
Ahmed & Company (supra), wherein it has been held as follows:-
“16. In view of clause (a) of sub-section (7) of Section 31 of
the Act, it is clear that the arbitrator could not have awarded
interest up to the date of the award, as the agreement between
the parties barred payment of interest. The bar against award of
interest would operate not only during the pre-reference period,
that is, up to 13-3-1997 but also during the pendente lite
period, that is, from 14-3-1997 to 31-7-2001.”
19. This view has been reiterated by this Court in Sree Kamatchi
Amman Construction (supra), wherein it has been held as
follows:-
“19. Section 37(1) of the new Act by using the words “unless
otherwise agreed by the parties” categorically clarifies that
the arbitrator is bound by the terms of the contract insofar as
the award of interest from the date of cause of action to the
date of award. Therefore, where the parties had agreed that no
interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the
date of award.”
20. From the aforesaid it becomes apparent that the arbitrator
could not have awarded any interest from the date when the
recovery was made till the award was made. However, interest
would have been payable from the date when the award was made
till the money was deposited in the High Court and thereafter
converted to fixed deposit receipts. Upon the amount being
deposited in the High Court, no further interest could be
paid to the respondents.
21. In view of the aforesaid, the appeals are allowed and it is
directed that the respondents shall not be entitled to any
interest on the amount which was recovered by the appellant,
till the date of award and thereafter till the date when the
amount awarded was deposited in the High Court, i.e. from
12th July, 1997.
22. The appeals are allowed in the aforesaid terms.
...………………….….….J.
[Surinder Singh
Nijjar]
………….……….……………………….J.
[Fakkir Mohamed Ibrahim Kalifulla]
New Delhi;
March 3, 2014.
-----------------------
[1] (2012) 4 SCC 505
[2] (2010) 8 SCC 767
[3] (2009) 12 SCC 26
[4] (2011) 7 SCC 279
[5] (2001) 2 SCC 721
[6] (1992) 1 SCC 508
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