Union of India vs M/S. Krafters Engineering & Leasing (P) Ltd.

Union of India .... Appellant (s)

Versus

M/s Krafters Engineering & Leasing

(P) Ltd. .... Respondent(s)

J U D G M E N T

P. Sathasivam, J.

1) This appeal by Union of India arises out of the final

judgment and order dated 24.04.2006 passed by the High

Court of Judicature at Bombay in Appeal No. 219 of 2006

in Arbitration Petition No. 274 of 2005 whereby the

Division Bench of the High Court dismissed their appeal.

1 2) Brief facts:

(a) On 16.05.1988, the respondent was awarded with a

contract for the work of Provision of Signaling

Arrangements at "C" Class Stations on Igatpuri-Bhusawal

Section and 2 "C" Stations on Bhusawal-Badnera Section

of Bhusawal Division of Central Railway at the cost of

Rs.18,10,400/-. On completion of the contract, the

respondent raised certain disputes/claims by filing Suit

No. 2822 of 1993 before the High Court and demanded for

adjudication through arbitration. The High Court directed

the General Manager of the Central Railway to appoint an

arbitrator and refer the disputes for adjudication. Since

the Arbitrator appointed could not deliberate the matter

within the time limit, the respondent invoked the

jurisdiction of the Umpire. The Umpire, by order dated

26.04.2005, gave award for Claim Nos. 1, 3, 6, 8, 9, 10,

11, 12 & 13 and rejected Claim Nos. 2, 5, 7 & 14 and

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mentioned that a bank guarantee towards security deposit

against claim No. 4 is to be returned.

(b) Challenging the award given by the Umpire for Claim

Nos. 11 & 13, the appellant herein filed Arbitration

Petition No. 274 of 2005 before the High Court. The

learned Single Judge of the High Court, vide order dated

06.12.2005 dismissed their petition.

(c) Aggrieved by the order passed by the learned single

Judge, the appellant herein filed an appeal being

Arbitration Appeal No. 219 of 2006 before the Division

Bench of the High Court. The Division Bench, by

impugned order dated 24.04.2006, dismissed the appeal.

Challenging the said order, the Union of India preferred

this appeal by way of special leave before this Court.

3) Heard Mr. A. S. Chandhiok, learned Additional

Solicitor General for the Union of India and Mr. Ramesh

Babu M.R., learned counsel for the respondent.

3 4) Before the High Court as well as before us, the

appellant projected their case only with regard to interest

that was granted by the arbitrator and confirmed by the

High Court. Therefore, the only point for consideration in

this appeal is whether an arbitrator has jurisdiction to

grant interest despite the agreement prohibiting the same?

5) Though the appellant has challenged the award of the

Umpire in respect of Claim Nos. 11 and 13, they are

mainly concerned about grant of interest; hence there is

no need to traverse all the factual details except the

required one which we have adverted to. According to Mr.

A.S. Chandhiok, learned ASG, in view of clause 1.15 of the

General Conditions of the Contract between the parties,

the arbitrator does not have the power to award interest

pendente lite. The said clause reads as under:

"1.15 Interest on Amounts - 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 deposited in terms of clause

1.14.4 will be repayable with interest accrued thereon."

4

According to the learned ASG, in view of the above-

mentioned clause, no interest is payable on the amount

payable to the Contractor under the contract. On the

other hand, Mr. Ramesh Babu M.R., learned counsel

appearing for the respondent submitted that irrespective

of the bar in the contract arbitrator has power to award

interest for which he strongly relied on the decision of this

Court in Board of Trustees for the Port of Calcutta vs.

Engineers-De-Space-Age, (1996) 1 SCC 516 and

Madnani Construction Corporation Private Limited vs.

Union of India and Others, (2010) 1 SCC 549.

6) We have already extracted the relevant clause

wherein the words "amounts payable to the Contractor

under the contract" are of paramount importance. If there

is no prohibition in the arbitration agreement to exclude

the jurisdiction of the arbitrator to entertain a claim for

interest on the amount due under the contract, the

arbitrator is free to consider and award interest in respect

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of the period. If there is a prohibition in the agreement to

pay the interest, in that event, the arbitrator cannot grant

the interest. Clause 1.15 prohibits payment of interest on

the amount payable to the contractor under the contract.

7) It is not in dispute that the provisions of the

Arbitration Act, 1940 alone are applicable to the case on

hand. Now, let us consider various decisions of this Court

dealing with similar prohibition in the agreement for grant

of interest. In Secretary, Irrigation Department,

Government of Orissa and Others vs. G.C. Roy, (1992) 1

SCC 508, the Constitution Bench had considered Section

29 of the Arbitration Act, 1940 which deals with interest

pendente lite. After analyzing the scheme of the Act and

various earlier decisions, the Constitution Bench

considered the very same issue, namely, whether an

arbitrator has power to award interest pendente lite and, if

so, on what principle. The relevant paragraphs are

extracted hereunder:-

6 "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. Thawardas 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

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or universal rule as they appear to, on first impression. Until

Jena case 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."

8) In Executive Engineer, Dhenkanal Minor

Irrigation Division, Orissa and Others vs. N.C

Budharaj (deceased) by LRs and Others, (2001) 2 SCC

721, another Constitution Bench considered payment of

interest for pre-reference period in respect of cases arising

when Interest Act, 1839 was in force. The following

conclusion in para 26 is relevant which reads thus:

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"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 contra

view 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."

(Emphasis supplied).

9) In the earlier paras, we have referred to the stand

taken by the learned counsel for the respondent and

reliance based on the decision reported in Board of

Trustees for the Port of Calcutta (supra). It is true

that in that decision, this Court has held that arbitrator

has jurisdiction to interpret the clauses of the contract

and to decide whether interest pendente lite could be

awarded by him. The short question that arose in that

case was that the arbitrator had awarded interest

pendente lite notwithstanding the prohibition contained in

the contract against the payment of interest on delayed

payments. Ultimately, the two-Judge Bench of this Court

has concluded that irrespective of the terms of the

9

contract, the arbitrator was well within his jurisdiction in

awarding interest pendente lite. It is useful to point out

that the ratio in that decision was considered by this

Court in Sayeed Ahmed and Company vs. State of

Uttar Pradesh and Others, (2009) 12 SCC 26. While

considering the very same issue, particularly, specific

clause in the agreement prohibiting interest pendente lite,

this Court considered the very same decision i.e. Board of

Trustees for the Port of Calcutta (supra). After

adverting to the clause in the Board of Trustees for the

Port of Calcutta (supra) and the Constitution Bench in

G.C. Roy's case (supra), this Court concluded as under:

"23. The observation in Engineers-De-Space-Age 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 the

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 the arbitrator from awarding

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interest. The observations made in the context of interest

pendente lite cannot be used out of contract.

24. The learned counsel for the appellant next contended on

the basis of the above observations in Engineers-De-Space-

Age, that even if Clause G1.09 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 with by the High Court. In view of the

Constitution Bench decisions in G.C. Roy and N.C. Budharaj

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 the

Arbitration Act, 1940 that the 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 the arbitrator."

10) Considering the specific prohibition in the agreement

as discussed and interpreted by the Constitution Bench,

we are in respectful agreement with the view expressed in

Sayeed Ahmed and Company (supra) and we cannot

possibly agree with the observation in Board of Trustees

for the Port of Calcutta (supra) in a case arising under

the Arbitration Act, 1940 that the arbitrator could award

interest pendente lite ignoring the express bar in the

contract.

11 11) In Union of India vs. Saraswat Trading Agency

and Others, (2009) 16 SCC 504, though it was under the

Arbitration and Conciliation Act, 1996, this Court has

considered elaborately about the legal position in regard to

interest after adverting to all the earlier decisions and

basing reliance on clause 31 of the agreement held:

"33. In the case in hand Clause 31 of the agreement is

materially different. It bars payment of any interest or damage

to the contractor for any reason whatsoever. We are, therefore,

clearly of the view that no pre-reference or pendente lite interest

was payable to the respondent on the amount under Item 3 and

the arbitrator's award allowing pre-reference and pendente lite

interest on that amount was plainly in breach of the express

terms of the agreement. The order of the High Court insofar as

pre-reference and pendente lite interest on the amount under

Item 3 is concerned is, therefore, unsustainable."

12) At the end of the argument, learned counsel for the

respondent heavily relied on the recent decision of this

Court in Madnani Construction Corporation Private

Limited (supra) which arose under the Arbitration Act,

1940. There also, Clause 30 of SCC and Clause 52 of

GCC prohibits payment of interest. Though the Bench

relied on all the earlier decisions and considered the very

same clause as to which we are now discussing, upheld

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the order awarding interest by the arbitrator de hors to

specific bar in the agreement. It is relevant to point out

that the decision of Madnani Construction Corporation

Private Limited (supra) was cited before another Bench

of this Court in Sree Kamatchi Amman Constructions

vs. Divisional Railway Manager (Works), Palghat and

Others, (2010) 8 SCC 767, wherein the decision in

Madnani Construction Corporation Private Limited

(supra) was very much discussed and considered. After

adverting to all the earlier decisions including the

Constitution Bench judgments, this Court has analyzed

the effect of Madnani Construction Corporation Private

Limited (supra). The following discussion and ultimate

conclusion are relevant:

"17. In Madnani the arbitrator had awarded interest

pendente lite, that is, from the date of appointment of

arbitrator to the 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:

(Madnani case, SCC pp. 560-61, para 39)

13

"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."

18. 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 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:

(SCC p. 36, paras 23-24)

"23. The observation in Engineers-De-Space-Age 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 the

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 the arbitrator from awarding

interest. The observations made in the context of interest

pendente lite cannot be used out of contract.

14 24. The learned counsel for the 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 with

by the High Court. In view of the Constitution Bench

decisions in G.C. Roy and N.C. Budharaj 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 the Arbitration Act, 1940 that the 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 the

arbitrator."

The same reasoning applies to the decision in Madnani also

as that also relates to a case under the old Act and did not

independently consider the issue but merely relied upon the

decision in Engineers-De-Space-Age.

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

otherwise agreed by the parties" categorically clarifies that

the arbitrator is bound by the terms of the contract insofar

as the award of interest from the date of cause of action to the

date of award. Therefore, where the parties had agreed that

no interest shall be payable, the Arbitral Tribunal cannot

award interest between the date when the cause of action

arose to the date of award.

20. 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 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

15

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..."

13) Inasmuch as we have already expressed similar view

as mentioned above and conveyed our inability to apply

the reasoning in Madnani Construction Corporation

Private Limited (supra), we fully endorse the view

expressed in Sree Kamatchi Amman Constructions

(supra).

14) In the light of the above discussion, following

conclusion emerge:

Reliance based on the ratio in Board of Trustees for

the Port of Calcutta (supra) is unacceptable since the

said view has been overruled in Sayeed Ahmed and

Company (supra) and insofar as the ratio in Madnani

Construction Corporation Private Limited (supra)

which is also unacceptable for the reasons mentioned in

the earlier paras, we reject the stand taken by the counsel

for the respondent. On the other hand, we fully accept the

16

stand of the Union of India as rightly projected by Mr. A.S.

Chandhiok, learned ASG. We reiterate that where the

parties had agreed that no interest shall be payable, the

arbitrator cannot award interest for the amounts payable

to the contractor under the contract. Where the

agreement between the parties does not prohibit grant of

interest and where a party claims interest and the said

dispute is referred to the arbitrator, he shall have the

power to award interest pendent elite. As observed by the

Constitution Bench in G.C. Roy's case (supra), in such a

case, it must be presumed that interest was an implied

term of the agreement between the parties. However, this

does not mean that in every case, the arbitrator should

necessarily award interest pendente lite. In the

subsequent decision of the Constitution Bench, i.e., N.C.

Budharaj's case (supra), it has been reiterated that in

the absence of any specific stipulation or prohibition in

the contract to claim or grant any such interest, the

17

arbitrator is free to award interest.

15) In the light of the above principle and in view of the

specific prohibition of contract contained in Clause 1.15,

the arbitrator ceases to have the power to grant interest.

We also clarify that the Arbitration Act, 1940 does not

contain any specific provision relating to the power of

arbitrator to award interest. However, in the Arbitration &

Conciliation Act, 1996, there is a specific provision with

regard to award of interest by the arbitrator. The bar

under clause 1.15 is absolute and interest cannot be

awarded without rewriting the contract.

16) For the aforesaid reasons, we set aside the award of

the arbitrator granting interest in respect of the amount

payable to the contractor under the contract as well as the

order of the learned Single Judge and the Division Bench

of the High Court confirming the same.

17) Consequently, the appeal is allowed to the extent

pointed out above with no order as to costs.

18 ..........................................J.

(P. SATHASIVAM)

..........................................J.

(A.K. PATNAIK)

NEW DELHI;

JULY 12, 2011.

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