Union Of India vs Pramod Kumar Agrawal

1 AA-5-2008 IN THE HIGH COURT OF MADHYA PRADESH AT JABALPUR BEFORE HON'BLE SHRI JUSTICE VIVEK JAIN ON THE 12th OF FEBRUARY, 2026 ARBITRATION APPEAL No. 5 of 2008 UNION OF INDIA Versus PRAMOD KUMAR AGRAWAL Appearance: Shri Piyush Bhatnagar - Advocate for the appellant. Shri RC. Sobhani - Advocate for the respondent.

ORDER

The present appeal under Section 37 of Arbitration and Conciliation Act, 1996 has been filed arising out of the order passed by the District Court under Section 34 of the Act of 1996, whereby the District Court has rejected the application of the appellant railways under Section 34 of Act of 1996 and confirmed the award dated 05.01.2006 passed by the arbitrator.

2. The necessary facts for the purpose of disposal of the present appeal are that the District Court in Case No.10-B/2003 had appointed one Shri K.S.

Inamdar, retired Chief Engineer as arbitrator to adjudicate upon the disputes arising between the parties in pursuance of agreement relating to construction of superstructure for ROB at Betul Railway Station. The matter in dispute arises out of an agreement executed on 15.07.1996 and its subsequent termination in the year 1997 and it is a case arising under the Act of 1996.

Signature Not Verified Signed by: RAJESH KUMAR JYOTISHI Signing time: 2/17/2026 7:19:27 PM NEUTRAL CITATION NO. 2026:MPHC-JBP:12770

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3. The arbitrator entered into reference and passed an award of Rs.3,02,000/- and further directed payment of interest at the rate of 12% per annum from 10.08.1998 till date of award.

4. The counsel for the appellant has attacked the aforesaid award mainly on two grounds. Firstly, that since the matter arises after enforcement of Act of 1996, therefore, the District Court could not have appointed an arbitrator because it has been conclusively held by the Constitution Bench of the Hon'ble Supreme Court in the case of SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 that only the Chief Justice or his designate can appoint the arbitrator and therefore, in the present case since the arbitrator was appointed by the District Court and therefore, the appointment is invalid and award be

set aside.

5. It is further argued that since Clause 16(2) of the General Conditions of the Contract (GCC) mandates that interest will not be payable to the contractor, therefore, the arbitrator could not have awarded pendente lite interest or ante lite interest, but he has proceeded to award pendente lite interest, which should be set aside.

6. Per contra, the impugned award is vehemently supported by learned counsel for the respondent on the ground that the award is very well justified and that no objection was taken on the jurisdiction of the arbitrator during the course of the arbitration proceeding and therefore, at this stage this objection cannot be taken and considered.

7. Heard.

8. So far as the question regarding authority of the arbitrator is

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3 AA-5-2008 concerned, it was challenged on the ground that the arbitrator was appointed by the District Court. However, prior to judgement of the Constitution Bench of the Hon'ble Supreme Court in the case of SBP & Co. (Supra) the High Court of M.P. had framed rules known as the Scheme for Appointment of Arbitrators by the Chief Justice of Madhya Pradesh High Court, 1996 and as per Clause 3 of the aforesaid Scheme/Rules, the Additional District Judge/District Judge of the district was authorized to appoint arbitrator where the subject matter value did not exceed Rs.25 lakhs and where the subject matter value exceeded Rs.25.00 lakhs in those cases the arbitrator had to be appointed by the High Court.

9. Since in the present case the arbitrator had been appointed prior to judgment of the Constitution Bench in case of SBP & Co. (Supra), therefore, the appointment of Arbitrator having been made as per the rules, which were prevailing on the date of appointment of Arbitrator, at this distance of time, this Court does not intend to interfere in the authority of the Arbitrator. Therefore, the objection as to the authority of the Arbitrator is discarded.

10. The other ground taken in the matter of interest being awarded by the Arbitrator is taken up. The Clause 16(2) of the GCC mentions as under:-

"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 deposited in terms of Sub- Clause (1) of this clause will be repayable with interest accrued thereon."

11. The aforesaid Clause 16(2) not only bars interest from the security deposit or earnest money, but also amount payable to the contractor under

the contract. This clause is under unconditional and bars payment of interest to any amount payable to the contractor under the contract. The case is a case

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under the Act of 1996 and is not a case under the Act of 1940.

12. The Scheme under the Act of 1996 is more towards recognizing sanctity to party autonomy and giving more weight to the terms of the agreement between the parties and the mode of looking at such agreements under the Act of 1940 and under the Act of 1996 is different.

13. In the case of Ferro Concrete Construction (India) Pvt. Ltd. vs. State of Rajasthan 2025 SCC OnLine SC 708, the Hon'ble Supreme Court has considered the approach between the Act of 1940 and the Act of 1996 by considering that under the Act of 1996 the approach is towards recognizing and sanctifying party autonomy. The Hon'ble Supreme Court held as under:-

14. The difference in the interpretative approach can be stated as follows. Under the 1940 Act, a stricter approach is followed that requires a clear and express clause against the payment of interest in case of difference, dispute, or misunderstanding, in case of delay of payment, or any other case whatsoever, to constitute a bar on the arbitrator from granting interest. A clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient. On the other hand, under the 1996 Act wherein Section 31(7)(a) sanctifies party autonomy, interest is not payable the moment the contract provides otherwise. This distinction has been reiterated by us in a recent decision in Pam Developments (supra), which summarised the position of law as follows:

"23. The power of the arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest under Section 31(7) of the Act is fairly well-settled. The judicial determinations also highlight the difference in the position of law under the Arbitration Act, 1940. The following propositions can be summarised from a survey of these cases:

23.1. Under the Arbitration Act, 1940, there was no specific provision that empowered an arbitrator to grant interest.

However, through judicial pronouncements, this Court has affirmed the power of the arbitrator to grant pre-reference, Signature Not Verified Signed by: RAJESH KUMAR JYOTISHI Signing time: 2/17/2026 7:19:27 PM NEUTRAL CITATION NO. 2026:MPHC-JBP:12770

5 AA-5-2008 pendente lite, and post-award interest on the rationale that a person who has been deprived of the use of money to which he is legitimately entitled has a right to be compensated for the same. When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the arbitrator has the power to decide the same.

23.2. Under the 1940 Act, this Court has adopted a strict construction of contractual clauses that prohibit the grant of interest and has held that the arbitrator has the power to award interest unless there is an express, specific provision that excludes the jurisdiction of the arbitrator. 23.3. Under the 1996 Act, the power of the arbitrator to grant interest is governed by the statutory provision in Section 31(7). This provision has two parts. Under clause (a), the arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise agreed by the parties. Clause (b) provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest @ 2% higher than the current rate of interest, from the date of the award to the date of payment.

23.4. The wording of Section 31(7)(a) marks a departure from the Arbitration Act, 1940 in two ways : first, it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are provided for under this sub-section; second, it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest the moment the agreement bars payment of interest, even if it is not a specific bar against the arbitrator. 23.5. The power of the arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded or does not contain a specific term that prohibits the same.

23.6. While pendente lite interest is a matter of procedural law, pre-reference interest is governed by substantive law. Therefore, the grant of pre-reference interest cannot be sourced solely in Section 31(7)(a) (which is a procedural law), but must be based on an agreement between the parties (express or implied), statutory provision (such as Section 3 of the Interest Act, 1978), or proof of mercantile usage."

15. In the case of Oil and Natural Gas Corporation Ltd. vs G & T Beckfield Drilling Services Pvt. Ltd. 2025 SCC OnLine SC 1888, the Signature Not Verified Signed by: RAJESH KUMAR JYOTISHI Signing time: 2/17/2026 7:19:27 PM NEUTRAL CITATION NO. 2026:MPHC-JBP:12770

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Hon'ble Supreme Court categorically held that under the Act of 1996, if the agreement stipulates that no interest is payable, then the Arbitral Tribunal cannot award interest and award contrary to the terms of contract would be vulnerable to challenge under Section 34. The Hon'ble Supreme Court held as under:-

"12. Sub-section (7) of Section 31 of 1996 Act deals with award of interest when the arbitral award is for the payment of money. Sub-section (7) has two clauses. Clause (a) deals with interest for the period between the date on which the cause of action arose and the date on which the award is made. Clause (a) says that when the 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. However, arbitral tribunal's power to award interest for the aforesaid period is subject to the agreement between the parties. Therefore, if the agreement stipulates that no interest is payable, the arbitral tribunal cannot award interest for the aforesaid period and an award contrary to the terms of the contract would be vulnerable to a challenge under Section 34 of 1996 Act.4 Moreover, such an agreement to waive interest is not ultra vires in terms of Section 28 of the Contract Act, 18725. However, if the agreement is silent on award of interest, the arbitral tribunal can award interest in terms of clause (a) of sub-section (7) of Section

316. As far as clause (b) of sub-section (7) of Section 31 is concerned, it deals with post-award interest. Prior to 2015 amendment, clause (b) mandated payment of interest on the sum awarded at the rate of 18% per annum from the date of the award to the date of payment, unless the award directed otherwise. Interestingly, clause (b) is not subject to an agreement between the parties and, therefore, if the arbitral award is with regard to payment of money, it would carry interest at such rate as the arbitral award directs and if it is not so directed, it would carry statutorily prescribed rate of interest from the date of the award till the date of payment. In a nutshell, the arbitral tribunal has jurisdiction to award interest for three distinct periods, namely, pre-reference, pendente lite, and future i.e., post-award. Award of pre-reference and pendente-lite interest is subject to the agreement

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7 AA-5-2008 between the parties whereas post award interest is statutorily governed and is not subject to the agreement between the parties. In other words, clause (b) does not give the parties the right to 'contract out' interest for the post award period."

16. In the case of Jaiprakash Associates Ltd. v. Tehri Hydro Development Corpn. (India) Ltd., (2019) 17 SCC 786, the Hon'ble Supreme Court again considered the law relating to award of interest under the Act of 1996 and held that if agreement between the parties specifically prohibits grant of interest, then arbitrator cannot award pendente lite interest.

17. Therefore, this Court is of the considered opinion that the Arbitrator has committed error of law in not giving sanctity to party autonomy and the award passed contrary to provisions of the agreement, is vulnerable in terms of Section 34. Therefore, since there is agreement to be contrary between the parties, hence award of pendente lite interest was barred in terms of Section 31(7)(a) of Act of 1996 and being contrary to the statutory provisions, the award becomes vulnerable under Section 34.

18. In view of the above, the impugned award is modified by sustaining the objection as to payment of pendente lite interest.

19. Therefore, the appeal is partly allowed and that part of the impugned award is set aside, whereby the pendente lite interest has been granted on the awarded amount.

20. In the above terms, the appeal is partly allowed and disposed of .

(VIVEK JAIN) JUDGE

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Signature Not Verified Signed by: RAJESH KUMAR JYOTISHI Signing time: 2/17/2026 7:19:27 PM