M/S Sree Kamatchi Amman Constructions vs Divisional Rly.Manager/Works & Ors

Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 6815-6816 OF 2010 [Arising out of SLP [C] Nos.13291-13292 of 2008]

Sree Kamatchi Amman Constructions ... Appellant

Vs.

The Divisional Railway Manager (Works), Palghat & Ors. ... Respondents

JUDGMENT

R.V.RAVEENDRAN, J.

Leave granted.

2. The first respondent entrusted certain construction work to the

appellant under a contract in the year 1995. Alleging breach by the first

respondent (for short `Railways') the appellant invoked the arbitration

Clause and the disputes were referred to an arbitral tribunal of which

respondents 2 to 4 are the members. The arbitral tribunal made a non-

speaking award dated 14.5.1999 in favour of the appellant. The High Court

by order dated 9.1.2001 set aside the said award and remitted the matter to

the arbitral tribunal with a direction to make a reasoned award after fresh 2

consideration. The arbitral tribunal accordingly passed an award dated

5.12.2001 awarding certain amounts with a direction that the award amount

should be paid to the appellant by 4.1.2002 and if it failed to do so, the

appellant will be entitled to simple interest at 10% per annum on the

amounts awarded from 5.12002 till date of payment. That is, the arbitral

tribunal awarded only future interest and refused to award the interest for

pre-reference period and interest pendente lite. It may be mentioned that the

award rejected two of the claims of the appellants and rejected all the claims

of the Railways.

3. Feeling aggrieved by the award, the Railways filed a petition under

section 34 of the Arbitration and Conciliation Act, 1996 (`Act' for short).

Aggrieved by the rejection of its claims 1 and 2 and the failure to award

interest for the pre-reference period and pendente lite, the appellant also

filed a petition under section 34 of the Act. A learned Single Judge of the

High Court rejected both the challenges to the award. Insofar as interest is

concerned the learned Single Judge held that having regard to the bar

contained in Clause 16(2) of the General Conditions of Contract, the

contractor was not entitled to it. Again both Railways and the appellant filed

appeals against the order of the learned Single Judge. The Division Bench of

the Madras High Court by the impugned judgment dated 18.7.2007 3

dismissed the appeal by the appellant- contractor. It allowed the Railways

appeal and set aside the award made on claim No.3 (damages for idle

labour) and claim No.5 (damages for overstay). As a result what remained

was award of Rs.38,92,455/- under claim No. (4) (erroneous billing with

reference to unit of measurement/unit rate of payment for the work covered

under the optional item No. 19 of Schedule of Work) and award of

Rs.94,100 (refund of security deposit) under claim 6 with interest at 10% per

annum from 5.1.2002 till date of payment. The appellant has challenged the

said common judgment in these appeals. This court on 7.7.2008 granted

leave only in regard to the non-award of interest pendente lite and for pre-

reference period. This court refused to interfere with the decision of the

division bench, setting aside the award insofar as claim Nos. 3 and 5.

4. The appellant urged the following contentions : (i) Clause 16(2) of the

General conditions of contract did not prohibit or prevent arbitrator to direct

payment of interest; and therefore the award insofar as it denied interest for

pre-reference period and pendente lite by relying upon Clause 16(2) was

liable to be interfered with. (ii) As the arbitrators had recorded a clear

finding that the delay in completion of the work was occasioned due to

reasons attributable to Railways and not on account of the appellants, the

appellant cannot be denied interest for pre-reference period and pendente 4

lite. On the other hand Railways contended that the contract contained a

specific bar against award of interest on any amount payable to the

contractor under the contract or upon the earnest money or security deposit

and therefore the arbitral tribunal was barred from awarding interest for the

said periods under section 31(7)(a) of the Act. It was further submitted that

if the contract between the parties barred payment of interest, arbitral

tribunal cannot award interest for the period between the date on which the

cause of action arose and the date on which the award was made and

therefore the arbitral tribunal had rightly not awarded the interest for the

same period. On the aforesaid contentions the following questions arise for

consideration :

(i) whether the contract between the parties contains an express bar regarding award of interest?

(ii) If so whether the arbitral tribunal was justified in refusing interest for the period between the date of cause of action to date of award?

Re : Point (i)

5. Clause 16(2) of the General Conditions of contract governing the

contract between the parties bars payment of interest and the same is

extracted below :

5

"16(2). No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposit in terms of sub-Clause (1) of this Clause will be repayable (with) interest accrued thereon".

(emphasis supplied)

The two claims on which amounts are awarded are with reference to claim

No. (4) relating to erroneous billing and claim No. (6) relating to security

deposit. Clause 16(2) in terms specifically bars payment of interest on

security deposit. Insofar as claim No. (4) is concerned, the question is

whether the amount awarded is an "amount payable to the contractor under

the contract". Learned counsel for the appellant made a faint attempt to

contend that the award relating to claim No. (4) was not in regard to an

amount payable to the contractor under the contract. This contention has

absolutely no merit as the award itself categorically recorded a finding that

under item No.19 "the actual quantity executed by the claimant at the orders

of the respondent very much becomes a part and parcel of the original

agreement quantity". What was awarded for the "rate per metre of rails to be

led to SLY Yard and stacked vide Agreement Schedule Item No. 19" at the

rate of Rs.225 per metre. Thus claim No.4 related to a work executed by the

contractor as a part and parcel of the work contemplated under the

agreement. Payment directed by the arbitral tribunal for such work was also

in accordance with the Agreement Schedule Item No.19. Therefore it is 6

evident that the amount awarded in regard to claim No. (4) was an amount

payable to the contractor under the contract. Consequently no interest could

be paid thereon having regard to the bar under Clause 16(2) of the General

conditions of contract.

Re : Point (ii)

6. This court had occasion to consider the jurisdiction and authority of

the arbitrator to award interest under the Arbitration Act, 1940 and under the

new Act in Sayeed Ahmed & Co. v. State of U.P. [2009 (12) SCC 26]. Relying upon the earlier decisions of this court in Irrigation Department,

Government of Orissa v. G C Roy [1992 (1) SCC 508], Executive Engineer,

Dhenkanal Minor Irrigation Division v. N C Budharaj [2001 (2) SCC 721]

and Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd. [2005 (6) SCC 462]

and State of Rajasthan v. Ferro Concrete Construction (P) Ltd. [2009 (12)

SCC 1], this court held that the arbitrator had the jurisdiction and authority

to award interest for three distinct periods namely, the pre-reference period

(which referred to the period between date of cause of action to date of

reference), pendente lite (which referred to the period between date of

reference to date of award) and future period (which referred to the period

between the date of award to date of payment) if there was no express bar in 7

the contract regarding award of interest. This court then noticed the change

under the new Act as follows :

"13. The Legislature while enacting the Arbitration and Conciliation Act, 1996, incorporated a specific provision in regard to award of interest by Arbitrators. Sub-section (7) of Section 31 of the Act deals with the Arbitrator's power to award interest. Clause (a) relates to the period between the date on which the cause of action arose and the date on which the award is made. Clause (b) relates to the period from the date of award to date of payment. The said Sub-section (7) is extracted below:

"31.7(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment."

Having regard to sub-section (7) of Section 31 of the Act, the difference between pre-reference period and pendente lite period has disappeared in so far as award of interest by arbitrator. The said section recognises only two periods and makes the following provisions:

(a) In regard to the period between the date on which the cause of action arose and the date on which the award is made (pre-reference period plus pendente lite), the arbitral tribunal may award interest at such rate as it deems reasonable, for the whole or any part of the period, unless otherwise agreed by the parties.

(b) For the period from the date of award to the date of payment the interest shall be 18% per annum if no specific order is made in regard to interest. The arbitrator may however award interest at a different rate for the period between the date of award and date of payment.

14. The decisions of this Court with reference to the awards under the old Arbitration Act making a distinction between the pre-reference period and pendente lite period and the observation therein that arbitrator has the discretion to award interest during pendente lite period inspite of any bar against interest contained in the contract between the parties are not applicable to arbitrations governed by the Arbitration and Conciliation Act 1996."

8 We may also refer to the decision of this court in Union of India v. Saraswat

Trading Agency [2009 (16) SCC 504] this court reiterated that if there is a

bar against payment of interest in the contract, the arbitrator cannot award

any interest for the pre-reference period or pendente lite. In view of the

specific bar under Clause 16(2), we are of the view that the arbitral tribunal

was justified in refusing interest from the date of cause of action to date of

awards.

7. We may at this juncture refer to the contention of the appellant that

even if the appellant was not entitled to interest for the pre-reference period,

that is date of cause of action to date of reference, the appellant will be

entitled to interest pendente lite, that is for the period from the date of

reference to date of award, having regard to the decisions of this court in

Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age [1996

(1) SCC 516] and Madnani Construction Corporation Pvt. Ltd. v. Union of

India [2010 (1) SCC 549].

8. In Engineers-De-Space-Age (supra) this court held :

"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 9

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. If that be so, we would be justified in placing a strict construction on the term of the contract on which reliance has been placed. Strictly construed the terms of the contract merely prohibits the Commissioner from paying interest to the contractor for delayed payment but once the matter goes to arbitration the discretion of the arbitrator is not, in any manner, stifled by this term of the contract and the arbitrator would be entitled to consider the question of grant of interest pendente lite and award interest if he finds the claim to be justified. We are, therefore, of the opinion that under the Clause of the contract the arbitrator was in no manner prohibited from awarding interest pendente lite.

In Madnani i(supra) the arbitrator had awarded interest pendente lite, that is

from the date of appointment of arbitrator to date of award. The High Court

had interfered with the same on the ground that there was a specific

prohibition in the contract regarding awarding of interest. This court

following the decision in Engineers-De-Space-Age reversed the said

rejection and held as follows :

"39. In the instant case also the relevant Clauses, which have been quoted above, namely, Clause 16(2) of GCC and Clause 30 of SCC do not contain any prohibition on the arbitrator to grant interest. Therefore, the High Court was not right in interfering with the arbitrator's award on the matter of interest on the basis of the aforesaid Clauses. We, therefore, on a strict construction of those Clauses and relying on the ratio in Engineers find that the said Clauses do not impose any bar on the arbitrator in granting interest."

1 9. At the outset it should be noticed that Engineers-De-Space-Age and

Madnani arose under the old Arbitration Act, 1940 which did not contain a

provision similar to section 31(7) of the new Act. This court, in Sayeed

Ahmed held that the decisions rendered under the old Act may not be of

assistance to decide the validity of grant of interest under the new Act. The

logic in Engineers-De-Space-Age was that while the contract governed the

interest from the date of cause of action to date of reference, the arbitrator

had the discretion to decide the rate of interest from the date of reference to

date of award and he was not bound by any prohibition regarding interest

contained in the contract, insofar as pendente lite period is concerned. This

Court in Sayeed Ahmed (supra) held that the decision in Engineers-De-

Space-Age would not apply to cases arising under the new Act. We extract

below, the relevant portion from Sayeed Ahmed:

"23. The observation in Engineers-De-Space-Age (supra) that the term of the contract merely prohibits the department/employer from paying interest to the contractor for delayed payment but once the matter goes to arbitrator, the discretion of the arbitrator is not in any manner stifled by the terms of the contract and the arbitrator will be entitled to consider and grant the interest pendente lite, 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. Whether the provision in the contract bars the employer from entertaining any claim for interest or bars the contractor from making any claim for interest, it amounts to a clear prohibition regarding interest. The provision need not contain another bar prohibiting Arbitrator from awarding interest. The observations made in the context of interest pendente lite cannot be used out of contract.

1 24. The learned Counsel for appellant next contended on the basis of the above observations in Engineers-De-Space-Age, that even if Clause G- 1.09 is held to bar interest in the pre-reference period, it should be held not to apply to the pendente lite period that is from 14.3.1997 to 31.7.2001. He contended that the award of interest during the pendency of the reference was within the discretion of the arbitrator and therefore, the award of interest for that period could not have been interfered by the High Court. In view of the Constitution Bench decisions in G.C. Roy and N.C. Budharaj (supra) rendered before and after the decision in Engineers-De- Space-Age, it is doubtful whether the observation in Engineers-De-Space- Age in a case arising under Arbitration Act, 1940 that Arbitrator could award interest pendente lite, ignoring the express bar in the contract, is good law. But that need not be considered further as this is a case under the new Act where there is a specific provision regarding award of interest by Arbitrator."

The same reasoning applies to the decision in Madnani also as that also

relates to a case of under the old Act and did not independently consider the

issue but merely relied upon the decision in Engineers-De-Space-Age.

10. Section 37(1) of the new Act by using the words "unless otherwise

agreed by the parties" categorically clarifies that the arbitrator is bound by

the terms of the contract insofar as the award of interest from the date of

cause of action to date of award. Therefore where the parties had agreed that

no interest shall be payable, arbitral tribunal cannot award interest between

the date when the cause of action arose to date of award.

11. We are of the view that the decisions in Engineers-De-Space-Age and

Madnani are inapplicable for yet another reason. In Engineers-De-Space-

Age and Madnani the arbitrator had awarded interest for the pendente lite 1

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 this 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 and Madnani are inapplicable. Be that as it may.

12. For the aforesaid reasons, we find no merit in these appeals and they

are dismissed. Parties to bear their respective costs.

...................................J. (R V Raveendran)

New Delhi; ...................................J. August 20, 2010. (H L Gokhale)