Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
SPECIAL LEAVE PETITION [C] No.11114/2009
Union of India … Petitioner
Vs.
M/s. Ambica Construction … Respondent
(With SLP [C] No.17219/2009]
JUDGM ENT
ARUN MISHRA, J.
1. The issue involved in the reference is in regard to the power of
the Arbitrator to award pendente lite interest when contract contains bar
for grant of interest in a case covered by the Arbitration Act, 1940
(hereinafter referred to as “the Act”). A Division Bench of this Court
had doubted the correctness of the decisions in Board of Trustees for the
Port of Calcutta v. Engineers-De-Space-Age (1996) 1 SCC 516; and Madnani
Construction Corporation (P) Ltd. v. Union of India and Others (2010) 1 SCC
549. In view of the decision of the Constitution Bench judgment in
Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy
(1992) 1 SCC 508 and Executive Engineer, Dhenkanal Minor Irrigation
Division, Orissa & Ors. v. N.C. Budharaj (D) by L.Rs. & Ors. (2001) 2 SCC
721 which held that the Arbitrator had the jurisdiction and authority to
award interest for pre-reference period, pendente lite and future period if
there was no express bar in the contract regarding award of interest. A
doubt was expressed about the correctness of the decision in Engineers-De-
Space Age (supra) in Sayeed Ahmed & Co. v. State of U.P. & Ors. (2009) 12
SCC 26 and Sree Kamatchi Amman Constructions v. Divisional Railway Manager
(Works), Palghat & Ors. (2010) 8 SCC 767. Hence the matter had been
referred to a larger Bench for decision.
2. The case has a chequered history. The tender of M/s. Ambica
Construction for fabrication of tie bars from M.S. Flats in CST-9 sleepers
was accepted on 8.9.1989. Final agreement was executed on 30.11.1989. The
work was completed on 21.11.1990. With respect to payments, certain
differences and disputes arose between the parties. Thus M/s. Ambica
Construction prayed for appointment of an Arbitrator. On 5.3.1991 as the
petitioner M/s. Ambica Construction was in serious financial difficulties,
it accepted the amount in full and final settlement. Later on, the Union of
India informed the petitioner on 11.3.1991 that the matter was under
consideration. However the Arbitrator was not appointed. An application
under section 20 of the Act was filed before the High Court of Calcutta for
referring the case to arbitration. On 2.6.1992 the High Court directed to
file the arbitration agreement in the court and appointed two Arbitrators
in terms of the arbitration clause. Said Arbitrators failed to publish the
award and as such an application was filed for revocation of the authority
of joint Arbitrators and another sole Arbitrator was appointed. The sole
Arbitrator ultimately published the award on 30.12.1997. On an application
filed by the Union of India, the High Court vide order dated 9.4.1998
remitted the award to the Arbitrator to give an item-wise break-up. On
12.5.1998 the sole Arbitrator published the item-wise award. Again the
Union of India questioned the same before the High Court. The award was set
aside on the ground that the Arbitrator had not given an intelligible award
in terms of clause 64(3)(a)(iii) of the agreement and had not taken into
effect the supplementary agreement dated 5.3.1991. The appeal preferred by
the petitioner was dismissed by the Division Bench of the High Court on
15.10.2004 against which an SLP was filed in which leave was granted and
ultimately C.A. No.6621/2005 was allowed and case was remitted vide order
dated 7.11.2005 passed by this Court to the Arbitrator for assigning
reasons and to pass fresh award. Thereafter, Arbitrator passed a fresh
award on 11.2.2006. Again an application was filed by the Union of India
under sections 30 and 33 of the Act. The Single Judge dismissed the
application vide order dated 26.6.2007. Union of India filed an application
for recall. The order dated 26.6.2007 was recalled. Vide order dated
22.8.2007 learned Single Judge set aside the award with regard to interest
for pre-reference period and directed that interest would be allowed on the
principal sum of Rs.9,82,660/- at the rate of 10% per annum from 1.9.1992
the date from which the original Arbitrator entered upon the reference. An
appeal was preferred before the Division Bench and the same had been partly
allowed with regard to claim Nos.6 and 7. Aggrieved thereby, M/s. Ambica
Construction had preferred S.L.P. [C] No.17219/2009 in this Court and Union
of India has also assailed the judgment and order of the High Court in
S.L.P. [C] No.11114/2009.
3. The only question for consideration is whether an Arbitrator has the
power to award pendente lite interest in case contract bars the same in a
case covered by Act and decisions of this Court in Engineers De-Space Age
(supra) and Madnani Construction Corporation (P) Ltd. (supra) have been
correctly decided.
4. It was submitted on behalf of the Union of India that the Arbitrator
is bound by the terms of the contract and cannot award interest in case the
contract bars the same. On the other hand, learned counsel appearing on
behalf of M/s. Ambica Construction has contended that in view of the
decision in Engineers-De-Space Age (supra) followed in Madnani Construction
Corporation (P) Ltd. (supra) notwithstanding the terms in the contract
agreement barring the award of interest would cover the pre-reference
period and not pendente lite interest.
5. There are certain provisions which are statutorily implied in
arbitration agreement unless excluded in the agreement. Section 3 of the
Act of 1940 deals with the provisions which are implied in the arbitration
agreement. Section 3 is extracted below :
“3. Provisions implied in arbitration agreement.—An arbitration
agreement, unless a different intention is expressed therein, shall be
deemed to include the provisions set out in the First Schedule in so far as
they are applicable to the reference.”
The provisions of section 3 make it clear that unless a different
intention is expressed in the arbitration agreement, the agreement would
include the provisions contained in the First Schedule so far as they are
applicable to the reference. Provisions in the First Schedule contain 8
paragraphs. It provides for reference to a sole Arbitrator and in case
there are even numbers of Arbitrators, appointment of umpire is also
provided. An Arbitrator is required to pass award within 4 months from the
date of entering on the reference. In case Arbitrator fails to pass an
award within the specified time the umpire shall make the award within 2
months. Para 6 of First Schedule provides that the Arbitrator or umpire
shall examine the matters in difference and the award shall be final and
binding. Arbitrator or umpire has the power for examining the witnesses and
production of relevant documents. Para 8 of Schedule I provides for costs
of reference and awards shall be in the discretion of the Arbitrator.
6. “Court” has been defined in section 2(c) of the Act to mean a
civil court having jurisdiction to decide the questions forming the subject-
matter of the reference. Section 41 of the Act is extracted hereunder:
“41. Procedure and powers of Court. – Subject to the provisions of this Act
and of rules made thereunder :
The provisions of the Code of Civil Procedure, 1908 (5 of 1908), shall
apply to all proceedings before the Court, and to all appeals, under this
Act, and
The Court shall have, for the purpose of, and in relation to arbitration
proceedings, the same power of making orders in respect of any of the
matters set out in the Second Schedule as it has for the purpose of, and in
relation to any proceedings before the Court:
Provided that nothing in CI. (b) shall be taken to prejudice any power
which may be vested in an Arbitrator or umpire for making orders with
respect to any of such matters.”
The court can exercise the power specified in Second Schedule of the
Act. However, Arbitrator is not a court. Arbitrator is the outcome of
agreement. He decides the disputes as per the agreement entered into
between the parties. Arbitration is an alternative forum for resolution of
disputes but an Arbitrator ipso facto does not enjoy or possess all the
powers conferred on the courts of law.
7. Section 29 of the Act confers on the court power to award interest
from the date of decree. Section 34 of the C.P.C. confers on the court
power to award interest prior to the institution of the suit and during
pendency of the suit and post decree.
8. A Constitution Bench of this Court in G.C. Roy (supra) has considered
the question of power of the Arbitrator to award pendente lite interest and
it has been laid down that if the arbitration agreement or the contract
itself provides for interest, Arbitrator would have the jurisdiction to
award the interest. Similarly, where the agreement expressly provides that
no interest pendente lite shall be payable on the amount due, the
Arbitrator has no power to award pendente lite interest. In G.C. Roy
(supra) this Court has held thus :
“xxx If the arbitration agreement or the contract itself provides for
award of interest on the amount found due from one party to the other, no
question regarding the absence of Arbitrator’s jurisdiction to award the
interest could arise as in that case the Arbitrator has power to award
interest pendent lite as well. Similarly, where the agreement expressly
provides that no interest pendente lite shall be payable on the amount due,
the Arbitrator has no power to award pendente lite interest. But where the
agreement does not provide either for grant or denial of interest on the
amount found due, the question arises whether in such an event the
Arbitrator has power and authority to grant pendente lite interest.”
The question involved in G.C. Roy (supra) was with respect to the
award of interest for the period commencing from the date of Arbitrator
entering upon the reference till the date of making the award. In G.C. Roy
(supra), this Court has considered decisions in Raipur Development
Authority & Ors. v. M/s. Chokhamal Contractors & Ors., (1989) 2 SCC 721;
Executive Engineer (Irrigation) Balimela & Ors. v. Abhaduta Jena & Ors.,
(1988) 1 SCC 418; Nachiappa Chettiar & Ors, v. Subramaniam Chettiar, AIR
1960 SC 307; Satinder Singh v. Amrao Singh & Anr., AIR 1961 SC 908; Firm
Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd., Indore, AIR 1967 SC
1030; Union of India v. Bungo Steel Furniture Pvt. Ltd., AIR 1967 SC 1032;
Ashok Construction Company v. Union of India, (1971) 3 SCC 66; State of
M.P. v. M/s. Saith and Skelton Pvt. Ltd., (1972) 1 SCC 702, various foreign
courts decisions and decisions of the High Court. This Court has also
referred to Halsbury’s Laws of England in Paras 36 & 37 thus:-
“36. “534. Express and implied clauses.— In general, the parties to an
arbitration agreement may include in it such clauses as they think fit. By
statute, however, certain terms are implied in an arbitration agreement
unless a contrary intention is expressed or implied therein. Moreover, it
is normally an implied term of an arbitration agreement that the Arbitrator
must decide the dispute in accordance with the ordinary law. This includes
the basic rules as to procedure, although parties can expressly or
impliedly consent to depart from those rules. The normal principles on
which terms are implied in an agreement have to be considered in the
context that the agreement relates to an arbitration.”
37. At page 303, para 580 (4th edn., Vol. 2) dealing with the award of
interest, it reads:
“580. Interest.— A Arbitrator or umpire has power to award interest on the
amount of any debt or damages for the whole or any part of the period
between the date when the cause of action arose and the date of the award.”
Ultimately, in G.C. Roy (supra), this Court has answered the
question whether Arbitrator has the power to award interest pendent lite.
Their Lordships have reiterated that they have dealt with the situation
where the agreement does not provide for grant of such interest nor does it
prohibit such grant when the agreement is silent as to award of interest.
This Court has laid down various principles in para 43 of the report thus:
“43. The question still remains whether Arbitrator has the power to award
interest pendente lite, and if so on what principle. We must reiterate that
we are dealing with the situation where the agreement does not provide for
grant of such interest nor does it prohibit such grant. In other words, we
are dealing with a case where the agreement is silent as to award of
interest. On a conspectus of aforementioned decisions, the following
principles emerge:
(i) A person deprived of the use of money to which he is legitimately
entitled has a right to be compensated for the deprivation, call it by any
name. It may be called interest, compensation or damages. This basic
consideration is as valid for the period the dispute is pending before the
Arbitrator as it is for the period prior to the Arbitrator entering upon
the reference. This is the principle of Section 34, Civil Procedure Code
and there is no reason or principle to hold otherwise in the case of
Arbitrator.
(ii) An Arbitrator is an alternative form (sic forum) for resolution of
disputes arising between the parties. If so, he must have the power to
decide all the disputes or differences arising between the parties. If the
Arbitrator has no power to award interest pendente lite, the party claiming
it would have to approach the court for that purpose, even though he may
have obtained satisfaction in respect of other claims from the Arbitrator.
This would lead to multiplicity of proceedings.
(iii) An Arbitrator is the creature of an agreement. It is open to the
parties to confer upon him such powers and prescribe such procedure for him
to follow, as they think fit, so long as they are not opposed to law. (The
proviso to Section 41 and Section 3 of Arbitration Act illustrate this
point). All the same, the agreement must be in conformity with law. The
Arbitrator must also act and make his award in accordance with the general
law of the land and the agreement.
(iv) Over the years, the English and Indian courts have acted on the
assumption that where the agreement does not prohibit and a party to the
reference makes a claim for interest, the Arbitrator must have the power to
award interest pendente lite. Seth Thawardas Pherumal v. Union of India,
AIR 1955 SC 468 has not been followed in the later decisions of this Court.
It has been explained and distinguished on the basis that in that case
there was no claim for interest but only a claim for unliquidated damages.
It has been said repeatedly that observations in the said judgment were not
intended to lay down any such absolute or universal rule as they appear to,
on first impression. Until Executive Engineer (Irrigation) Balimela & Ors.
v. Abhaduta Jena & Ors., (1988) 1 SCC 418 almost all the courts in the
country had upheld the power of the Arbitrator to award interest pendente
lite. Continuity and certainty is a highly desirable feature of law.
(v) Interest pendente lite is not a matter of substantive law, like
interest for the period anterior to reference (pre-reference period). For
doing complete justice between the parties, such power has always been
inferred.”
“44. Having regard to the above consideration, we think that the following
is the correct principle which should be followed in this behalf:
Where the agreement between the parties does not prohibit grant of interest
and where a party claims interest and that dispute (along with the claim
for principal amount or independently) is referred to the Arbitrator, he
shall have the power to award interest pendente lite. This is for the
reason that in such a case it must be presumed that interest was an implied
term of the agreement between the parties and therefore when the parties
refer all their disputes — or refer the dispute as to interest as such — to
the Arbitrator, he shall have the power to award interest. This does not
mean that in every case the Arbitrator should necessarily award interest
pendente lite. It is a matter within his discretion to be exercised in the
light of all the facts and circumstances of the case, keeping the ends of
justice in view.”
The Constitution Bench of this Court has laid down that where the
agreement between the parties does not prohibit grant of interest and where
the party claims interest and that dispute is referred to the Arbitrator,
he shall have the power to award interest pendent lite. The law declared
has been held applicable prospectively.
9. Another Constitution Bench of this Court in N.C. Budharaj (supra),
considered the question of award of interest by the Arbitrator for the pre-
reference period. In that connection, discussion has been made and it has
been observed as long as there is nothing in the arbitration agreement to
exclude the jurisdiction of the Arbitrator entertaining claim for interest
on the amount due under the contract or any provision to claim interest on
the amount due, the jurisdiction of the Arbitrator to award interest for
pre-reference period under section 29 of the Arbitration Act, 1940 has to
be upheld. In majority opinion, this Court has held thus:
“25. If that be the position, courts which of late encourage litigants to
opt for and avail of the alternative method of resolution of disputes,
would be penalising or placing those who avail of the same in a serious
disadvantage. Both logic and reason should counsel courts to lean more in
favour of the Arbitrator holding to possess all the powers as are necessary
to do complete and full justice between the parties in the same manner in
which the civil court seized of the same dispute could have done. By
agreeing to settle all the disputes and claims arising out of or relating
to the contract between the parties through arbitration instead of having
recourse to civil court to vindicate their rights the party concerned
cannot be considered to have frittered away and given up any claim which
otherwise it could have successfully asserted before courts and obtained
relief. By agreeing to have settlement of disputes through arbitration, the
party concerned must be understood to have only opted for a different forum
of adjudication with less cumbersome procedure, delay and expense and not
to abandon all or any of its substantive rights under the various laws in
force, according to which only even the Arbitrator is obliged to adjudicate
the claims referred to him. As long as there is nothing in the arbitration
agreement to exclude the jurisdiction of the Arbitrator to entertain a
claim for interest on the amounts due under the contract, or any
prohibition to claim interest on the amounts due and become payable under
the contract, the jurisdiction of the Arbitrator to consider and award
interest in respect of all periods subject only to Section 29 of the
Arbitration Act, 1940 and that too the powers of the court thereunder, has
to be upheld. The submission that the Arbitrator cannot have jurisdiction
to award interest for the period prior to the date of his appointment or
entering into reference which alone confers upon him power, is too stale
and technical to be countenanced in our hands, for the simple reason that
in every case the appointment of an Arbitrator or even resort to court to
vindicate rights could be only after disputes have cropped up between the
parties and continue to subsist unresolved, and that if the Arbitrator has
the power to deal with and decide disputes which cropped up at a point of
time and for the period prior to the appointment of an Arbitrator, it is
beyond comprehension as to why and for what reason and with what
justification the Arbitrator should be denied only the power to award
interest for the pre-reference period when such interest becomes payable
and has to be awarded as an accessory or incidental to the sum awarded as
due and payable, taking into account the deprivation of the use of such sum
to the person lawfully entitled to the same.
26. For all the reasons stated above, we answer the reference by holding
that the Arbitrator appointed with or without the intervention of the
court, has jurisdiction to award interest, on the sums found due and
payable, for the pre-reference period, in the absence of any specific
stipulation or prohibition in the contract to claim or grant any such
interest. The decision in Jena case taking a contraview does not lay down
the correct position and stands overruled, prospectively, which means that
this decision shall not entitle any party nor shall it empower any court to
reopen proceedings which have already become final, and apply only to any
pending proceedings. No costs.”
It has also been observed that G.C. Roy’s case (supra) cannot be said
to have overruled Executive Engineer (Irrigation) Balimela’s case (supra)
insofar as it dealt with the power of Arbitrator to award interest for the
pre-reference period.
10. A 3 Judges Bench of this Court in Hindustan Construction Co. Ltd. v.
State of Jammu & Kashmir (1992) 4 SCC 217 has laid down that the Arbitrator
has the power to award pendente lite interest on the basis of principle of
Section 34 of the Code of Civil Procedure though same is not applicable.
However, the observation has to be considered in case there is no express
bar in the agreement for awarding pendente lite interest as it has simply
followed what has been laid down in G.C. Roy (supra). This Court has laid
down thus:
“5. The question of interest can be easily disposed of as it is covered by
recent decisions of this Court. It is sufficient to refer to the latest
decision of a five Judge bench of this Court in Secretary, Irrigation
Department, Govt. of Orissa & Ors. v. G.C. Roy. Though the said decision
deals with the power of the Arbitrator to award interest pendente lite, the
principle of the decision makes it clear that the Arbitrator is competent
to award interest for the period commencing with the date of award to the
date of decree or date of realisation, whichever is earlier. This is also
quite logical for, while award of interest for the period prior to an
Arbitrator entering upon the reference is a matter of substantive law, the
grant of interest for the post-award period is a matter of procedure.
Section 34 of Code of Civil Procedure provides both for awarding of
interest pendente lite as well as for the post-decree period and the
principle of Section 34 has been held applicable to proceedings before the
Arbitrator, though the section as such may not apply. In this connection,
the decision in Union of India v. Bungo Steel Furniture (P) Ltd. AIR 1967
SC 1032 may be seen as also the decision in Gujarat Water Supply & Sewerage
Board v. Unique Erectors (Gujarat) P. Ltd. 1989 1 532 SCC which upholds
the said power though on a somewhat different reasoning. We, therefore,
think that the award on Item No. 8 should have been upheld.”
11. In Sayeed Ahmed (supra) various decisions of this Court have been
referred. In State of Orissa v. B.N. Agarwalla, (1997) 2 SCC 469, this
Court has laid down thus:
“18. In view of the aforesaid decisions there can now be no doubt with
regard to the jurisdiction of the Arbitrator to grant interest. The
principles which can now be said to be well-settled are that the Arbitrator
has the jurisdiction to award pre-reference interest in cases which arose
after the Interest Act, 1978 had become applicable. With regard to those
cases pertaining to the period prior to the applicability of the Interest
Act, 1978, in the absence of any substantive law, contract or usage, the
Arbitrator has no jurisdiction to award interest. For the period during
which the arbitration proceedings were pending in view of the decision in
G.C. Roy case and Hindustan Construction Ltd. case, the Arbitrator has the
power to award interest. The power of the Arbitrator to award interest for
the post-award period also exists and this aspect has been considered in
the discussion relating to Civil Appeal No. 9234 of 1994 in the later part
of this judgment.”
12. The decision in B.N. Agarwalla (supra) has been considered and
distinguished by this Court in Sayeed Ahmed (supra) thus :
“20. The appellant next relied upon the judgment of this Court in State of
Orissa v. B.N. Agarwalla (1997) 2 SCC 469. In that case, this Court held
that the Arbitrator has jurisdiction to award: (i) interest for pre-
reference period, (ii) interest for pendente lite, and (iii) future
interest. This Court also held that the following part of Clause (4) of the
contract dealing with “Rates, materials and workmanship” did not bar award
of interest by the Arbitrator on the claims of the contractor: (SCC p. 478,
para 22)
No interest is payable on amount withheld under the item of the agreement.
Interpreting the said clause (which provided that interest was not payable
on the amount which was withheld), this Court held that it referred only to
the amount withheld by the employer State towards retention money for the
defect liability period. This Court in fact clarified the position that if
the terms of contract expressly stipulated that no interest would be
payable, then the Arbitrator would not get the jurisdiction to award
interest. As Clause G1.09 in the present case contains an express bar and
is different from the clause considered in B.N. Agarwalla (supra) the said
decision is also of no assistance.”
In B.N. Agarwalla (supra) this Court has observed that Clause 4 of
the contract dealing with “Rates, materials and workmanship” did not bar
award of interest by the Arbitrator on the claims of the contractor. The
stipulation was no interest was payable on amount withheld under the
agreement.
13. In Sayeed Ahmed (supra), this Court has referred the decision in
State of U.P. v. Harish Chandra & Co. (1999) 1 SCC 63, in which this Court
has interpreted the stipulation contained in clause 1.9 of the agreement
which came up for consideration before a 3 Judges Bench of this Court.
Clause 1.9 is extracted hereunder:
“1.9 No claim for delayed payment due to dispute etc.—No claim for
interest or damages will be entertained by the Government with respect to
any moneys or balances which may be lying with the Government owing to any
dispute, difference; or misunderstanding between the Engineer-in-Charge in
marking periodical or final payments or in any other respect whatsoever.”
This Court has interpreted the clause 1.9 and held that there is no
provision which could be culled out against the respondent-contractor that
he could not raise claim of interest by way of damages before the
Arbitrator on the relevant items placed for adjudication.
This Court in Sayeed Ahmed (supra) has also distinguished the decision in
Harish Chandra (supra) in which clause 1.09 came up for consideration thus
:
“17. x x x x x This Court held that the said clause did not bar award of
interest on any claim for damages or for claim for payment for work done.
We extract below the reasoning for such decision: (SCC p. 67, para 10)
“10. A mere look at the clause shows that the claim for interest by way of
damages was not to be entertained against the Government with respect to
only a specified type of amount, namely, any moneys or balances which may
be lying with the Government owing to any dispute, difference between the
Engineer-in-Charge and the contractor; or misunderstanding between the
Engineer-in-Charge and the contractor in making periodical or final
payments or in any other respect whatsoever. The words ‘or in any other
respect whatsoever’ also referred to the dispute pertaining to the moneys
or balances which may be lying with the Government pursuant to the
agreement meaning thereby security deposit or retention money or any other
amount which might have been with the Government and refund of which might
have been withheld by the Government. The claim for damages or claim for
payment for the work done and which was not paid for would not obviously
cover any money which may be said to be lying with the Government.
Consequently, on the express language of this clause, there is no
prohibition which could be culled out against the respondent contractor
that he could not raise the claim for interest by way of damages before the
Arbitrator on the relevant items placed for adjudication.”
(emphasis supplied)
18. In Harish Chandra (1999) 1 SCC 63 a different version of Clause 1.09
was considered. Having regard to the restrictive wording of that clause,
this Court held that it did not bar award of interest on a claim for
damages or a claim for payments for work done and which was not paid. This
Court held that the said clause barred award of interest only on amounts
which may be lying with the Government by way of security deposit/retention
money or any other amount, refund of which was withheld by the Government.
19. But in the present case, Clause G1.09 is significantly different. It
specifically provides that no interest shall be payable in respect of any
money that may become due owing to any dispute, difference or
misunderstanding between the Engineer-in-Charge and contractor or with
respect to any delay on the part of the Engineer-in-Charge in making
periodical or final payment or in respect of any other respect whatsoever.
The bar under Clause G1.09 in this case being absolute, the decision in
Harish Chandra (supra) will not assist the appellant in any manner.”
In Harish Chandra (supra), this Court has laid down that clause 1.09 did
not bar award of interest for claim of damages for payment for work done
and which was not paid for would not obviously cover any money which may be
said to be lying with the Government.
14. In our opinion, it would depend upon the nature of the ouster clause
in each case. In case there is express stipulation which debars pendente
lite interest, obviously, it cannot be granted by Arbitrator. The award of
pendente lite interest inter alia must depend upon the overall intention of
the agreement and what is expressly excluded.
15. In Sayeed Ahmed (supra), this Court has referred the decision in
Superintending Engineer v. B. Subba Reddy (1999) 4 SCC 423 and observed
thus :
“11. Two more decisions dealing with cases arising under the Arbitration
Act, 1940 require to be noticed. In Superintending Engineer v. B. Subba
Reddy (1999) 4 SCC 423 this Court held that interest for pre-reference
period can be awarded only if there was an agreement to that effect or if
it was allowable under the Interest Act, 1978. Therefore, claim for
interest for pre-reference period, which is barred as per the agreement or
under the Interest Act, 1978 could not be allowed. This Court however held
that the Arbitrator can award interest pendente lite and future interest.”
In Sayeed Ahmed (supra) this Court has also referred the decision in
State of Rajasthan & Anr. v. Ferro Concrete Construction (P) Ltd. (2009) 12
SCC 1 thus :
“12. The principles relating to interest were summarised by this Court in
State of Rajasthan v. Ferro Concrete Construction (P) Ltd. (2009) 12 SCC 1
thus:
(a) Where a provision for interest is made on any debt or damages, in
any agreement, interest shall be paid in accordance with such agreement.
(b) Where payment of interest on any debt or damages is barred by
express provision in the contract, no interest shall be awarded.
(c) Where there is no express bar in the contract and where there is
also no provision for payment of interest then the principles of Section 3
of the Interest Act will apply and consequently interest will be payable:
(i) where the proceedings relate to a debt (ascertained sum) payable by
virtue of a written instrument at a certain time, then from the date when
the debt is payable to the date of institution of the proceedings;
(ii) where the proceedings is for recovery of damages or for recovery of
a debt which is not payable at a certain time, then from the date mentioned
in a written notice given by the person making a claim to the person liable
for the claim that interest will be claimed.
(d) Payment of interest pendente lite and future interest shall not be
governed by the provisions of the Interest Act, 1978, but by the provisions
of Section 34 of the Code of Civil Procedure, 1908 or the provisions of law
governing arbitration as the case may be.”
In Sayeed Ahmed (supra), the provisions of Arbitration & Conciliation
Act, 1996 were applicable.
16. A 3-Judge Bench of this Court in Union of India v. Bright Power
Projects (India) Pvt. Ltd. (2015) 9 SCC 695 has considered the provisions
contained in section 31(7)(a) of the Arbitration and Conciliation Act, 1996
and considered the words “unless otherwise agreed by parties” in the said
section and held that the Arbitrator is bound by the terms of the contract
so far as award of interest from the date of execution to the date of award
is concerned. This Court considered clause 13(3) of the contract and came
to the conclusion that once agreed that contractor would not claim any
interest on the amount to be paid under the contract, he could not have
claimed the interest. The Arbitrator while awarding interest failed to
consider the provisions of section 31(7)(a) and binding nature of clause
13(3) of the terms of agreement. With respect to section 31(7)(a) of the
Arbitration & Conciliation Act, 1996 this Court in Union of India v. Bright
Power Projects (supra) has observed thus :
“18. Section 31(7)(a) of the Act ought to have been read and interpreted by
the Arbitral Tribunal before taking any decision with regard to awarding
interest. The said section, which has been reproduced hereinabove, 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.”
Section 31(7)(a) of the 1996 Act confers power on Arbitrator to award
interest pendente lite, “unless otherwise agreed by parties”. Thus, it is
clear from the provisions contained in section 31(7)(a) that the contract
between the parties has been given importance and is binding on the
Arbitrator. Arbitration clause is also required to be looked into while
deciding the power of the Arbitrator and in case there is any bar contained
in the contract on award of interest, it operates on which items and in the
arbitration clause what are the powers conferred on Arbitrator and whether
bar on award of interest has been confined to certain period or it relates
to pendency of proceedings before Arbitrator.
17. In Sree Kamatchi Amman Constructions (supra), it was observed that
the words “unless otherwise agreed by the parties” in section 31 of new Act
of 1996 clarify that Arbitrator is bound by the terms of contract for award
of interest pendente lite. It was also held thus :
“19. Section 31(7) 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. We are of the view that the decisions in Engineers-De-Space-Age (supra)
and Madnani (supra) are inapplicable for yet another reason. In Engineers-
De-Space-Age (supra) and Madnani (supra) the Arbitrator had awarded
interest for the pendente lite period. This Court upheld the award of such
interest under the old Act on the ground that the Arbitrator had the
discretion to decide whether interest should be awarded or not during the
pendente lite period and he was not bound by the contractual terms insofar
as the interest for the pendente lite period. But in the instant case the
Arbitral Tribunal has refused to award interest for the pendente lite
period. Where the Arbitral Tribunal has exercised its discretion and
refused award of interest for the period pendente lite, even if the
principles in those two cases were applicable, the award of the Arbitrator
could not be interfered with. On this ground also the decisions in
Engineers-De-Space-Age (supra) and Madnani (supra) are inapplicable. Be
that as it may.”
18. This Court in Union of India v. Krafters Engineering & Leasing Pvt.
Ltd. (2011) 7 SCC 279 has held that by a provision in the agreement, the
jurisdiction of the Arbitrator to award interest can be excluded. This
Court considered the nature of the claim vis-à-vis the provision contained
in the relevant clause.
19. It is apparent from various decisions referred to above that in G.C.
Roy (supra) Constitution Bench of this Court has laid down where agreement
expressly provides that no interest pendente lite shall be payable on
amount due. The arbitrator has no power to award interest. In N.C.
Budharaj (supra) a Constitution Bench has observed that in case there is
nothing in the arbitration agreement to exclude jurisdiction of arbitrator
to entertaining claim for interest, the jurisdiction of arbitrator to
consider and award interest in respect to all periods is subject to section
29 of the Act. In Hindustan Construction Co. Ltd. (supra) this Court has
followed decision in G.C. Roy (supra) and laid down that on the basis of
principles of section 34 arbitrator would have the power to award pendente
lite interest also. In B.N. Agarwalla (supra), this Court has again
followed G.C. Roy (supra) and Hindustan Construction Co. Ltd. (supra) with
respect to power of arbitrator to award pendente lite interest and it was
held that arbitrator has power to award interest. In Harish Chandra
(supra) this Court interpreted the clause 1.9 which provided that no claim
for interest or damages will be entertained by the Government in respect to
any moneys or balances which may be lying with the Government. It was held
that there was no provision which could be culled out against the
contractor not to claim interest by way of damages before the arbitrator on
the relevant items placed for adjudication. In Ferro Concrete Construction
(P) Ltd. (supra) this Court considered clause 4 containing a stipulation
that no interest was payable on amount withheld under the agreement. It was
held that clause 4 dealt with rates, material and workmanship did not bar
award of interest by the arbitrator on claims of the contractor made in the
said case. In Sayeed Ahmed (supra) this Court has emphasized that award of
interest would depend upon nature of the clause in the agreement. In Bright
Power Projects (India) Pvt. Ltd. (supra) this Court has considered the
expression “unless otherwise agreed by parties” employed in section
31(7)(a) of the Act of 1996 and laid down that in case contract bars claim
of interest contractor could not have claimed interest. The provision of
section 31(7)(a) of the Act of 1996 is binding upon the arbitrator. In Sree
Kamatchi Amman Constructions (supra) similar view has been taken.
20. Now we come to the question of correctness of decision of this Court
rendered by a Bench of two Judges in Engineers-De-Space-Age (supra) which
has been referred for our consideration in which this Court after
consideration of G.C. Roy’s case has observed thus :
“3….. It will appear from what the Constitution Bench stated to be the
legal position, that ordinarily a person who is deprived of his money to
which he is legitimately entitled as of right is entitled to be compensated
in deprivation thereof, call it by whatever name. This would be in terms of
the principle laid down in Section 34 of the Code of Civil Procedure. Their
Lordships pointed out that there was no reason or principle to hold
otherwise in the case of an Arbitrator. Pointing out that Arbitrator is an
alternative forum for resolution of disputes arising between the parties,
it said that he must have the power to decide all disputes and differences
arising between the parties and if he were to be denied the power to award
interest pendente lite, the party entitled thereto would be required to go
to a court which would result in multiplicity of proceedings, a situation
which the court should endeavour to avoid. Reliance was, however, placed on
the observation in sub-para (iii) wherein it is pointed out that an
Arbitrator is a creature of an agreement and if the agreement between the
parties prohibits the payment of interest pendente lite the Arbitrator must
act in accordance therewith. In other words, according to their Lordships
the Arbitrator is expected to act and make his award in accordance with the
general law of the land but subject to an agreement, provided, the
agreement is valid and legal. Lastly, it was pointed out that interest
pendente lite is not a matter of substantive law, like interest for the
period anterior to reference. Their Lordships concluded that where the
agreement between the parties does not prohibit grant of interest and where
a party claims interest and that dispute is referred to the Arbitrator, he
shall have the power to award interest pendente lite for the simple reason
that in such a case it is presumed that interest was an implied term of the
agreement between the parties; it is then a matter of exercise of
discretion by the Arbitrator. The position in law has, therefore, been
clearly stated in the aforesaid decision of the Constitution Bench”.
4. We are not dealing with a case in regard to award of interest for the
period prior to the reference. We are dealing with a case in regard to
award of interest by the Arbitrator post reference. The short question,
therefore, is whether in view of sub-clause (g) of clause 13 of the
contract extracted earlier the Arbitrator was prohibited from granting
interest under the contract. Now the term in sub-clause (g) merely
prohibits the Commissioner from entertaining any claim for interest and
does not prohibit the Arbitrator from awarding interest. The opening words
“no claim for interest will be entertained by the Commissioner” clearly
establishes that the intention was to prohibit the Commissioner from
granting interest on account of delayed payment to the contractor. Clause
has to be strictly construed for the simple reason that as pointed out by
the Constitution Bench, ordinarily, a person who has a legitimate claim is
entitled to payment within a reasonable time and if the payment has been
delayed beyond reasonable time he can legitimately claim to be compensated
for that delay whatever nomenclature one may give to his claim in that
behalf.”
21. In Sayeed Ahmed (supra) the decision in Engineers-De-Space-Age
(supra) has been considered and it was observed that it cannot be used to
support an outlandish argument that bar on the Government or department
paying interest is not a bar on the Arbitrator awarding interest. This
Court expressed doubt as to the correctness of certain observations made in
Engineers-De-Space-Age (supra) to the extent that the Arbitrator could
award interest pendente lite ignoring the express bar in the contract. But
this Court did not consider the question further as the case in Sayeed
Ahmed (supra) arose under the Arbitration and Conciliation Act of 1996, and
there was a specific provision under new Act regarding award of interest by
the Arbitrator. From the discussion made in Sayeed Ahmed (supra) it is
apparent that this Court has emphasized that it would depend upon the
nature of clause and claim etc. and it is required to be found on
consideration of stipulation whether interest is barred, if yes, on what
amounts interest is barred under the contract.
22. A three-Judge Bench of this Court in Tehri Hydro Development
Corporation Limited and Another v. Jai Prakash Associates Limited, (2012)
12 SCC 10, has considered the question which has been referred in the
instant case and it has been laid down in the context of clauses 1.2.14 and
1.2.15 imposed a clear bar on either entertainment or payment of interest
in any situation of non-payment or delayed payment of either the amounts
due for work done or lying in security deposit. Thus, the arbitrator had
no power to grant pendente lite interest. This Court has also doubted the
correctness of the decisions in Engineers-De-Space Age (supra) and
Madnani Construction Corporation (P) Ltd. (supra). This court has
considered the aforesaid clauses and various decisions in Tehri Hydro
Development Corporation (supra) in which one of us Ranjan Gogoi, J. spoke
for the Court. This Court has laid down thus :–
“14. This will lead the court to a consideration of what is the principal
bone of contention between the parties in the present case, namely, the
issue with regard to payment of interest. Clauses 1.2.14 and 1.2.15 on
which much arguments have been advanced by Learned Counsel for both sides
may now be extracted below:
PART - II
CONDITIONS OF CONTRACT
1.2.14. No claim for delayed payment due to dispute, etc. - The
contractor agrees that no claim for interest of damages will be entertained
or payable by the Government in respect of any money or balances which may
be lying with the Government owing to any disputes, differences or
misunderstandings between the parties or in respect of any delay or
omission on the part of the engineer-in-charge in making immediate or final
payments or in any other respect whatsoever.
1.2.15. Interest on money due to the contractor. - No omission on the
part of the engineer-in-charge to pay the amount due upon measurement or
otherwise shall vitiate or make void the contract, nor shall the contractor
be entitled to interest upon any guarantee or payments in arrears nor upon
any balance which may on the final settlement of his accounts be due to
him.
A reading of the aforesaid two clauses of the contract agreement between
the parties clearly reveal that despite some overlapping of the
circumstances contemplated by the two clauses, no interest is payable to
the contractor for delay in payment, either, interim or final, for the
works done or on any amount lying in deposit by way of guarantee. The
aforesaid contemplated consequence would be applicable both to a situation
where withholding of payment is on account of some dispute or difference
between the parties or even otherwise.
15. Of the several decisions of this Court referred to by the learned
counsel for the appellant the judgments of the Constitution Bench of this
Court in Irrigation Deptt., Govt. of Orissa v. G.C. Roy, (1992) 1 SCC 508
and Dhenkanal Minor Irrigation Division v. N.C. Budharaj, (2001) 2 SCC 721
will require specific notice. The true ratio laid down in the aforesaid two
judgments have been elaborately considered in a more recent pronouncement
of this Court in the case of Union of India v. Krafters Engg. and Leasing
(P) Ltd., (2011) 7 SCC 279. In Krafters Engineers's case (supra) the ratio
of the decision in G.C. Roy's case (supra) was identified to mean that if
the agreement between the parties does not prohibit grant of interest and
the claim of a party to interest is referred to the arbitrator, the
arbitrator would have the power to award the interest. This is on the basis
that in such a case of silence (where the agreement is silent) it must be
presumed that interest was an implied term of the agreement and, therefore,
whether such a claim is tenable can be examined by the arbitrator in the
reference made to him. The aforesaid view, specifically, is with regard to
pendente lite interest. In the subsequent decision of the Constitution
Bench in N.C. Budharaj's case (supra) a similar view has been taken with
regard to interest for the pre-reference period.
16. In Krafters Engineers' case (supra), the somewhat discordant note
struck by the decisions of this Court in Port of Calcutta v. Engineers-De-
Space-Age (supra) and Madnani Construction Corporation Private Limited v.
Union of India and Ors. (supra), were also taken note of. Thereafter, it
was also noticed that the decision in Engineers-De-Space-Age's case (supra)
was considered in Sayeed Ahmed & Co. v. State of U.P. (supra) and the
decision in Madnani Construction case (supra) was considered in Sree
Kamatchi Amman Constructions v. Railways (2010) 8 SCC 767. In Sayeed
Ahmed's case (supra) (SCC para 24) it was held that in the light of the
decision of the Constitution Bench in G.C. Roy's case (1992) 1 SCC 508 and
N.C. Budharaj case (2001) 2 SCC 721 it is doubtful whether the observations
in Engineers-de-Space-Age's case (supra) to the effect that the Arbitrator
could award interest pendente lite, ignoring the express bar in the
contract, is good law. In Sree Kamatchi Amman Construction's case (Supra)
while considering Madnani's case (supra) this Court noted that the decision
in Madnani case (supra) follows the decision in Engineers-de-Space-Age's
case (supra).
17. From the above discussions, it is crystal clear that insofar as
pendente lite interest is concerned, the observations contained in Para 43
and 44 of the judgment in G.C. Roy case (supra) will hold the field. Though
the gist of the said principle has been noticed earlier it would still be
appropriate to set out para 44 of the judgment in G.C. Roy's case (supra)
which is in the following terms:
44. Having regard to the above consideration, we think that the following
is the correct principle which should be followed in this behalf.
Where the agreement between the parties does not prohibit grant of interest
and where a party claims interest and that dispute (along with the claim
for principal amount or independently) is referred to the arbitrator, he
shall have the power to award interest pendente lite. This is for the
reason that in such a case it must be presumed that interest was an implied
term of the agreement between the parties and therefore when the parties
refer all their disputes - or refer the dispute as to interest as such - to
the arbitrator, he shall have the power to award interest. This does not
mean that in every case the arbitrator should necessarily award interest
pendente lite. It is a matter within his discretion to be exercised in the
light of all the facts and circumstances of the case, keeping the ends of
justice in view.
18. The provisions of the U.P. Civil Laws (Reforms and Amendment) Act
amending the First Schedule to the Arbitration Act, 1940 does not assist
the respondent contractor in any manner to sustain the claim of award of
interest pendente lite, inasmuch, as Para 7-A of the First Schedule, as
amended, is only an enabling provision which will have no application to a
situation where there is an express bar to the entertainment or payment of
interest on the delayed payment either of an amount due for the work done
or of an amount lying in deposit as security. The decision in B.N.
Agarwalla case (supra) on which reliance has been placed by the learned
counsel for the respondent, once again, does not assist the claim of the
respondent to interest pendente lite inasmuch as in B.N. Agarwalla case
(supra) the views of the Constitution Bench in G.C. Roy case (supra) with
regard to interest pendente lite could not have been and, in fact, were not
even remotely doubted. The observation of the Bench in B.N. Agarwalla case
that in G.C. Roy case (supra) the decision in Deptt. of Irrigation v.
Abhaduta Jena (1988) 1 SCC 418 was not overruled was only in the context of
the issue of award of interest for the pre- reference period. The decision
in Asian Techs Limited case (supra) also relied on by the respondent takes
note of the decision in Engineers-De-Space-Age case (supra) to come to the
conclusion the prohibition on payment of interest contained in Clause 11 of
the agreement between the parties was qua the department and did not bar
the arbitrator from entertaining the claim. It has already been noticed
that the correctness of the propositions laid down in Engineers-De-Space-
Age case (supra) have been doubted in the subsequent decisions of this
Court, reference to which has already been made.
19. Clauses 1.2.14 and 1.2.15, already extracted and analysed, imposed a
clear bar on either entertainment or payment of interest in any situation
of non-payment or delayed payment of either the amounts due for work done
or lying in security deposit. On the basis of the discussions that have
preceded we, therefore, take the view that the grant of pendente lite
interest on the claim of Rs. 10,17,461/- is not justified. The award as
well as the orders of the courts below are accordingly modified to the
aforesaid extent.”
In para 4 in Engineers-De-Space-Age (supra) this Court has observed
that bar under the contract will not be applicable to Arbitrator cannot be
said to be observation of general application. In our opinion, it would
depend upon the stipulation in the contract in each case whether power of
Arbitrator to grant pendente lite interest is expressly taken away. If
answer is ‘yes’ then Arbitrator would have no power to award pendente lite
interest.
23. The decision in Madnani Construction Corporation (supra) has followed
decision in Engineers-De-Space-Age (supra). Same is also required to be
diluted to the extent that express stipulation under contract may debar the
Arbitrator from awarding interest pendente lite. Grant of pendente lite
interest may depend upon several factors such as phraseology used in the
agreement, clauses conferring power relating to arbitration, nature of
claim and dispute referred to Arbitrator and on what items power to award
interest has been taken away and for which period.
24. Thus, our answer to the reference is that if contract expressly
bars award of interest pendente lite, the same cannot be awarded by the
Arbitrator. We also make it clear that the bar to award interest on
delayed payment by itself will not be readily inferred as express bar to
award interest pendente lite by the Arbitral Tribunal, as ouster of power
of Arbitrator has to be considered on various relevant aspects referred to
in the decisions of this Court, it would be for the Division Bench to
consider the case on merits.
………………………J.
(Ranjan Gogoi)
………………………J.
(Arun Mishra)
New Delhi; ……………………….J.
March 16, 2016. (Prafulla C. Pant)
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
SPECIAL LEAVE PETITION [C] No.11114/2009
Union of India … Petitioner
Vs.
M/s. Ambica Construction … Respondent
(With SLP [C] No.17219/2009]
JUDGM ENT
ARUN MISHRA, J.
1. The issue involved in the reference is in regard to the power of
the Arbitrator to award pendente lite interest when contract contains bar
for grant of interest in a case covered by the Arbitration Act, 1940
(hereinafter referred to as “the Act”). A Division Bench of this Court
had doubted the correctness of the decisions in Board of Trustees for the
Port of Calcutta v. Engineers-De-Space-Age (1996) 1 SCC 516; and Madnani
Construction Corporation (P) Ltd. v. Union of India and Others (2010) 1 SCC
549. In view of the decision of the Constitution Bench judgment in
Secretary, Irrigation Department, Government of Orissa & Ors. v. G.C. Roy
(1992) 1 SCC 508 and Executive Engineer, Dhenkanal Minor Irrigation
Division, Orissa & Ors. v. N.C. Budharaj (D) by L.Rs. & Ors. (2001) 2 SCC
721 which held that the Arbitrator had the jurisdiction and authority to
award interest for pre-reference period, pendente lite and future period if
there was no express bar in the contract regarding award of interest. A
doubt was expressed about the correctness of the decision in Engineers-De-
Space Age (supra) in Sayeed Ahmed & Co. v. State of U.P. & Ors. (2009) 12
SCC 26 and Sree Kamatchi Amman Constructions v. Divisional Railway Manager
(Works), Palghat & Ors. (2010) 8 SCC 767. Hence the matter had been
referred to a larger Bench for decision.
2. The case has a chequered history. The tender of M/s. Ambica
Construction for fabrication of tie bars from M.S. Flats in CST-9 sleepers
was accepted on 8.9.1989. Final agreement was executed on 30.11.1989. The
work was completed on 21.11.1990. With respect to payments, certain
differences and disputes arose between the parties. Thus M/s. Ambica
Construction prayed for appointment of an Arbitrator. On 5.3.1991 as the
petitioner M/s. Ambica Construction was in serious financial difficulties,
it accepted the amount in full and final settlement. Later on, the Union of
India informed the petitioner on 11.3.1991 that the matter was under
consideration. However the Arbitrator was not appointed. An application
under section 20 of the Act was filed before the High Court of Calcutta for
referring the case to arbitration. On 2.6.1992 the High Court directed to
file the arbitration agreement in the court and appointed two Arbitrators
in terms of the arbitration clause. Said Arbitrators failed to publish the
award and as such an application was filed for revocation of the authority
of joint Arbitrators and another sole Arbitrator was appointed. The sole
Arbitrator ultimately published the award on 30.12.1997. On an application
filed by the Union of India, the High Court vide order dated 9.4.1998
remitted the award to the Arbitrator to give an item-wise break-up. On
12.5.1998 the sole Arbitrator published the item-wise award. Again the
Union of India questioned the same before the High Court. The award was set
aside on the ground that the Arbitrator had not given an intelligible award
in terms of clause 64(3)(a)(iii) of the agreement and had not taken into
effect the supplementary agreement dated 5.3.1991. The appeal preferred by
the petitioner was dismissed by the Division Bench of the High Court on
15.10.2004 against which an SLP was filed in which leave was granted and
ultimately C.A. No.6621/2005 was allowed and case was remitted vide order
dated 7.11.2005 passed by this Court to the Arbitrator for assigning
reasons and to pass fresh award. Thereafter, Arbitrator passed a fresh
award on 11.2.2006. Again an application was filed by the Union of India
under sections 30 and 33 of the Act. The Single Judge dismissed the
application vide order dated 26.6.2007. Union of India filed an application
for recall. The order dated 26.6.2007 was recalled. Vide order dated
22.8.2007 learned Single Judge set aside the award with regard to interest
for pre-reference period and directed that interest would be allowed on the
principal sum of Rs.9,82,660/- at the rate of 10% per annum from 1.9.1992
the date from which the original Arbitrator entered upon the reference. An
appeal was preferred before the Division Bench and the same had been partly
allowed with regard to claim Nos.6 and 7. Aggrieved thereby, M/s. Ambica
Construction had preferred S.L.P. [C] No.17219/2009 in this Court and Union
of India has also assailed the judgment and order of the High Court in
S.L.P. [C] No.11114/2009.
3. The only question for consideration is whether an Arbitrator has the
power to award pendente lite interest in case contract bars the same in a
case covered by Act and decisions of this Court in Engineers De-Space Age
(supra) and Madnani Construction Corporation (P) Ltd. (supra) have been
correctly decided.
4. It was submitted on behalf of the Union of India that the Arbitrator
is bound by the terms of the contract and cannot award interest in case the
contract bars the same. On the other hand, learned counsel appearing on
behalf of M/s. Ambica Construction has contended that in view of the
decision in Engineers-De-Space Age (supra) followed in Madnani Construction
Corporation (P) Ltd. (supra) notwithstanding the terms in the contract
agreement barring the award of interest would cover the pre-reference
period and not pendente lite interest.
5. There are certain provisions which are statutorily implied in
arbitration agreement unless excluded in the agreement. Section 3 of the
Act of 1940 deals with the provisions which are implied in the arbitration
agreement. Section 3 is extracted below :
“3. Provisions implied in arbitration agreement.—An arbitration
agreement, unless a different intention is expressed therein, shall be
deemed to include the provisions set out in the First Schedule in so far as
they are applicable to the reference.”
The provisions of section 3 make it clear that unless a different
intention is expressed in the arbitration agreement, the agreement would
include the provisions contained in the First Schedule so far as they are
applicable to the reference. Provisions in the First Schedule contain 8
paragraphs. It provides for reference to a sole Arbitrator and in case
there are even numbers of Arbitrators, appointment of umpire is also
provided. An Arbitrator is required to pass award within 4 months from the
date of entering on the reference. In case Arbitrator fails to pass an
award within the specified time the umpire shall make the award within 2
months. Para 6 of First Schedule provides that the Arbitrator or umpire
shall examine the matters in difference and the award shall be final and
binding. Arbitrator or umpire has the power for examining the witnesses and
production of relevant documents. Para 8 of Schedule I provides for costs
of reference and awards shall be in the discretion of the Arbitrator.
6. “Court” has been defined in section 2(c) of the Act to mean a
civil court having jurisdiction to decide the questions forming the subject-
matter of the reference. Section 41 of the Act is extracted hereunder:
“41. Procedure and powers of Court. – Subject to the provisions of this Act
and of rules made thereunder :
The provisions of the Code of Civil Procedure, 1908 (5 of 1908), shall
apply to all proceedings before the Court, and to all appeals, under this
Act, and
The Court shall have, for the purpose of, and in relation to arbitration
proceedings, the same power of making orders in respect of any of the
matters set out in the Second Schedule as it has for the purpose of, and in
relation to any proceedings before the Court:
Provided that nothing in CI. (b) shall be taken to prejudice any power
which may be vested in an Arbitrator or umpire for making orders with
respect to any of such matters.”
The court can exercise the power specified in Second Schedule of the
Act. However, Arbitrator is not a court. Arbitrator is the outcome of
agreement. He decides the disputes as per the agreement entered into
between the parties. Arbitration is an alternative forum for resolution of
disputes but an Arbitrator ipso facto does not enjoy or possess all the
powers conferred on the courts of law.
7. Section 29 of the Act confers on the court power to award interest
from the date of decree. Section 34 of the C.P.C. confers on the court
power to award interest prior to the institution of the suit and during
pendency of the suit and post decree.
8. A Constitution Bench of this Court in G.C. Roy (supra) has considered
the question of power of the Arbitrator to award pendente lite interest and
it has been laid down that if the arbitration agreement or the contract
itself provides for interest, Arbitrator would have the jurisdiction to
award the interest. Similarly, where the agreement expressly provides that
no interest pendente lite shall be payable on the amount due, the
Arbitrator has no power to award pendente lite interest. In G.C. Roy
(supra) this Court has held thus :
“xxx If the arbitration agreement or the contract itself provides for
award of interest on the amount found due from one party to the other, no
question regarding the absence of Arbitrator’s jurisdiction to award the
interest could arise as in that case the Arbitrator has power to award
interest pendent lite as well. Similarly, where the agreement expressly
provides that no interest pendente lite shall be payable on the amount due,
the Arbitrator has no power to award pendente lite interest. But where the
agreement does not provide either for grant or denial of interest on the
amount found due, the question arises whether in such an event the
Arbitrator has power and authority to grant pendente lite interest.”
The question involved in G.C. Roy (supra) was with respect to the
award of interest for the period commencing from the date of Arbitrator
entering upon the reference till the date of making the award. In G.C. Roy
(supra), this Court has considered decisions in Raipur Development
Authority & Ors. v. M/s. Chokhamal Contractors & Ors., (1989) 2 SCC 721;
Executive Engineer (Irrigation) Balimela & Ors. v. Abhaduta Jena & Ors.,
(1988) 1 SCC 418; Nachiappa Chettiar & Ors, v. Subramaniam Chettiar, AIR
1960 SC 307; Satinder Singh v. Amrao Singh & Anr., AIR 1961 SC 908; Firm
Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd., Indore, AIR 1967 SC
1030; Union of India v. Bungo Steel Furniture Pvt. Ltd., AIR 1967 SC 1032;
Ashok Construction Company v. Union of India, (1971) 3 SCC 66; State of
M.P. v. M/s. Saith and Skelton Pvt. Ltd., (1972) 1 SCC 702, various foreign
courts decisions and decisions of the High Court. This Court has also
referred to Halsbury’s Laws of England in Paras 36 & 37 thus:-
“36. “534. Express and implied clauses.— In general, the parties to an
arbitration agreement may include in it such clauses as they think fit. By
statute, however, certain terms are implied in an arbitration agreement
unless a contrary intention is expressed or implied therein. Moreover, it
is normally an implied term of an arbitration agreement that the Arbitrator
must decide the dispute in accordance with the ordinary law. This includes
the basic rules as to procedure, although parties can expressly or
impliedly consent to depart from those rules. The normal principles on
which terms are implied in an agreement have to be considered in the
context that the agreement relates to an arbitration.”
37. At page 303, para 580 (4th edn., Vol. 2) dealing with the award of
interest, it reads:
“580. Interest.— A Arbitrator or umpire has power to award interest on the
amount of any debt or damages for the whole or any part of the period
between the date when the cause of action arose and the date of the award.”
Ultimately, in G.C. Roy (supra), this Court has answered the
question whether Arbitrator has the power to award interest pendent lite.
Their Lordships have reiterated that they have dealt with the situation
where the agreement does not provide for grant of such interest nor does it
prohibit such grant when the agreement is silent as to award of interest.
This Court has laid down various principles in para 43 of the report thus:
“43. The question still remains whether Arbitrator has the power to award
interest pendente lite, and if so on what principle. We must reiterate that
we are dealing with the situation where the agreement does not provide for
grant of such interest nor does it prohibit such grant. In other words, we
are dealing with a case where the agreement is silent as to award of
interest. On a conspectus of aforementioned decisions, the following
principles emerge:
(i) A person deprived of the use of money to which he is legitimately
entitled has a right to be compensated for the deprivation, call it by any
name. It may be called interest, compensation or damages. This basic
consideration is as valid for the period the dispute is pending before the
Arbitrator as it is for the period prior to the Arbitrator entering upon
the reference. This is the principle of Section 34, Civil Procedure Code
and there is no reason or principle to hold otherwise in the case of
Arbitrator.
(ii) An Arbitrator is an alternative form (sic forum) for resolution of
disputes arising between the parties. If so, he must have the power to
decide all the disputes or differences arising between the parties. If the
Arbitrator has no power to award interest pendente lite, the party claiming
it would have to approach the court for that purpose, even though he may
have obtained satisfaction in respect of other claims from the Arbitrator.
This would lead to multiplicity of proceedings.
(iii) An Arbitrator is the creature of an agreement. It is open to the
parties to confer upon him such powers and prescribe such procedure for him
to follow, as they think fit, so long as they are not opposed to law. (The
proviso to Section 41 and Section 3 of Arbitration Act illustrate this
point). All the same, the agreement must be in conformity with law. The
Arbitrator must also act and make his award in accordance with the general
law of the land and the agreement.
(iv) Over the years, the English and Indian courts have acted on the
assumption that where the agreement does not prohibit and a party to the
reference makes a claim for interest, the Arbitrator must have the power to
award interest pendente lite. Seth Thawardas Pherumal v. Union of India,
AIR 1955 SC 468 has not been followed in the later decisions of this Court.
It has been explained and distinguished on the basis that in that case
there was no claim for interest but only a claim for unliquidated damages.
It has been said repeatedly that observations in the said judgment were not
intended to lay down any such absolute or universal rule as they appear to,
on first impression. Until Executive Engineer (Irrigation) Balimela & Ors.
v. Abhaduta Jena & Ors., (1988) 1 SCC 418 almost all the courts in the
country had upheld the power of the Arbitrator to award interest pendente
lite. Continuity and certainty is a highly desirable feature of law.
(v) Interest pendente lite is not a matter of substantive law, like
interest for the period anterior to reference (pre-reference period). For
doing complete justice between the parties, such power has always been
inferred.”
“44. Having regard to the above consideration, we think that the following
is the correct principle which should be followed in this behalf:
Where the agreement between the parties does not prohibit grant of interest
and where a party claims interest and that dispute (along with the claim
for principal amount or independently) is referred to the Arbitrator, he
shall have the power to award interest pendente lite. This is for the
reason that in such a case it must be presumed that interest was an implied
term of the agreement between the parties and therefore when the parties
refer all their disputes — or refer the dispute as to interest as such — to
the Arbitrator, he shall have the power to award interest. This does not
mean that in every case the Arbitrator should necessarily award interest
pendente lite. It is a matter within his discretion to be exercised in the
light of all the facts and circumstances of the case, keeping the ends of
justice in view.”
The Constitution Bench of this Court has laid down that where the
agreement between the parties does not prohibit grant of interest and where
the party claims interest and that dispute is referred to the Arbitrator,
he shall have the power to award interest pendent lite. The law declared
has been held applicable prospectively.
9. Another Constitution Bench of this Court in N.C. Budharaj (supra),
considered the question of award of interest by the Arbitrator for the pre-
reference period. In that connection, discussion has been made and it has
been observed as long as there is nothing in the arbitration agreement to
exclude the jurisdiction of the Arbitrator entertaining claim for interest
on the amount due under the contract or any provision to claim interest on
the amount due, the jurisdiction of the Arbitrator to award interest for
pre-reference period under section 29 of the Arbitration Act, 1940 has to
be upheld. In majority opinion, this Court has held thus:
“25. If that be the position, courts which of late encourage litigants to
opt for and avail of the alternative method of resolution of disputes,
would be penalising or placing those who avail of the same in a serious
disadvantage. Both logic and reason should counsel courts to lean more in
favour of the Arbitrator holding to possess all the powers as are necessary
to do complete and full justice between the parties in the same manner in
which the civil court seized of the same dispute could have done. By
agreeing to settle all the disputes and claims arising out of or relating
to the contract between the parties through arbitration instead of having
recourse to civil court to vindicate their rights the party concerned
cannot be considered to have frittered away and given up any claim which
otherwise it could have successfully asserted before courts and obtained
relief. By agreeing to have settlement of disputes through arbitration, the
party concerned must be understood to have only opted for a different forum
of adjudication with less cumbersome procedure, delay and expense and not
to abandon all or any of its substantive rights under the various laws in
force, according to which only even the Arbitrator is obliged to adjudicate
the claims referred to him. As long as there is nothing in the arbitration
agreement to exclude the jurisdiction of the Arbitrator to entertain a
claim for interest on the amounts due under the contract, or any
prohibition to claim interest on the amounts due and become payable under
the contract, the jurisdiction of the Arbitrator to consider and award
interest in respect of all periods subject only to Section 29 of the
Arbitration Act, 1940 and that too the powers of the court thereunder, has
to be upheld. The submission that the Arbitrator cannot have jurisdiction
to award interest for the period prior to the date of his appointment or
entering into reference which alone confers upon him power, is too stale
and technical to be countenanced in our hands, for the simple reason that
in every case the appointment of an Arbitrator or even resort to court to
vindicate rights could be only after disputes have cropped up between the
parties and continue to subsist unresolved, and that if the Arbitrator has
the power to deal with and decide disputes which cropped up at a point of
time and for the period prior to the appointment of an Arbitrator, it is
beyond comprehension as to why and for what reason and with what
justification the Arbitrator should be denied only the power to award
interest for the pre-reference period when such interest becomes payable
and has to be awarded as an accessory or incidental to the sum awarded as
due and payable, taking into account the deprivation of the use of such sum
to the person lawfully entitled to the same.
26. For all the reasons stated above, we answer the reference by holding
that the Arbitrator appointed with or without the intervention of the
court, has jurisdiction to award interest, on the sums found due and
payable, for the pre-reference period, in the absence of any specific
stipulation or prohibition in the contract to claim or grant any such
interest. The decision in Jena case taking a contraview does not lay down
the correct position and stands overruled, prospectively, which means that
this decision shall not entitle any party nor shall it empower any court to
reopen proceedings which have already become final, and apply only to any
pending proceedings. No costs.”
It has also been observed that G.C. Roy’s case (supra) cannot be said
to have overruled Executive Engineer (Irrigation) Balimela’s case (supra)
insofar as it dealt with the power of Arbitrator to award interest for the
pre-reference period.
10. A 3 Judges Bench of this Court in Hindustan Construction Co. Ltd. v.
State of Jammu & Kashmir (1992) 4 SCC 217 has laid down that the Arbitrator
has the power to award pendente lite interest on the basis of principle of
Section 34 of the Code of Civil Procedure though same is not applicable.
However, the observation has to be considered in case there is no express
bar in the agreement for awarding pendente lite interest as it has simply
followed what has been laid down in G.C. Roy (supra). This Court has laid
down thus:
“5. The question of interest can be easily disposed of as it is covered by
recent decisions of this Court. It is sufficient to refer to the latest
decision of a five Judge bench of this Court in Secretary, Irrigation
Department, Govt. of Orissa & Ors. v. G.C. Roy. Though the said decision
deals with the power of the Arbitrator to award interest pendente lite, the
principle of the decision makes it clear that the Arbitrator is competent
to award interest for the period commencing with the date of award to the
date of decree or date of realisation, whichever is earlier. This is also
quite logical for, while award of interest for the period prior to an
Arbitrator entering upon the reference is a matter of substantive law, the
grant of interest for the post-award period is a matter of procedure.
Section 34 of Code of Civil Procedure provides both for awarding of
interest pendente lite as well as for the post-decree period and the
principle of Section 34 has been held applicable to proceedings before the
Arbitrator, though the section as such may not apply. In this connection,
the decision in Union of India v. Bungo Steel Furniture (P) Ltd. AIR 1967
SC 1032 may be seen as also the decision in Gujarat Water Supply & Sewerage
Board v. Unique Erectors (Gujarat) P. Ltd. 1989 1 532 SCC which upholds
the said power though on a somewhat different reasoning. We, therefore,
think that the award on Item No. 8 should have been upheld.”
11. In Sayeed Ahmed (supra) various decisions of this Court have been
referred. In State of Orissa v. B.N. Agarwalla, (1997) 2 SCC 469, this
Court has laid down thus:
“18. In view of the aforesaid decisions there can now be no doubt with
regard to the jurisdiction of the Arbitrator to grant interest. The
principles which can now be said to be well-settled are that the Arbitrator
has the jurisdiction to award pre-reference interest in cases which arose
after the Interest Act, 1978 had become applicable. With regard to those
cases pertaining to the period prior to the applicability of the Interest
Act, 1978, in the absence of any substantive law, contract or usage, the
Arbitrator has no jurisdiction to award interest. For the period during
which the arbitration proceedings were pending in view of the decision in
G.C. Roy case and Hindustan Construction Ltd. case, the Arbitrator has the
power to award interest. The power of the Arbitrator to award interest for
the post-award period also exists and this aspect has been considered in
the discussion relating to Civil Appeal No. 9234 of 1994 in the later part
of this judgment.”
12. The decision in B.N. Agarwalla (supra) has been considered and
distinguished by this Court in Sayeed Ahmed (supra) thus :
“20. The appellant next relied upon the judgment of this Court in State of
Orissa v. B.N. Agarwalla (1997) 2 SCC 469. In that case, this Court held
that the Arbitrator has jurisdiction to award: (i) interest for pre-
reference period, (ii) interest for pendente lite, and (iii) future
interest. This Court also held that the following part of Clause (4) of the
contract dealing with “Rates, materials and workmanship” did not bar award
of interest by the Arbitrator on the claims of the contractor: (SCC p. 478,
para 22)
No interest is payable on amount withheld under the item of the agreement.
Interpreting the said clause (which provided that interest was not payable
on the amount which was withheld), this Court held that it referred only to
the amount withheld by the employer State towards retention money for the
defect liability period. This Court in fact clarified the position that if
the terms of contract expressly stipulated that no interest would be
payable, then the Arbitrator would not get the jurisdiction to award
interest. As Clause G1.09 in the present case contains an express bar and
is different from the clause considered in B.N. Agarwalla (supra) the said
decision is also of no assistance.”
In B.N. Agarwalla (supra) this Court has observed that Clause 4 of
the contract dealing with “Rates, materials and workmanship” did not bar
award of interest by the Arbitrator on the claims of the contractor. The
stipulation was no interest was payable on amount withheld under the
agreement.
13. In Sayeed Ahmed (supra), this Court has referred the decision in
State of U.P. v. Harish Chandra & Co. (1999) 1 SCC 63, in which this Court
has interpreted the stipulation contained in clause 1.9 of the agreement
which came up for consideration before a 3 Judges Bench of this Court.
Clause 1.9 is extracted hereunder:
“1.9 No claim for delayed payment due to dispute etc.—No claim for
interest or damages will be entertained by the Government with respect to
any moneys or balances which may be lying with the Government owing to any
dispute, difference; or misunderstanding between the Engineer-in-Charge in
marking periodical or final payments or in any other respect whatsoever.”
This Court has interpreted the clause 1.9 and held that there is no
provision which could be culled out against the respondent-contractor that
he could not raise claim of interest by way of damages before the
Arbitrator on the relevant items placed for adjudication.
This Court in Sayeed Ahmed (supra) has also distinguished the decision in
Harish Chandra (supra) in which clause 1.09 came up for consideration thus
:
“17. x x x x x This Court held that the said clause did not bar award of
interest on any claim for damages or for claim for payment for work done.
We extract below the reasoning for such decision: (SCC p. 67, para 10)
“10. A mere look at the clause shows that the claim for interest by way of
damages was not to be entertained against the Government with respect to
only a specified type of amount, namely, any moneys or balances which may
be lying with the Government owing to any dispute, difference between the
Engineer-in-Charge and the contractor; or misunderstanding between the
Engineer-in-Charge and the contractor in making periodical or final
payments or in any other respect whatsoever. The words ‘or in any other
respect whatsoever’ also referred to the dispute pertaining to the moneys
or balances which may be lying with the Government pursuant to the
agreement meaning thereby security deposit or retention money or any other
amount which might have been with the Government and refund of which might
have been withheld by the Government. The claim for damages or claim for
payment for the work done and which was not paid for would not obviously
cover any money which may be said to be lying with the Government.
Consequently, on the express language of this clause, there is no
prohibition which could be culled out against the respondent contractor
that he could not raise the claim for interest by way of damages before the
Arbitrator on the relevant items placed for adjudication.”
(emphasis supplied)
18. In Harish Chandra (1999) 1 SCC 63 a different version of Clause 1.09
was considered. Having regard to the restrictive wording of that clause,
this Court held that it did not bar award of interest on a claim for
damages or a claim for payments for work done and which was not paid. This
Court held that the said clause barred award of interest only on amounts
which may be lying with the Government by way of security deposit/retention
money or any other amount, refund of which was withheld by the Government.
19. But in the present case, Clause G1.09 is significantly different. It
specifically provides that no interest shall be payable in respect of any
money that may become due owing to any dispute, difference or
misunderstanding between the Engineer-in-Charge and contractor or with
respect to any delay on the part of the Engineer-in-Charge in making
periodical or final payment or in respect of any other respect whatsoever.
The bar under Clause G1.09 in this case being absolute, the decision in
Harish Chandra (supra) will not assist the appellant in any manner.”
In Harish Chandra (supra), this Court has laid down that clause 1.09 did
not bar award of interest for claim of damages for payment for work done
and which was not paid for would not obviously cover any money which may be
said to be lying with the Government.
14. In our opinion, it would depend upon the nature of the ouster clause
in each case. In case there is express stipulation which debars pendente
lite interest, obviously, it cannot be granted by Arbitrator. The award of
pendente lite interest inter alia must depend upon the overall intention of
the agreement and what is expressly excluded.
15. In Sayeed Ahmed (supra), this Court has referred the decision in
Superintending Engineer v. B. Subba Reddy (1999) 4 SCC 423 and observed
thus :
“11. Two more decisions dealing with cases arising under the Arbitration
Act, 1940 require to be noticed. In Superintending Engineer v. B. Subba
Reddy (1999) 4 SCC 423 this Court held that interest for pre-reference
period can be awarded only if there was an agreement to that effect or if
it was allowable under the Interest Act, 1978. Therefore, claim for
interest for pre-reference period, which is barred as per the agreement or
under the Interest Act, 1978 could not be allowed. This Court however held
that the Arbitrator can award interest pendente lite and future interest.”
In Sayeed Ahmed (supra) this Court has also referred the decision in
State of Rajasthan & Anr. v. Ferro Concrete Construction (P) Ltd. (2009) 12
SCC 1 thus :
“12. The principles relating to interest were summarised by this Court in
State of Rajasthan v. Ferro Concrete Construction (P) Ltd. (2009) 12 SCC 1
thus:
(a) Where a provision for interest is made on any debt or damages, in
any agreement, interest shall be paid in accordance with such agreement.
(b) Where payment of interest on any debt or damages is barred by
express provision in the contract, no interest shall be awarded.
(c) Where there is no express bar in the contract and where there is
also no provision for payment of interest then the principles of Section 3
of the Interest Act will apply and consequently interest will be payable:
(i) where the proceedings relate to a debt (ascertained sum) payable by
virtue of a written instrument at a certain time, then from the date when
the debt is payable to the date of institution of the proceedings;
(ii) where the proceedings is for recovery of damages or for recovery of
a debt which is not payable at a certain time, then from the date mentioned
in a written notice given by the person making a claim to the person liable
for the claim that interest will be claimed.
(d) Payment of interest pendente lite and future interest shall not be
governed by the provisions of the Interest Act, 1978, but by the provisions
of Section 34 of the Code of Civil Procedure, 1908 or the provisions of law
governing arbitration as the case may be.”
In Sayeed Ahmed (supra), the provisions of Arbitration & Conciliation
Act, 1996 were applicable.
16. A 3-Judge Bench of this Court in Union of India v. Bright Power
Projects (India) Pvt. Ltd. (2015) 9 SCC 695 has considered the provisions
contained in section 31(7)(a) of the Arbitration and Conciliation Act, 1996
and considered the words “unless otherwise agreed by parties” in the said
section and held that the Arbitrator is bound by the terms of the contract
so far as award of interest from the date of execution to the date of award
is concerned. This Court considered clause 13(3) of the contract and came
to the conclusion that once agreed that contractor would not claim any
interest on the amount to be paid under the contract, he could not have
claimed the interest. The Arbitrator while awarding interest failed to
consider the provisions of section 31(7)(a) and binding nature of clause
13(3) of the terms of agreement. With respect to section 31(7)(a) of the
Arbitration & Conciliation Act, 1996 this Court in Union of India v. Bright
Power Projects (supra) has observed thus :
“18. Section 31(7)(a) of the Act ought to have been read and interpreted by
the Arbitral Tribunal before taking any decision with regard to awarding
interest. The said section, which has been reproduced hereinabove, 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.”
Section 31(7)(a) of the 1996 Act confers power on Arbitrator to award
interest pendente lite, “unless otherwise agreed by parties”. Thus, it is
clear from the provisions contained in section 31(7)(a) that the contract
between the parties has been given importance and is binding on the
Arbitrator. Arbitration clause is also required to be looked into while
deciding the power of the Arbitrator and in case there is any bar contained
in the contract on award of interest, it operates on which items and in the
arbitration clause what are the powers conferred on Arbitrator and whether
bar on award of interest has been confined to certain period or it relates
to pendency of proceedings before Arbitrator.
17. In Sree Kamatchi Amman Constructions (supra), it was observed that
the words “unless otherwise agreed by the parties” in section 31 of new Act
of 1996 clarify that Arbitrator is bound by the terms of contract for award
of interest pendente lite. It was also held thus :
“19. Section 31(7) 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. We are of the view that the decisions in Engineers-De-Space-Age (supra)
and Madnani (supra) are inapplicable for yet another reason. In Engineers-
De-Space-Age (supra) and Madnani (supra) the Arbitrator had awarded
interest for the pendente lite period. This Court upheld the award of such
interest under the old Act on the ground that the Arbitrator had the
discretion to decide whether interest should be awarded or not during the
pendente lite period and he was not bound by the contractual terms insofar
as the interest for the pendente lite period. But in the instant case the
Arbitral Tribunal has refused to award interest for the pendente lite
period. Where the Arbitral Tribunal has exercised its discretion and
refused award of interest for the period pendente lite, even if the
principles in those two cases were applicable, the award of the Arbitrator
could not be interfered with. On this ground also the decisions in
Engineers-De-Space-Age (supra) and Madnani (supra) are inapplicable. Be
that as it may.”
18. This Court in Union of India v. Krafters Engineering & Leasing Pvt.
Ltd. (2011) 7 SCC 279 has held that by a provision in the agreement, the
jurisdiction of the Arbitrator to award interest can be excluded. This
Court considered the nature of the claim vis-à-vis the provision contained
in the relevant clause.
19. It is apparent from various decisions referred to above that in G.C.
Roy (supra) Constitution Bench of this Court has laid down where agreement
expressly provides that no interest pendente lite shall be payable on
amount due. The arbitrator has no power to award interest. In N.C.
Budharaj (supra) a Constitution Bench has observed that in case there is
nothing in the arbitration agreement to exclude jurisdiction of arbitrator
to entertaining claim for interest, the jurisdiction of arbitrator to
consider and award interest in respect to all periods is subject to section
29 of the Act. In Hindustan Construction Co. Ltd. (supra) this Court has
followed decision in G.C. Roy (supra) and laid down that on the basis of
principles of section 34 arbitrator would have the power to award pendente
lite interest also. In B.N. Agarwalla (supra), this Court has again
followed G.C. Roy (supra) and Hindustan Construction Co. Ltd. (supra) with
respect to power of arbitrator to award pendente lite interest and it was
held that arbitrator has power to award interest. In Harish Chandra
(supra) this Court interpreted the clause 1.9 which provided that no claim
for interest or damages will be entertained by the Government in respect to
any moneys or balances which may be lying with the Government. It was held
that there was no provision which could be culled out against the
contractor not to claim interest by way of damages before the arbitrator on
the relevant items placed for adjudication. In Ferro Concrete Construction
(P) Ltd. (supra) this Court considered clause 4 containing a stipulation
that no interest was payable on amount withheld under the agreement. It was
held that clause 4 dealt with rates, material and workmanship did not bar
award of interest by the arbitrator on claims of the contractor made in the
said case. In Sayeed Ahmed (supra) this Court has emphasized that award of
interest would depend upon nature of the clause in the agreement. In Bright
Power Projects (India) Pvt. Ltd. (supra) this Court has considered the
expression “unless otherwise agreed by parties” employed in section
31(7)(a) of the Act of 1996 and laid down that in case contract bars claim
of interest contractor could not have claimed interest. The provision of
section 31(7)(a) of the Act of 1996 is binding upon the arbitrator. In Sree
Kamatchi Amman Constructions (supra) similar view has been taken.
20. Now we come to the question of correctness of decision of this Court
rendered by a Bench of two Judges in Engineers-De-Space-Age (supra) which
has been referred for our consideration in which this Court after
consideration of G.C. Roy’s case has observed thus :
“3….. It will appear from what the Constitution Bench stated to be the
legal position, that ordinarily a person who is deprived of his money to
which he is legitimately entitled as of right is entitled to be compensated
in deprivation thereof, call it by whatever name. This would be in terms of
the principle laid down in Section 34 of the Code of Civil Procedure. Their
Lordships pointed out that there was no reason or principle to hold
otherwise in the case of an Arbitrator. Pointing out that Arbitrator is an
alternative forum for resolution of disputes arising between the parties,
it said that he must have the power to decide all disputes and differences
arising between the parties and if he were to be denied the power to award
interest pendente lite, the party entitled thereto would be required to go
to a court which would result in multiplicity of proceedings, a situation
which the court should endeavour to avoid. Reliance was, however, placed on
the observation in sub-para (iii) wherein it is pointed out that an
Arbitrator is a creature of an agreement and if the agreement between the
parties prohibits the payment of interest pendente lite the Arbitrator must
act in accordance therewith. In other words, according to their Lordships
the Arbitrator is expected to act and make his award in accordance with the
general law of the land but subject to an agreement, provided, the
agreement is valid and legal. Lastly, it was pointed out that interest
pendente lite is not a matter of substantive law, like interest for the
period anterior to reference. Their Lordships concluded that where the
agreement between the parties does not prohibit grant of interest and where
a party claims interest and that dispute is referred to the Arbitrator, he
shall have the power to award interest pendente lite for the simple reason
that in such a case it is presumed that interest was an implied term of the
agreement between the parties; it is then a matter of exercise of
discretion by the Arbitrator. The position in law has, therefore, been
clearly stated in the aforesaid decision of the Constitution Bench”.
4. We are not dealing with a case in regard to award of interest for the
period prior to the reference. We are dealing with a case in regard to
award of interest by the Arbitrator post reference. The short question,
therefore, is whether in view of sub-clause (g) of clause 13 of the
contract extracted earlier the Arbitrator was prohibited from granting
interest under the contract. Now the term in sub-clause (g) merely
prohibits the Commissioner from entertaining any claim for interest and
does not prohibit the Arbitrator from awarding interest. The opening words
“no claim for interest will be entertained by the Commissioner” clearly
establishes that the intention was to prohibit the Commissioner from
granting interest on account of delayed payment to the contractor. Clause
has to be strictly construed for the simple reason that as pointed out by
the Constitution Bench, ordinarily, a person who has a legitimate claim is
entitled to payment within a reasonable time and if the payment has been
delayed beyond reasonable time he can legitimately claim to be compensated
for that delay whatever nomenclature one may give to his claim in that
behalf.”
21. In Sayeed Ahmed (supra) the decision in Engineers-De-Space-Age
(supra) has been considered and it was observed that it cannot be used to
support an outlandish argument that bar on the Government or department
paying interest is not a bar on the Arbitrator awarding interest. This
Court expressed doubt as to the correctness of certain observations made in
Engineers-De-Space-Age (supra) to the extent that the Arbitrator could
award interest pendente lite ignoring the express bar in the contract. But
this Court did not consider the question further as the case in Sayeed
Ahmed (supra) arose under the Arbitration and Conciliation Act of 1996, and
there was a specific provision under new Act regarding award of interest by
the Arbitrator. From the discussion made in Sayeed Ahmed (supra) it is
apparent that this Court has emphasized that it would depend upon the
nature of clause and claim etc. and it is required to be found on
consideration of stipulation whether interest is barred, if yes, on what
amounts interest is barred under the contract.
22. A three-Judge Bench of this Court in Tehri Hydro Development
Corporation Limited and Another v. Jai Prakash Associates Limited, (2012)
12 SCC 10, has considered the question which has been referred in the
instant case and it has been laid down in the context of clauses 1.2.14 and
1.2.15 imposed a clear bar on either entertainment or payment of interest
in any situation of non-payment or delayed payment of either the amounts
due for work done or lying in security deposit. Thus, the arbitrator had
no power to grant pendente lite interest. This Court has also doubted the
correctness of the decisions in Engineers-De-Space Age (supra) and
Madnani Construction Corporation (P) Ltd. (supra). This court has
considered the aforesaid clauses and various decisions in Tehri Hydro
Development Corporation (supra) in which one of us Ranjan Gogoi, J. spoke
for the Court. This Court has laid down thus :–
“14. This will lead the court to a consideration of what is the principal
bone of contention between the parties in the present case, namely, the
issue with regard to payment of interest. Clauses 1.2.14 and 1.2.15 on
which much arguments have been advanced by Learned Counsel for both sides
may now be extracted below:
PART - II
CONDITIONS OF CONTRACT
1.2.14. No claim for delayed payment due to dispute, etc. - The
contractor agrees that no claim for interest of damages will be entertained
or payable by the Government in respect of any money or balances which may
be lying with the Government owing to any disputes, differences or
misunderstandings between the parties or in respect of any delay or
omission on the part of the engineer-in-charge in making immediate or final
payments or in any other respect whatsoever.
1.2.15. Interest on money due to the contractor. - No omission on the
part of the engineer-in-charge to pay the amount due upon measurement or
otherwise shall vitiate or make void the contract, nor shall the contractor
be entitled to interest upon any guarantee or payments in arrears nor upon
any balance which may on the final settlement of his accounts be due to
him.
A reading of the aforesaid two clauses of the contract agreement between
the parties clearly reveal that despite some overlapping of the
circumstances contemplated by the two clauses, no interest is payable to
the contractor for delay in payment, either, interim or final, for the
works done or on any amount lying in deposit by way of guarantee. The
aforesaid contemplated consequence would be applicable both to a situation
where withholding of payment is on account of some dispute or difference
between the parties or even otherwise.
15. Of the several decisions of this Court referred to by the learned
counsel for the appellant the judgments of the Constitution Bench of this
Court in Irrigation Deptt., Govt. of Orissa v. G.C. Roy, (1992) 1 SCC 508
and Dhenkanal Minor Irrigation Division v. N.C. Budharaj, (2001) 2 SCC 721
will require specific notice. The true ratio laid down in the aforesaid two
judgments have been elaborately considered in a more recent pronouncement
of this Court in the case of Union of India v. Krafters Engg. and Leasing
(P) Ltd., (2011) 7 SCC 279. In Krafters Engineers's case (supra) the ratio
of the decision in G.C. Roy's case (supra) was identified to mean that if
the agreement between the parties does not prohibit grant of interest and
the claim of a party to interest is referred to the arbitrator, the
arbitrator would have the power to award the interest. This is on the basis
that in such a case of silence (where the agreement is silent) it must be
presumed that interest was an implied term of the agreement and, therefore,
whether such a claim is tenable can be examined by the arbitrator in the
reference made to him. The aforesaid view, specifically, is with regard to
pendente lite interest. In the subsequent decision of the Constitution
Bench in N.C. Budharaj's case (supra) a similar view has been taken with
regard to interest for the pre-reference period.
16. In Krafters Engineers' case (supra), the somewhat discordant note
struck by the decisions of this Court in Port of Calcutta v. Engineers-De-
Space-Age (supra) and Madnani Construction Corporation Private Limited v.
Union of India and Ors. (supra), were also taken note of. Thereafter, it
was also noticed that the decision in Engineers-De-Space-Age's case (supra)
was considered in Sayeed Ahmed & Co. v. State of U.P. (supra) and the
decision in Madnani Construction case (supra) was considered in Sree
Kamatchi Amman Constructions v. Railways (2010) 8 SCC 767. In Sayeed
Ahmed's case (supra) (SCC para 24) it was held that in the light of the
decision of the Constitution Bench in G.C. Roy's case (1992) 1 SCC 508 and
N.C. Budharaj case (2001) 2 SCC 721 it is doubtful whether the observations
in Engineers-de-Space-Age's case (supra) to the effect that the Arbitrator
could award interest pendente lite, ignoring the express bar in the
contract, is good law. In Sree Kamatchi Amman Construction's case (Supra)
while considering Madnani's case (supra) this Court noted that the decision
in Madnani case (supra) follows the decision in Engineers-de-Space-Age's
case (supra).
17. From the above discussions, it is crystal clear that insofar as
pendente lite interest is concerned, the observations contained in Para 43
and 44 of the judgment in G.C. Roy case (supra) will hold the field. Though
the gist of the said principle has been noticed earlier it would still be
appropriate to set out para 44 of the judgment in G.C. Roy's case (supra)
which is in the following terms:
44. Having regard to the above consideration, we think that the following
is the correct principle which should be followed in this behalf.
Where the agreement between the parties does not prohibit grant of interest
and where a party claims interest and that dispute (along with the claim
for principal amount or independently) is referred to the arbitrator, he
shall have the power to award interest pendente lite. This is for the
reason that in such a case it must be presumed that interest was an implied
term of the agreement between the parties and therefore when the parties
refer all their disputes - or refer the dispute as to interest as such - to
the arbitrator, he shall have the power to award interest. This does not
mean that in every case the arbitrator should necessarily award interest
pendente lite. It is a matter within his discretion to be exercised in the
light of all the facts and circumstances of the case, keeping the ends of
justice in view.
18. The provisions of the U.P. Civil Laws (Reforms and Amendment) Act
amending the First Schedule to the Arbitration Act, 1940 does not assist
the respondent contractor in any manner to sustain the claim of award of
interest pendente lite, inasmuch, as Para 7-A of the First Schedule, as
amended, is only an enabling provision which will have no application to a
situation where there is an express bar to the entertainment or payment of
interest on the delayed payment either of an amount due for the work done
or of an amount lying in deposit as security. The decision in B.N.
Agarwalla case (supra) on which reliance has been placed by the learned
counsel for the respondent, once again, does not assist the claim of the
respondent to interest pendente lite inasmuch as in B.N. Agarwalla case
(supra) the views of the Constitution Bench in G.C. Roy case (supra) with
regard to interest pendente lite could not have been and, in fact, were not
even remotely doubted. The observation of the Bench in B.N. Agarwalla case
that in G.C. Roy case (supra) the decision in Deptt. of Irrigation v.
Abhaduta Jena (1988) 1 SCC 418 was not overruled was only in the context of
the issue of award of interest for the pre- reference period. The decision
in Asian Techs Limited case (supra) also relied on by the respondent takes
note of the decision in Engineers-De-Space-Age case (supra) to come to the
conclusion the prohibition on payment of interest contained in Clause 11 of
the agreement between the parties was qua the department and did not bar
the arbitrator from entertaining the claim. It has already been noticed
that the correctness of the propositions laid down in Engineers-De-Space-
Age case (supra) have been doubted in the subsequent decisions of this
Court, reference to which has already been made.
19. Clauses 1.2.14 and 1.2.15, already extracted and analysed, imposed a
clear bar on either entertainment or payment of interest in any situation
of non-payment or delayed payment of either the amounts due for work done
or lying in security deposit. On the basis of the discussions that have
preceded we, therefore, take the view that the grant of pendente lite
interest on the claim of Rs. 10,17,461/- is not justified. The award as
well as the orders of the courts below are accordingly modified to the
aforesaid extent.”
In para 4 in Engineers-De-Space-Age (supra) this Court has observed
that bar under the contract will not be applicable to Arbitrator cannot be
said to be observation of general application. In our opinion, it would
depend upon the stipulation in the contract in each case whether power of
Arbitrator to grant pendente lite interest is expressly taken away. If
answer is ‘yes’ then Arbitrator would have no power to award pendente lite
interest.
23. The decision in Madnani Construction Corporation (supra) has followed
decision in Engineers-De-Space-Age (supra). Same is also required to be
diluted to the extent that express stipulation under contract may debar the
Arbitrator from awarding interest pendente lite. Grant of pendente lite
interest may depend upon several factors such as phraseology used in the
agreement, clauses conferring power relating to arbitration, nature of
claim and dispute referred to Arbitrator and on what items power to award
interest has been taken away and for which period.
24. Thus, our answer to the reference is that if contract expressly
bars award of interest pendente lite, the same cannot be awarded by the
Arbitrator. We also make it clear that the bar to award interest on
delayed payment by itself will not be readily inferred as express bar to
award interest pendente lite by the Arbitral Tribunal, as ouster of power
of Arbitrator has to be considered on various relevant aspects referred to
in the decisions of this Court, it would be for the Division Bench to
consider the case on merits.
………………………J.
(Ranjan Gogoi)
………………………J.
(Arun Mishra)
New Delhi; ……………………….J.
March 16, 2016. (Prafulla C. Pant)
