Executive
Engineer Irrigation Galimala & Ors A V. Abaaduta Jena [1987] INSC 264 (22
September 1987)
REDDY,
O. CHINNAPPA (J) REDDY, O. CHINNAPPA (J) KANIA, M.H.
SHETTY,
K.J. (J)
CITATION:
1988 AIR 1520 1988 SCR (1) 253 1988 SCC (1) 418 JT 1987 (4) 8 1987 SCALE (2)675
CITATOR
INFO : F 1988 SC1530 (4) F 1988 SC1791 (13) RF 1989 SC 777 (16) R 1989 SC 973
(12,14) F 1989 SC1987 (2) F 1989 SC2125 (4) D 1989 SC2257 (3,8) R 1990 SC 685 (11,12)
RF 1990 SC 864 (5) R 1990 SC1340 (13 TO 17) O 1992 SC 732
(2,9,10,11,22,33,43,46,47) RF 1992 SC2090 (2)
ACT:
Arbitration
Act, 1940: Sections 14, 15, 30 and 33- Arbitrator-Competency of-To award
interest on reference made without intervention of Court-Court whether entitled
to go behind the award and decide whether award of interest justifiable. C
InterestAct 1839/lnterestAct 1978.
Civil
Procedure Code 1908, Section 34. Award of pendente lite interest by arbitrator.
D
HEADNOTE:
In
the appeals by Special Leave to this Court the question for consideration was:
whether an arbitrator to whom a reference was made without the intervention of
the Court could award interest during the period prior to the reference and
during the pendency of the arbitration:
^
HELD:
1. The general statutory provisions in regard to the award of interest by the
Court are contained in the Interest Act and the Civil Procedure Code. [258F]
2.
The Interest Act of 1839 was repealed and a new Interest Act incorporated in
1978. Both these Acts provide for the award of interest upto the date of the
institution of the proceedings. Neither the Interest Act of 1839 nor the
Interest Act of 1978 provides for the award of pendente lite interest. [260D]
3.
The award of pendente lite interest is provided for in Section 34 of the Civil
Procedure Code. Section 34 however, applies to arbitrations in suits for the
simple reason that where a matter is referred to arbitration in a suit, the
arbitrator will have all the powers of the Court in deciding the dispute.
Section 34 does not otherwise apply to arbitrations as arbitrators are not
courts within the meaning of s. 34 Civil Procedure Code. [260E] 254
4.
While under the Interest Act of 1978 the expression 'court' was defined to
exclude an arbitrator, under the Interest Act of 1839 it was not so defined.
The result is that while in cases arising after the commencement of the
Interest Act of 1978 an arbitrator has the same power to award interest upto
the date of institution of proceedings, in cases which arose prior to
commencement of the 1978 Act the arbitrator has no such power under the
Interest Act of 1839. [260G]
5.
Since the arbitrator is required to conduct himself and make the award in
accordance with law, the substantive law has to be looked into for the power of
the arbitrator to award interest before the commencement of the proceedings.
[260H-261A]
6.
If the agreement between the parties entitles the arbitrator to award interest
no further question arises and the arbitrator may award interest. Similarly, if
there is a usage of trade having the force of law the arbitrator must award
interest. [261B]
7.
Again, there are other provisions of the substantive law enabling the award of
interest by the arbitrator.
Section
80 of the Negotiable Instruments Act under which the court may award interest
even in a case where no rate of interest is specified in the promissory note or
bill of exchange, and Section 61(2) of the Sale of Goods Act which provides for
the award of interest to the seller or the buyer under certain circumstances in
suits filed by them.
[261C]
8.
There is also the instance of non-performance of a contract of which equity
could give specific performance and to award interest. [261C]
9.
Where one of the parties is forced to pay interest to a third party say on an
overdraft, consequent on the failure of the other party to the contract not
fulfilling the obligation of paying the amount due to them, equity may compel
the payment of interest. [261C]
10.
Loss of interest in the place of the right to remain in possession may be
rightfully claimed in equity by the owner of a property who has been
dispossessed from it.
[261D]
11.
In the instant appeals, in those cases in which the references to arbitration
were made prior to the commencement of the new Act which was on August 19, 1981
and the amount claimed was a certain sum payable at a certain time by virtue of
a written instrument, interest is payable under the Interest Act for the period
before the commencement of the proceeding. [269H-270A] 255
12.
In regard to pendente lite interest, that is, interest from the date of
reference to the date of the award, the claimants would not be entitled to the
same for the simple reason that the arbitrator is not a court within the
meaning of s. 34 of the CPC, nor were the references to arbitration made in the
course of suits.[1270C]
13.
In the remaining cases which arose before the commencement of the Interest Act,
1978, the respondents are not entitled to claim interest either before the
commencement of the proceedings or during the pendency of the arbitration. They
are not entitled to claim interest for the period prior to the commencement of
the arbitration proceedings for the reason that the Interest Act, 1839 does not
apply to their cases and there is no agreement to pay interest or any usage of
trade having the force of law or any other provision of law under which the
claimants were entitled to recover interest. They are not entitled to claim
pendente lite interest as the arbitrator is not a court nor were the references
to arbitration made in suits. [270D-E]
14.
The arbitrator is bound to make his award in accordance with law. If the
arbitrator could not possibly have awarded interest on any permissible ground
because such ground did not exist, it would be open to the court to set aside
the award relating to the award of interest on the ground of an error
apparition the record. On the other hand, if there was the slightest
possibility of the entitlement of the claimant to interest on one or other of
the legally permissible grounds, it may not be open to the court to go behind the
award and decide whether the award of interest was justifiable. [270F-G] Bengal
Nagpur Railway Company Limited v. Ruttanji Ramji 6S Indian Appeals 66;
Thawardas Pherumal v. The Union of India, [1955] 2 SCR 48; Union of India v.
Prem Chand Satnam Das, AIR 1951 Patna 20l; Nachiappa Chettiar v. Subramaniam
Chettiar, [1960] 2 SCR 209; Satinder Singh v. Amrao Singh, [1961] 3 SCR 676;
Firm Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd., [1967] 1 SCR lO5;
Union of India v. Bungo Steel Furniture Pvt. Ltd., [1967] 1 SCR 324 and State
of Madhya Pradesh v. M/s. Saith & Skelton Pvt. Ltd., [1972] 3 SCR 233,
referred to.
Civil
Appellate Jurisdiction: Civil Appeal Nos. 6245-46 of 1983.
From
the Judgment and order dated 9.1.1981 of the orissa High 256 Court in Miscellaneous
Appeal Nos. 285 and 286 of 1980.
G.L.
Sanghi, D.P. Mohanty, R.K. Mehta, Inderjit Roy, P.N. Misra and R.N. Poddar for
the Petitioners. Probir Patil, Y.S. Chitale, Sankar Ghosh, Jitender Sharma,
Vinoo Bhagat, Arun Madan, P.N. Misra, D.N. Mukherjee, M.M. Kashtriya P.K.
Banerjee, P.K. Mukherjee, Ms. Lily Thomes, Bagga Mrs. S.K. Bagga, B.P.
Meheshwari, J.R. Das, Parijat Sinha, and M.A. Firoz for the Respondents. .
The
Judgment of the Court was delivered by CHINNAPPA REDDY, J. This group of
appeals raises the question of award of interest by an arbitrator to whom a
reference is made without the intervention of the court.
Special
leave to appeal was granted under Art. 136 of the Constitution limited to the
question of award of interest during the period prior to the reference and
during 1:) the pendency of the arbitration proceedings. Special leave was not
granted in regard to the award of interest subsequent to the date of the
arbitrator's award. This question, therefore, does not concern us in these appeals.
The
various references to arbitration in these cases were in regard to work done by
different contractors in excess of what was stipulated under the several
contracts.
The
contracts generally contained a clause to the following effect:
"Clause
11-The Engineer-in-charge shall have power to make any alterations in or
additions to the original specifications, drawings, designs, and instructions
that may appear to him to be necessary or advisable during the progress of the
work, and the contractor shall be bound to carry but the work in accordance
with any instructions which may be given to him in writing signed by the
Engineer-in charge, and such alteration shall not invalidate the contract; and
any additional work which the contractor may be directed to do in the manner
above specified as part of the work shall be carried out by the contractor on
the same conditions in all respects on which he agreed to do the main work, and
at the same rates as are specified in the tender for the main work. The time for
the completion of the work shall be extended in the proportion that the
additional work bears to the original work bears to the original contract work
and the certificate of the Engineer-in-charge shall be conclusive as to such
proportion. And if the additional work includes any class of work, for which no
rate is specified in this contract, then such class of work shall be carried
out at the rates entered in the sanctioned schedule of rates of the locality
during the period when the work is being carried on and if such last mentioned
class of work is not entered in the schedule of rates of the district then the
contractor shall within seven days of the date of his receipt of the order to
carry out the work inform the Engineer-in-charge of the rate which it is his
intention to charge for such class of work, and if the Engineer-in-charge does
not agree to this rate he shall by notice in writing be at liberty to cancel
his order to carry out such class of work and arrange to carry it out in such
manner as he may consider advisable, provided always that if the contractor
shall commence work order of any expenditure in regard thereof before the rates
shall have been determined as lastly her in before mentioned, then and in such
case he shall only be entitled to be paid in respect of the work carried out or
expenditure incurred by him prior to the date of the determination of the rate
as aforesaid according to such rate or rates as shall be fixed by the
Engineer-in-charge. In the event of a dispute, the decision of the
Superintending Engineer of the circle will be final:
Provided
always that the contractor shall not be entitled to any payment or any
additional work done unless he has received an order in writing from the
Engineer-in-charge for the additional work that the contractor shall be bound
to submit his claim for any additional work done during any month on or before
the 15th day of the following month accompanied by a copy of the order in
writing of the Engineer-in-charge for the additional work, and that the
contractor shall not be entitled to any payment in respect of such additional
work if he fails to submit his claim within the aforesaid period." All the
contracts also contained a provision for a reference to arbitration in case of
disputes. The clause of the contract enabling the reference was as follows:-
258 "Clause 23-Except where otherwise provided in the contract all
questions and disputes relating to the meaning of the specifications, designs,
drawings, and instructions her in before mentioned and as to the quality of
workmanship, or materials used on the work, or as to any other question, claim,
right matter, or thing whatsoever, in any way arising out of, or relating to
the contract, designs, drawings, specifications, estimates instructions, orders,
or these conditions, or otherwise concerning the work or the execution, or
failure to execute the same, where arising during the progress of the work, or
after the completion or abandonment thereof shall be referred to the sole
arbitration of a Superintending Engineer of the State Public Works Department
unconnected with the work at any stage nominated by the concerned Chief
Engineer. If there be no such Superintending Engineer it should be referred to
the sole arbitration of the Chief Engineer concerned. If will be no objection
to any such appointment that the arbitrator so appointed is a Government
servant. The award of the arbitrator so appointed shall be final, conclusive
and binding on all parties to these contracts." Pursuant to the clause in
the contracts enabling the Chief Engineer to refer disputes to an arbitrator,
references were made. For the purposes of our decision, we are proceeding on
the basis that in the notices of demand made by the contractors before the
disputes were referred to arbitration interest on the amounts said to be
payable was claimed.
The
general statutory provisions in regard to the award of interest by a court are
contained in the Interest Act and the Civil Procedure Code. The Interest Act of
1839 contained only one section and it was as follows:- " 1. It is,
therefore, hereby enacted that, upon all debts or sums certain payable at a
certain time or otherwise, the Court before which such debts or sums may be
recovered may, if it shall think fit, allow interest to the creditor at a rate
not exceeding the current rate of interest from the time when such debts or
sums certain were payable, if such debts or sums be payable by virtue of some
written instrument at a certain time; or if payable otherwise, then from the
time when demand of payment shall have been made in writing so as such demand
shall give notice pay the debtor that 259 interest will be claimed from the
date of such demand until the term of payment; provided that interest shall be
payable in all cases in which it is now payable by law. " In 1978, the
Interest Act of 1839 was repealed and a new Interest Act was enacted. The
Statement of objects and Reasons of the new Act recited, "The Law
Commission of India in its sixty-third report had recommended the revision of
the existing Interest Act, 1839. This Act is a very short one; besides a
preamble, it contains only one section and a proviso. However, it is a statute
of importance, since it prescribes the general law of interest which becomes
applicable in the absence of any contractual or statutory provisions
specifically dealing with the subject.
According
to the Commission, almost every phrase used in the Act has given rise to
problems of interpretation and judicial decisions have disclosed divergence of
views in respect of the same. The Commission has revised the Act
comprehensively so as to make its provisions more precise, specific,
unambiguous and juristically satisfactory. It is proposed to replace the
existing Act by a new Act based on the recommendations of the Law
Commission." The new Act has made some important changes. One of the
important changes is that the expression 'court' is defined to include a
tribunal and an arbitrator. Debt is defined as meaning any liability for an
ascertained sum of money, including a debt payable in kind, but not including a
judgment debt. Section 3(1) enables the court, if it so thinks fit, to award
interest, in any proceeding for the recovery of any debt or damages or in any
proceeding in which a claim for interest in respect of any debt or damages
already paid is made, to the person entitled to the debt or damages or to the
person making such claim, for the whole or part of the following period; (a) if
the proceeding relates to a debt 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; (b) if the proceeding does not relate to any
such debt, then from the date mentioned in this regard in a written notice
given by the person entitled or the person making the claim to the person
liable that interest will be claimed, to the date of institution of the
proceeding. Section 3(3) provides that 260 nothing in the section shall apply
in relation to (i) any debt or damages upon which interest is payable as of
right, by virtue of any agreement;
or
(ii) any debt or damages upon which payment of interest is barred by virtue of
an express agreement. Section 3(3)(c) provides that nothing in the section
shall empower the court to award interest upon interest. Section 4(1) provides,
"notwithstanding anything contained in section 3, interest shall be
payable in all cases in which it is payable by virtue of any enactment or other
rule of law or usage having the force of law." Section 4(2) further provides
notwithstanding anything as s. 4, the court shall allow interest in the class
of cases specified in s. 4(2) from the dates stipulated to the dates stipulated
in the provision. Section 5 provides that nothing in the Act shall affect the
provisions of s. 34 of the Code of Civil Procedure, 1908.
It
is important to notice at this stage that both the Interest Act of 1839 and the
Interest Act of 1978 provide for the award of interest upto the date of the
institution of the proceedings Neither the Interest Act of 1839 nor the
Interest Act of 1978 provides for the award of pendente lite interest. We must
look elsewhere for the law relating to the award of interest pendente lite.
This, we find, provided for in s. 34 of the Civil Procedure Code in the case of
courts.
Section
34, however, applies to arbitrations in suits for the simple reason that where
a matter is referred to arbitration in a suit, the arbitrator will have all the
powers of the court in deciding the dispute, Section 34 does not otherwise
apply to arbitrations as arbitrators are not courts within the meaning of s. 34
Civil Procedure Code.
Again,
we must look elsewhere to discover the right of the arbitrator to award
interest before the institution of the proceedings, in cases where the
proceedings had concluded before the commencement of the Interest Act of 1978.
While under the Interest Act of 1978 the expression 'court' was defined to
include an arbitrator, under the Interest Act of 1839 it was not so defined.
The result is that while in cases arising after the commencement of the
Interest Act of 1978 an arbitrator has the same power as the court to award
interest upto the date of institution of the proceedings, in cases which arose
prior to the commencement of the 1978 Act the arbitrator has no such power
under the Interest Act of 1839. It is, therefore necessary, as we said, to look
elsewhere for the power of the arbitrator to award interest upto the date of
institution of the proceedings. Since the arbitrator is required to conduct
himself and make the award in accordance with law we must look to the
substantive law for the power of the arbitrator to award interest before the
commencement of the proceedings. If the agreement between the parties entitles
the arbitrator to award interest no further question arises and the arbitrator
may award interest. Similarly if there is a usage of trade having the force of
law the arbitrator may award interest.
Again
if there are any other provisions of the substantive law enabling the award of
interest the arbitrator may award interest. By way of an illustration, we may
mention s. 80 of the Negotiable Instruments Act as a provision of the
substantive law under which the court may award interest even in a case where
no rate of interest is specified in the promissory note or bill of exchange. We
may also refer s.
61(2)
of the Sale of Goods Act which provided for the award of interest to the seller
or the buyer as the case may be under certain circumstances in suits filed by
them. We may further cite the instance of the nonperformance of a contract of
which equity could give specific performance and to award interest. We may also
cite a case where one of the parties is forced to pay interest to a third
party, say on an overdraft, consequent on the failure of the other party to the
contract not fulfilling the obligation of paying the amount due to them. In
such a case also equity may compel the payment of interest. Loss of interest in
the place of the right to remain in possession may be rightfully claimed in
equity by the owner of a property who has been dispossessed from it.
We
may now refer to the case law. We may start the discussion of the topic with
the case of Bengal Nagpur Railway Company Limited v. Ruttanji Ramji (65 Indian
Appeals 66). There certain rates of payment under an agreement for the
construction of a railway line were abandoned by mutual consent of the parties
and the contractor was required to be paid at rates which were fair and
reasonable for the work done. The question arose whether the contractor was
entitled to be paid interest on the amount which the Railway Company was liable
to pay. The Privy Council found that the railway was liable to pay to the
plaintiff an amount of Rs.66,980- 10-6 on July 26, 1925. The suit for recovery
of the amount was filed on November 29, 1927. The Privy Council held that award
of interest from the date of the institution of the suit was governed by s. 34
of the Code of Civil Procedure and went on to observe that the crucial question
was whether the court had authority to allow interest for the period prior to
the institution of the suit. They observed that the solution of the question
depended not upon the Code of Civil Procedure out upon substantive law.
Interest for the period prior to the date of suit may be awarded if there was
an agreement for the payment of interest at a fixed rate or it was payable by
the usage of trade having the force of law or under the provision of H 262 any
substantive law entitling the plaintiff to recover interest. Section 80 of the Negotiable
Instruments Act was cited as a provision of the substantive law under which the
court may award interest when no rate of interest is specified in the
promissory note or bill of exchange. In the case before them however, they
observed there was neither usage nor any contract, express or implied, to
justify the award of interest. Interest was not payable by virtue of any
provision of the law governing the case. Under the interest Act of 1839, the
court may allow interest to the plaintiff if the amount claimed is a sum
certain which is payable at a certain time by virtue of a written instrument.
But it was conceded that the amount claimed in the case was not a sum certain.
Referring to the provisions of s. 1 of the Interest Act which stated that interest
shall be payable in all cases in which interest was then payable by law, the
Privy Council observed that the proviso applied to cases in which the court of
equity exercised the jurisdiction to allow interest. But then they said that
the case before them did not attract the jurisdiction of the court. An example
of cases which attract the equitable jurisdiction of the court to award
interest was given as the nonperformance of a contract of which equity could
give specific performance.
Considering
next the question whether interest could be awarded by way of damages, it was
held that it could not be so done. It was categorically stated that interest
could not be allowed by way of damages. It was also pointed out that in
England, the law had been amended by the Law Reform Miscellaneous Provisions
Act which empowered a court of record to-award interest on whole or any part of
damages.
But
there was no such amendment of the law in India (at that time).
Seth
Thawardas Pherumal v. The Union of India, [1985] 2 SCR 48 was a case which
arose out of a decision of the Patna High Court, which is reported in Union of
India v. Prem Chand Satnam Das, AIR 1951 Patna 201. Some. Of the facts have
been taken by us from the judgment of the Patna High Court as those facts were
not evident from the judgment of this court. Pursuant to clause 14 of the
contract between the Dominion of India and the contractor which provided that
all disputes arising out of or relating to the contract should be referred to
the Superintending Engineer, a reference was made on January 21, 1949 and an
award followed on May 8, 1949. Before the arbitrator the contractor submitted a
claim under 17 heads. Item No. 17 as mentioned in the Statement of claim before
the arbitrator was "interest on the amount of money involved in this claim
at the rate of six per cent-Rs.27,665. This work was finished in May 1946 and
it was proper for the Department to have decided all our claims at least by 263
31st December, 1947 .. But this was not done. Due to this, a heavy amount
remained blocked and we were compelled to take money from our bankers on
interest. We pray, therefore, for interest for 15 months from January 1, 1948
to March 31, 1949." The arbitrator held: "The contract's contention
that his claims should have been settled by January 1948 is, in my opinion,
reasonable. I, therefore, award interest at six per cent for sixteen months on
the total amount of the awards given, that is, Rs.17,363". The question
arose whether the arbitrator could award the interest? The Patna High Court
noticed that the contractor did not include any claim for interest for the
period March 3 1, 1947 to April 20, 1949 in the bill originally submitted by
him to the Chief Engineer and that the claim was made for the first time before
the arbitrator during the progress of the arbitration proceedings. The High
Court also noticed that the Executive Engineer who appeared on behalf of the
Union of India before the arbitrator did not seem to have submitted to the
jurisdiction of the arbitrator to decide the question of interest. In those
circumstances, the High Court held that it could not be said that the claim for
interest was one of the matters referred to arbitration. The arbitrator, it
was, therefore, held, had no jurisdiction to entertain the claim and award
interest. In the appeal by the contractor, the Supreme Court noticed that the
claim under each head on which interest was awarded was for an unliquidated sum
and observed that in that kind of case, interest was not payable by law
otherwise than by the application of the Interest Act. Reference was made to
the Bengal Nagpur Rly. Co. v. Ruttanji Ramji, 65 I.A. 66 as an authority for
that proposition. The Court then proceeded to say that even if an arbitrator
could be assumed to be a court within the meaning of the Act, which he did not
appear to be, none of the four conditions, which required to be fulfilled, was
present in the case before them. It was then said that the arbitrator erred in
thinking he had the power to allow interest simply because he thought the
demand was reasonable. A further argument that interest could be awarded at
least from the date of the suit on the analogy of sec. 34 of the Civil
Procedure Code was repelled with the following observations: "It was
suggested that at least interest from the date of suit could be awarded on the
analogy of sec. 34 of the Civil Procedure Code, 1908. But sec. 34 does not
apply because an arbitrator is not a court within the meaning of the Code nor
does the Code apply to arbitrator, and, but for sec. 34 even a court would not
have the power to give interest after the suit. This was, therefore, also
rightly struck out from the award." These observations of Bose, J. gave
rise to considerable difficulty in later cases, but in the series of cases,
Nachiappa Chettier v. Subramaniam Chettier, [1960] 2 SCR 209; Setinder Singh v.
Amrao Singh, [1961] 3 264 SCR 676; Firm Madanlal Roshanlal Mahajan v.
Hukumchand Mills Ltd., [1967] 1 SCR lO5; Union of India v. Bungo Steel
Furniture Pvt. Ltd., [ 1967] 1 SCR 324 and State of Madhya Pradesh v. M/s.
Saith & Skelton Pvt. Ltd., [1972] 3 SCR 233, these observations have been
explained and it was held that the observations never intended to lay down the
broad and unqualified proposition that they appeared to lay down on a first
impression. We will presently refer to these cases. At this juncture, it is
necessary to note that in Seth Thawardas Pherumal's case the question of
payment of interest was not the subject matter of reference to the arbitrator
and that the interest claimed before the arbitrator and awarded by the
arbitrator related to the period prior to the reference to arbitration and the
period during the pendency of the arbitration. It is also to be noted that the
reference was not in the course of a suit.
Nachiappa
Chettier v. Subramaniam Chettier, (supra) was a case of arbitration in a suit.
The arbitrator made an interim award on August 1, 1944 and December 6, 1944. He
awarded interest pendente lite as well as future interest until the date of
payment. Relying on the observations in Seth Thawardas Pherumal v. Union of
India, the award of interest was questioned. The court doubted whether the
observations in Seth Thawardas Pherumal's case were intended to lay down such a
broad and unqualified proposition, but did not pursue the matter further as
that contention was not urged before the High Court. E Satinder Singh v. Amrao
Singh (supra) was a case which arose under the East Punjab Acquisition and
Requisition of Immovable Property (Temporary) Powers Act, 1948. The Act
containd no provision for payment of interest. It was argued that in the
absence of a provision providing for interest could be awarded. The court
approved the observation of the Privy Council in 1928 A.C. 429 that where the
owner is deprived of his property "the right to receive the interest takes
the place of the right to retain possession and is within the rules." The
court then observed, "it would thus be noticed that the claim for interest
proceeds on the assumption that when the owner of immovable property loses
possession of it he is entitled to claim interest in place of right to retain
possession." and held that this general rule was not excluded by the 1948
Act. Referring then to the observations in Seth Thawardas Pherumal v. Union of
India, (supra) what was said in Nachiappa Chettier v. Subramaniam Chether,
(supra) was reitereated that no broad and unqualified proposition was intended
to be laid down in Seth Thawards Pherumal v. The Union of India. Referring to
the Interest Act and the power of the Court to allow 265 interest, it was
expressly noticed that the proviso to sec.
1
of the Interest Act, 1939 made it clear that interest shall be payable in all
cases in which it was now payable by law. The power to award interest on
equitable grounds or under any provisions of the law was held to be expressly
saved by the proviso. The award of interest by the arbitrator was upheld on the
ground that the right to receive interest in lieu of possession of immovable
property taken away either by private treaty or by compulsory acquisition was
generally regarded by judicial decisions as an equitable right.
In
Union of India v. Watkins & Co. (AIR 1966 SC 275, the question arose when
interest could be awarded for the period prior to the date of the institution
of the suit. The suit there was for compensation for storage of over 600 tonnes
of iron sheets for a period of about five years. It was held that interest
could not be awarded for the period prior to the suit as there was no agreement
for the payment of interest nor was their any usage of trade having the force
of law or any provision of the substantive law which entitle the plaintiff to
recover interest. Under the Interest Act, 1839, the court could allow interest
if the amount claimed was a sum certain, payable at a certain time, by virtue
of a written instrument. The compensation for an unliquidated amount was not a
sum certain. Interest prior to the institution of the suit was not awardable.
In
Union of India v. West Punjab Factories, [ 1961] 1 SCR 580, it was held, that
in a suit, interest by way of damages could not be awarded in the absence of
any usage or contract, express or implied, or of any provision of law.
Bengal
Nagpur Railway Co. v. Ruttanji Ramji, (supra) and Seth Thawardas Pherumal v.
Union of India, (supra) were relied on Firm Madanlal Roshanlal Mahajan v.
Hukumchand Mills Ltd. (supra) was a case where the arbitration was in a suit.
Before
the arbitrator, no claim was made for interest prior to the institution of the
suit, but interest was claimed from the date of institution of the suit till
recovery of the amount. The arbitrator awarded interest on the sum determined
by him from the date of the award till the date of payment. The award was then
filed in the court. One of the objections was to the grant of interest during
the pendency of the suit relying on the observations of Seth Thawardas Pherumal
v. Union of India, (supra) that sec. 34 CPC did not apply to arbitration
proceedings. The court observed that the observations lent colour to the
argument that the arbitrator had no power to award pendente lite interest, but
the obser- 266 vations were not intended to lay down such a broad and
unqualified proposition. A reference was made to Nachiappa Chettier v.
Subramaniam Chettier, (supra) and Satinder Singh v. Amrao Singh, (supra). It
was further observed "In the present case, all the disputes in the suit
were referred to the arbitrator for his decision. One of the disputes in the
suit was whether the respondent was entitled to pendente lite interest. The
arbitrator could decide the dispute and we could award pendente lite interest
just as a court could do so under sec. 34 of the Civil Procedure Code. Though,
in terms, s. 34 of the Code of Civil Procedure does not apply to arbitrations,
it was an implied term of the reference in the suit that the arbitrator would
decide the dispute according to law and would give such relief with regard to
pendente lite interest as the court could give if it decided the dispute. This
power of the arbitrator was not fettered either by the arbitration agreement or
by the Arbitration Act, 1940. The condention that in an arbitration in a suit
the arbitrator had no power to award pendente lite interest must be
rejected." Thus while the court did not dispute the proposition that the
arbitrator was not a court, it held that in a case where the reference was made
to arbitration in a suit, the arbitrator would have the same power as the court
to award interest.
In
Union of India v. Bungo Steel Furniture Private Limited, [1957] 1 SCR 324,
certain disputes between the Union of India and a contractor in respect of
certain contracts for the supply of bedsteads were referred to arbitration. The
question arose whether the arbitrator had jurisdiction to award interest on the
amount found due by the arbitrator from the date of the award till the date of
the decree. This of course is not the question before us.
But
even so we must say that the observations made therein appear prima facie to
justify the view that interest may be awarded by the arbitrator pendente lite.
Ramaswamy, J. who spoke for the court, observed that the observations of Bose,
B. in Seth Thawardas Pherumal's case (supra) were not intended to lay down any
broad and unqualified proposition and that though sec. 34 of the Code of Civil
Procedure did not apply in terms to arbitration proceedings, the principle of
that section would be applied by the arbitrator for awarding interest in the
classes of cases where the court having jurisdiction in a suit over the subject
matter or the proceeding would be competent to award interest. It was said
"In the present case, all the disputes in the suit, including the question
of interest were referred to the arbitrator for his decision. In our opinion,
the arbitrator had jurisdiction, in the present case, to grant interest on the
amount of the award from the date of the award till the date of the
decree." The words emphasised by us clearly show that in this case 267
too, the arbitration was in a suit and it was therefore, held that the
arbitrator had the same power to award interest as the court would h ave . In
M/s. Ashok Construction Company v. Union of India, [1971] 3 SCC 66, there was
an arbitration on the intervention of the Court (Deputy Commissioner). Before
the arbitrator, a total claim for Rs.4,41,440.20p was made consisting of a
claim of Rs.64,006.71 for works done, a claim for Rs. l,83,393.77p for damages
at 13 per cent per annum and a claim for Rs.1,91,097.88p for depreciation of
the value of money. The arbitrator made an award for a sum of Rs.1,79,843,80p.
He gave no reasons for his award. The last item of the claim was wholly
unjustified, but there was nothing to show that the arbitrator had taken that
claim of account in making the award. Considering the question of award of
interest by way of damages, the court referred to the arbitration agreement and
on its interpretation held that the terms of the arbitration agreement did not
exclude the jurisdiction of the arbitrator, to entertain a claim for interest,
award amount due under the contract In State of Madhya Pradesh v. M/s. Saith
& Skelton P. Limited, [1972] 3 SCR 233, with the consent of the parties,
the Court appointed an arbitrator and referred all the disputes to him. The
arbitrator awarded interest from the date when the amount became payable till
the date of the decree. The question arose whether the arbitrator had the power
to do so. It was held that, in the case before them, interest prior to the suit
could be awarded under sec. 61(2) of the Sale of Goods Act, 1930 which
expressly provides for the award of interest to the seller in any suit by him
for the amount of the price-from the date of the tender of the goods or from
the date on which the price was payable and to the buyer in a suit by him for
the refund of the price in a case of the breach of contract on the part of the
seller- from the date on which the payment was made. In view of the provision
of substantive law which enabled the award of interest it was held that
interest prior to the suit could be awarded by the arbitrator. In regard to
pendente lite interest, it was held that since all the disputes were referred
to arbitration by the court, the arbitrator had the same power as the court to
award the pendente lite interest.
As
a result of the discussion of the various cases, we see that Bengal Nagpur
Railway Company Ltd. v. Ruttanji Ramji, (supra), Union of India v. West Punjab
Factories, (supra) and Union of India v. Watkins & Co. (supra) were cases
of award of interest not by an 268 arbitrator, but by the court. It was laid
down in these three cases that interest could not. be awarded for the period
prior to the suit in the absence of an agreement for the payment of interest or
any usage of trade having the force of law or any provision of the substantive
law entitling the plaintiff to recover interest. Interest could also be awarded
by the court under the Interest Act if the amount claimed was a sum certain
payable at a certain time by virtue of a written instrument. In regard to
pendente lite interest, the-provisions of the Civil Procedure Code governed the
same.
The
question of award of interest by an arbitrator was considered in the remaining cases
to which we have referred earlier. Nachiappa Chettier v. Subramanian Chettier,
(supra) Sattinder Singh v. Amrao Singh (supra), Firm Madanlal Roshanlal Mahajan
v. Hukum Chand Mills Ltd. (supra) Union of India v. Bungo Steel Furniture
Private Limited (supra), Ashok Construction Company v. Union of India, (supra)
and State of Madhya Pradesh v. M/s. Saith & Skelton Private Limited were
all cases in which the reference to arbitration was made by the court, of all
the disputes in the suit. It was held that the arbitrator must be assumed in
these circumstances to have the same power to award interest as the court. It
was on that basis that the award of pendente lite interest was made on the
principle of s. 34 Civil Procedure Code in Nachiappa Chettier v. Subramaniam
Chettier (supra), Firm Madanlal Roshanlal Mahanan v. Hukamchand Mills Limited,
(supra), Union of India v. Bungo Furniture Private Limited, (supra) and State
of Madhya Pradesh v. M/s. Saith & Skelton Private Limited, (supra). In
regard to interest prior to the suit, it was held in these cases that since the
Interest Act, 1839 was not applicable, interest could be awarded if there was
an agreement to pay interest or a usage of trade having the force of law or any
other provision of substantive law entitling the claimant to recover interest.
Illustrations
of the provisions of substantive law under which the arbitrator could award
interest were also given in some of the cases. It was said, for instance, where
an owner was deprived of his property, the right to receive interest took the
place of the right to retain possession, and the owner of immovable property
who lost possession of it was, therefore, entitled to claim interest in the
place of right to retain possession. It was further said that it would be so
whether possession of immovable property was taken away by private treaty or by
compulsory acquisition. Another instance where interest could be awarded was
under s. 61(2) of the Sale of Goods Act which provided for the award of
interest to the seller or the buyer, as the case may be, under the
circumstances specified in that section.
269
Sec. 80 of the Negotiable Instruments Act was mentioned as an instance of a
provision of the substantive law under which interest prior to the institution
of the proceedings could be awarded. Interest could also be awarded in cases of
non-performance of a contract of which equity could give specific performance.
Seth Thawardas Pherumal was a case of direct reference to arbitration without
the intervention of a court. Neither the Interest Act, 1839 nor the Civil
Procedure Code applied as an arbitrator was not a court.
Interest
could, therefore, be awarded only if there was an agreement to pay interest or
a usage of trade having the force of law or some other provision of the
substantive law which entitled to plaintiff to receive interest. In that case,
interest had been awarded on the ground that it was reasonable to award
interest and the court, therefore, held that the arbitrator was wrong in
awarding the interest.
While
this is the position in cases which arose prior to the coming into force of the
Interest Act, 1978, in cases arising after the coming into force of the Act,
the position now is that though the award of pendente lite interest is still
governed by the same principles, the award of interest prior to the suit is now
governed by the Interest Act, 1978.
Under
the Interest Act, 1978, an arbitrator is, by definition, a court and may now
award interest in all the cases to which the Interest Act applies.
We
were referred to certain English cases: London Chatham and Dover Rly. Co. v.
South Eastern Ply. Co., [1893 AC 429], Chandris v. Isbrandtsen Mollar Co.,
[1951] 1 KB 240, Timber Shipping Co. v. London & overseas Freighters Ltd.,
[1972] AC 1 and President of lndia v. La Pintada Cia Navegacion, [1984] 2 All
Eng. Law Reports. Passages from Halsbury's Laws of England and Russell's
Arbitration were also read out. We have read them out we refrain from referring
to those cases and passages because of the abundance of authoritative
pronouncements of the Supreme Court of India.
Coming
to the cases before us, we find that in Civil Appeal Nos. 120 and 12 1 of 1981
before the arbitrator, there was no answer to the claim for interest and we see
no justification for us at this stage to go into the question whether interest
was rightly awarded or not. Out of the remaining cases we find that in all
cases except two (Civil Appeal Nos. 6019-22 of 1983 and Civil Appeal No. 2257
of 1984, the references to arbitration were made prior to the commencement of
the new Act which was on August 19, 1981. In the cases to which the Interest
Act, 1978 applied, it was argued by Dr. Chitale, learned counsel for H 270 the
respondents, that the amount claimed was a sum certain payable at a certain
time by virtue of a written instrument and, therefore, interest was payable
under the Interest Act for the period before the commencement of the
proceedings.
In
support of his contention that the amount claimed was a sum certain payable at
a certain time by virtue of a written instrument, the learned counsel relied
upon the decision of this court in State of Rajasthan v. Raghubir Singh, [
19791 3 SCR 6. The case certainly supports him and in the cases to which the
1978. Interest Act applies the award of interest prior to the proceeding is not
open to question. In regard to pendent lite interest, that is, interest from
the date of reference to the date of the award, the claimants would not be
entitled to the same for the simple reason that the arbitrator is not a court
within the meaning of sec. 34 of the CPC, nor were the references to
arbitration made in the course of suits. In the remaining cases which arose
before the commencement of the Interest Act, 1978, the respondents are not
entitled to claim interest either before the commencement of the proceedings or
during the pendency of the arbitration. They are not entitled to claim interest
for the period prior to the commencement of the arbitration proceedings for the
reason that the Interest Act, 1839 does not apply to their cases and there is
no agreement to pay interest or any usage of trade having the force of law or
any other provision of law under which the claimants were entitled to recover
interest. They are not entitled to claim pendent lite interest as the
arbitrator is not a court nor were the references to arbitration made in suits.
One of the submissions made on behalf of the respondents was that in every
case, all disputes were referred to arbitration and the jurisdiction of the
arbitrator to award interest under certain circumstances was undeniable. The
award not being a speaking award, it was not permissible to speculate on the
reasons for the award of interest and the court was not entitled to go behind
the award and disallow the interest.
It
is difficult to agree with this submission. The arbitrator is bound to make his
award in accordance with law. If the arbitrator could not possibly have awarded
interest on any permissible ground because such ground did not exist, it would
be open to the court to set aside the award relating to the award of interest
on the ground of an error apparent on the record. On the other hand, if there
was the slightest possibility of the entitlement of the claimant to interest on
one or other of the legally permissible grounds, it may not be open to the
court to go behind the award and decide whether the award of interest was
justifiable. We do not want to enter into a discussion on the legality or
properiety of a non-speaking award as we understand the question is now
awaiting the decision of a Seven Judge Bench. In the light of what we have said
above, Civil Appeal Nos. 120 271 and 121 of 1981 are dismissed, Civil Appeal
Nos. 6019-22 of 1983 and A Civil Appeal No. 2257 of 1984 are allowed to this
extent that interest during the pendency of the arbitration proceedings is
disallowed and the rest of the civil appeals are allowed to the extent that
both interest prior to the proceedings and interest during the pendency of the
proceedings are disallowed. There will be no order as to costs. S.L.P.8640/81
is disposed of on the same lines.
N.V.K.
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