M/S Sree
Kamatchi Amman Constructions Vs. Divisional Rly. Manager/Works & Ors.
[2010] INSC 656 (20 August 2010)
Judgment
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 The Divisional Railway Manager
(Works), Palghat & Ors. ... Respondents
R.V.RAVEENDRAN,
J.
1.
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 the 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. 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 dismissed the appeal by the appellant- 3 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."
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.
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 12
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)
...................................J.
New Delhi;
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