Union of India Vs Saraswat Trading Agency .

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4427 OF 2009 [Arising out of SLP (C) No.3501/2007]

Union of India … Appellant

Versus

Saraswat Trading Agency & Ors. … Respondents

J U D G M E N T

AFTAB ALAM,J.

Leave granted.

1

This appeal, at the instance of Union of India, arises from an

arbitration award dated September 9, 2000 made in favour of the respondent.

The appellant challenged the award before the Calcutta High Court by filing

an application under section 34 of the Arbitration and Conciliation Act,

1996. A learned Single Judge of the High Court upheld the challenge

substantially and by judgment and order dated November 20, 2001 passed in

G.A.No.87/01, arising out of AP No.325/98, sustained the award only on

one issue and set it aside on two of the three issues under reference. Against

the judgment of the Single Judge the respondent preferred an internal court

appeal and the Division Bench of the High Court by its judgment and order

dated July 4, 2006 passed in G.A.No.87/01: APOT No.792/01 with APO

No.362/01 allowed the appeal, set aside the judgment of the Single Judge

and fully restored the arbitrator’s award in favour of the respondent on all

the three issues in dispute. Against the judgment of the Division Bench of

the High Court the appellant has come in appeal to this Court.

The facts of the case are brief and simple and may be stated thus. For

the work of “handling of goods, parcels and booked luggage” at a group of

six stations falling in its Nagpur Division, the South Eastern Railway,

Calcutta, invited tenders that were opened on May 16, 1990. The tender

submitted by the respondent was the lowest. Hence, after some negotiations

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and extension of the validity of offer the respondent’s tender was accepted

on August 2, 1991 and it was given the work for a period of three years

commencing from August 3, 1991. The grant of the contract was formalized

in an agreement executed by the parties on December 3, 1991. The

agreement was deemed to have come into force with effect from August 3,

1991 and it was to remain in force for a period of three years, till August 2,

1994 unless determined by either of the parties in terms of clause 1(1)

(authorizing the appellant to determine the contract by giving three months

notice) and its proviso (giving the same right to the contractor, after expiry

of the period of one year of the contract). Clause 2 of the agreement dealt

with the nature of the work the contractor was required to do. Clause 4 of the

agreement along with a detailed schedule mentioned fixed rates for every

piece of work covered by the contract. Clause 7 stated that the contractor

would not be entitled to any increase in the accepted rates of remuneration or

compensation due to fluctuations in the traffic (increase or decrease) due to

any reason. Under clause 13 the contractor indemnified the Railway

Administration against all claims that might be made under the Workmen’s

Compensation Act, 1923 in consequence of any accident or injury sustained

by any labourer/servant or person in his employment and engaged in the

performance of the contract. Clause 14 bound the contractor to pay to the

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labourers engaged by him not less than the fair wage. It further provided that

‘fair wage’ would be the wage including the allowances, notified at the time

of inviting tenders for the work. Clause 15 made the contractor responsible

for compliance with the provisions of the Payment of Wages Act, 1936, and

the rules made thereunder in respect of the staff employed by him. Clause 16

similarly made the contractor responsible for compliance with the provisions

of the Contract Labour (Regulation and Abolition) Act, 1970 and the rules

made thereunder and required him to obtain the statutory license from the

licensing authority. Clause 18 made the contractor responsible for

compliance with the provision of the Hours of Employment Regulations in

respect of the staff employed by him in the manner decided upon by the

appropriate authorities. Clause 19 stipulated that no labourer would be

unfairly treated or removed from work except for valid reasons and further

provided that the porters engaged in the handling of goods, parcels and

booked luggage under the terms of the agreement would be deemed as

employees of the contractor within the meaning of the Industrial Disputes

Act, 1947 or any other enactment that might be applicable. This clause

further stated that the contractor would comply with all the laws, regulations

and rules for the benefit of labour that were in force or might come into

force and he would indemnify and keep the Railway Administration

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indemnified against all loss, damage, claims and costs arising in any manner

whatsoever. Clause 20 reserved the right of the Railway Administration to

deduct from the moneys due to the contractor or from his security deposit

any sum required or estimated to be required for making good the loss

suffered by the labour or labourers or any other person in his employment

for the reasons of non-fulfillment of the conditions for the benefit of the

labourers, non-payment of wages or deductions made from him or their

wages which were unjustified or illegal. Clause 31 stipulated that no interest

or damage would be paid to the contractor for delay in payment of the bill

‘for any reason whatsoever’. Clause 32 with its various sub-clauses

contained the provision for arbitration and provided that the General

Manager of the South Eastern Railway or a person appointed by him would

be the sole arbitrator in respect of any dispute as to the respective rights,

duties and obligations of the parties to the agreement or as to the

construction or interpretation of any of the terms and conditions of this

agreement or as to its applications.

We next come to what is at the root of the dispute between the parties.

It needs to be noted that at the time of submission of tender by the

respondent the base fair rate of wages for the casual labour was Rs.31=15

paise as per the Circular dated January 17, 1990. During the period of the

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contract the Railway authorities are said to have issued circulars/guidelines

revising the rates of casual labourers from retrospective dates. The manner

in which rates were revised by the circulars/guidelines issued by the Railway

authorities is noted in the arbitrator’s award as follows:

PARTICULARS

Circular No. Circular dated

Effect from

Average rate of unskilled labour

P/EN/C- RAT/1/90

17.1.90 1.7.89 Rs.31.15

P/EN/NGP/ P/EN/NGP/ Casual Labour 90-91

16.4.92 1.7.91 Rs.42.40

P/EN/NGP

Casual Labour/MS/92

10.2.93

1.1.92

1.7.92

Rs.47.45

Rs.50.50

P/EN/NGP

Casual Labour 93

15.2.94

1.1.93

1.7.93

Rs.51.10

Rs.53.50

P/EN/NGP/MS

/94

16.3.95 1.1.94

1.7.94

Rs.57.45

Rs.62.0

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On August 25, 1992, the respondent wrote a letter to the Railway

authorities demanding enhancement of rates under the contract on the

ground that the rates stated in the agreement were based on the circular dated

January 17, 1990 that had undergone a number of revisions and as a result

the contract rates had become unrealistic and unviable. The Railway

authorities rejected the respondent’s demand for enhancement and/or

revision of rates taking the stand that the contract was a “fixed price

contract” and it had no clause for enhancement of rates. Faced with the

authorities’ refusal to revise the contract rates the respondent terminated the

contract by giving three months notice as provided under the proviso to

clause 1(1) of the agreement. The Railway authorities accepted the

termination of the contract with effect from December 31, 1992 but in order

to avoid any dislocation requested the respondent to carry on the work on the

same terms and conditions, promising that its claim would receive due

consideration. On the appellant’s request the respondent continued with the

work under the contract, though under protest, till august 1994.

At the time of the final settlement of the respondent’s claims the

Railway authorities offered to it a sum of Rs.6,848=00 as additional

payment for the period January 1993 to August 1994. The respondent

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naturally declined to accept the paltry amount offered by the authorities and

requested for a proper consideration of its claim as earlier promised.

Finally, the Railway authorities appointed a high level committee to

consider the respondent’s claim for enhanced payment for the period

January 1, 1993 to August 31, 1994. The committee fixed the respondent’s

claim at Rs.3, 61,058=00 but it was not acceptable to the respondent.

A departmental arbitrator was then appointed in order to resolve the

disputes and differences arising between the parties. The departmental

arbitrator gave his award on June 4, 1998. Not being satisfied with the award

the respondent challenged it by filing an application under section 34 of the

Act before the High Court. The High Court by its order dated February 12,

1999 upheld the award on items 1 & 2 but set it aside in respect of items 3, 4

& 5 and appointed a certain advocate, a member of the bar to decide afresh

in regard to the respondent’s claim under those three items. On an

application made under section 11, the Acting Chief Justice of the High

Court, by order dated July 1, 1999, substituted another advocate as arbitrator

in place of the one appointed by the Court on the application under section

34 of the Act.

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The three issues/claims that came up before the arbitrator appointed

by the High Court were as follows:

“Claim No.3: Claim for increase in rates from

3.8.91 to 31.12.92 during the

Contractual period being sum

of Rs.10,74,408/-

Claim No.4: Claim for increase in rates from

1.1.93 to 31.8.94 during the

extended period being sum of

Rs.14, 454,581/-

Claim No.5: Payment of 18% interest on

Claim of contractor claim

No.3 and 4 on the (sic and)

from 1.11.94 till the (sic)date.”

The arbitrator appointed vide order dated July 1, 1999 passed by the

Court took up the proceedings on August 3, 1999 and made and published

his award on September 9, 2000. The award held the respondent entitled to

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receive from the appellant the sum of Rs. 32, 71,774=00 along with interest

on that amount @ 18% per annum from the date of the award till the date of

payment.

The appellant challenged the award by filing an application under section

34 of the Act before the High Court on January 2, 2001. As noted above, a

learned Single Judge of the High Court substantially upheld the appellant’s

challenge and set aside the award on items 1 and 3, upholding it only insofar

as the respondent’s claim under item 4 was concerned. Against the judgment

and order passed by the learned Singe Judge the respondent preferred an

appeal before the Division Bench of the High Court. Here it is significant to

note that the appellant did not prefer any appeal against the judgment of the

Single Judge insofar as it upheld the arbitrator’s award on item no.4. Thus

before the Division Bench of the High Court there was no challenge to the

arbitrator’s award in regard to the respondent’s claim for enhanced payment

from January 1, 1993 to August 31, 1994, that is to say, for the period after

the parties had agreed on the cancellation of the agreement.

The Division Bench of the High Court after an elaborate consideration

of the matter and after referring to a host of decisions of this Court and the

Calcutta High Court allowed the appeal, set aside the judgment and order

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passed by the learned Single Judge and restored the arbitrator’s award fully

on all the three items.

Mr. S. Wasim Qadri, learned counsel appearing on behalf of the

appellant, submitted that in the absence of any escalation clause in the

agreement the respondent’s claim for enhanced payments for the period

August 3, 1991 to December 31, 1992 during which the agreement was in

force was quite unfounded and both the arbitrator and the Division Bench of

the High Court were in error in granting the claim for that period. The

submission made by Mr. Qadri is fully answered by the decision of this

Court in Tarapore & Co. vs. State of M.P., (1994) 3 SCC 521, (noticed both

by the arbitrator and the Division Bench of the High Court). In paragraph 27

of the judgment this Court observed as follows:

“27. But then, the terms at hand did require the appellant (who is the contractor) not to pay less than fair wages as would appear from what has been stated in Para 2.10 and Para 1 of Annexure-B. The Explanation to latter Para states that where fair wages have not been notified these wages would be the one “prescribed by the PWD (Irrigation Department) for the division in which the work is done”. Now these wages were being increased from time to time as would appear from the decisions of the wage committee referred to above; and if the appellant was being required to pay wages as per these decisions, we do read a meeting of mind insofar as the claim of escalated payment on account of increase of fair wages is concerned.

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It has to be assumed that when the appellant was required to pay fair wages at increased rates, the authorities did visualize that the appellant would not do so by cutting down its profit. By asking the appellant to give tender by taking into account the fair wages notified at the time of inviting tenders, the authorities did give an impression that fair wages to be paid would be the one then notified/prescribed, a 1a the explanation to para 1. In such a situation, if rates of fair wages were raised afterwards, the tendered sum cannot be taken to be agreed amount for completing the contract, in the face of the directions of the authorities requiring the appellant to pay wages at rates higher than those prescribed or notified at the time of inviting tenders. On this fact situation, we hold that the State had by necessary implication agreed to reimburse this increased payment.”

In a more recent decision in Food Corporation of India vs. M/s. A. M.

Ahmed & Co. & Anr., AIR 2007 SC 829, the Court reiterated the same view

and in paragraph 32 of the judgment observed as follows:

“Escalation, in our view, is normal and routine incident arising out of gap of time in this inflationary age in performing any contract of any type. In this case, the arbitrator has found that there was escalation by way of statutory wage revision and, therefore, he came to the conclusion that it was reasonable to allow escalation under the claim. Once it was found that the arbitrator had jurisdiction to find that there was delay in execution of the contract due to the conduct of the FCI, the Corporation was liable for the consequences of the delay, namely, increase in statutory wages. Therefore, the arbitrator, in our opinion, had jurisdiction to go into this question.

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He has gone into that question and has awarded as he did. The Arbitrator by awarding wage revision has not mis-conducted himself. The award was, therefore, made rule of the High Court, rightly so in our opinion.”

Mr. Qadri next questioned the grant of interest on the amounts arrived at by

allowing the respondent’s claim for higher rates for the work done by it.

Learned counsel submitted that clause 31 of the agreement expressly barred

the claim of any interest by the contractor and hence, the award was clearly

unsustainable insofar as the grant of interest was concerned.

The arbitrator gave to the respondent pre-reference, pendente lite and

post-award interest on both its claims under items 3 & 4 as would be evident

from the following passages from the award:

“However, I am allowing interest to the claimant at the rate of 16% per annum on and from 1st November, 1994 till 9th September, 2000 the date of award amounting to Rs.15, 85,359.85 on the following basis.

Interest calculated from 1.11.94 to 9.9.2000 as per demand notice dated 19th September, 1994 till the date of award on Rs.16, 85,234.14 being the total amount of claim item Nos.3 and 4.”

**** **** ****

Therefore, I, hereby award to the claimant (1) a sum of Rs.6,05,777.34 for the claim item No.3 (ii) a sum of Rs.10,79,456.80 for the claim Item No.4

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and (iii) a sum of Rs.15,86,539.85 towards interest on Item No.3 and 4 for the claim Item No.5. The aggregate sum of Rs.32, 71,773.99 (Rupees Thirty two lacs seventy one thousand seven hundred seventy three and ninety nine paise only) rounded to Rs.32, 71,774/-. I further award an interest @ 18% per annum on the aforesaid sum till the date of payment.”

It is thus to be seen that the arbitrator allowed interest on the amounts

determined under Items Nos.3 and 4 both for the pre-reference period and

pendente lite at the rate of 16% per annum. He further allowed interest on

the consolidated amount for the post-award period at the rate of 18% per

annum till the date of payment.

The question of interest for the pre-reference period stands settled by

the Constitution Bench decision in Executive Engineer, Dhenkanal Minor

Irrigation Division, Orissa & Ors. Vs. N. C. Budharaj, 2001 (2) SCC 721.

The majority judgment (3:2) in that case held in paragraph 26 as follows:

“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 employer any court to reopen proceedings

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which have already become final, and apply only to any pending proceedings. No costs.” (emphasis added)

The legal position in regard to interest for the different periods has been

summed up, with reference to the earlier decisions, in the decision in

Bhagawati Oxygen Ltd. Vs. Hindustan Copper Ltd., 2005 (6) SCC 462. In

paragraphs 38, 39 and 40 of the judgment it was observed as follows:

“38. So far as interest for pre-reference period is concerned, in view of the conflicting decisions of this Court, the matter was referred to a larger Bench in Executive Engineer, Dhenkanal Minor Irrigation Division vs. N.C. Budharaj, 2001 (2) SCC 721. The Court, by majority, held that an arbitrator has power to grant interest for pre- reference period provided there is no prohibition in the arbitration agreement excluding his jurisdiction to grant interest. The forum of arbitration is created by the consent of parties and is a substitute for conventional civil court. It is, therefore, of unavoidable necessity that the parties be deemed to have agreed by implication that the arbitrator would have power to award interest in the same way and same manner as a court.” “39. Regarding interest pendent lite also, there was cleavage of opinion. The question was, therefore, referred to a larger Bench in Secy., Irrigation Deptt., Govt. of Orissa vs. G. C. Roy, 1992 (1) SCC 508. The Court considered several cases and laid down the following principles: (pp.532-33, para 43)

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43. The question still remains whether arbitrator has the power to award the 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 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.

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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 the 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 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.

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(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.”

“40. As to post-award interest, the point is covered by the decision of this Court in Hindustan Construction Co. Ltd. vs. State of J & K , 1992 (4) SCC 217. It was held there that an arbitrator is competent to award interest for the period from the date of the award to the date of decree or date of realization, whichever is earlier.”

In the case in hand, the respondent’s claim was in regard to two periods; one

from August 3, 1991 to December 31, 1992 when the agreement was

subsisting and the parties were bound by its terms, and the other from

January 1, 1993 to August 31, 1994 when the agreement was admittedly

terminated and the respondent was carrying on the work on the request of

the appellant. In our view the fact that the first period was covered by the

agreement while the second fell beyond it is significant and on that score the

two periods must receive different treatments.

Clause 31 of the agreement provided as follows:

“31. No interest or damage for delay in payment – No interest or damage shall be paid to the Contractor for delay in payment of the bill or any other amount due to the contractor for any reason whatsoever. The Railway Administration will, however, make every endeavour for payment of

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the bills or other amount due to the contractor within a reasonable time.” (emphasis added)

The Division Bench of the High Court took the view that Clause 31 of the

agreement operated as a bar only between the parties but it would not affect

the authority of the arbitrator to grant interest for the pre reference period

and pendente lite. In this connection the High Court has referred to the

decisions of this Court in Executive Engineer, Dhenkanal Minor Irrigation

Division, Orissa (supra), Executive Engineer (Irrigation) vs. Abhaduta Jena,

(1988) 1 SCC 418 (which was overruled by Executive Engineer, Dhenkanal)

and Secretary, Irrigation Department, Govt. of Orissa vs. G.C. Roy, (1992) 1

SCC 508, (which was referred to in Executive Engineer, Dhenkanal). But in

Executive Engineer, Dhenkanal it is not even remotely said that a clause in

the agreement like clause 31 (quoted above) would only act as a bar between

the parties to the agreement and would not restrict the powers of the

arbitrator to allow interest for pre-reference period and pendente lite. The

High Court has then relied upon another decision of this court in The Board

of Trustees for the Port of Calcutta vs. Engineers-De-Space-Age, AIR 1996

SC 2853. The High Court has observed that in this case a similar clause in

the agreement was held not restrictive of the arbitrator’s powers to allow

interest pendente lite and for pre reference period. We have closely

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examined the decision in Engineers-De-Space-Age and we find that the

relevant clause in the agreement in that case was completely differently

worded and the view taken by the High Court cannot be supported on the

basis of that decision. In Engineers-De-Space-Age the court was dealing

with a case in regard to award of interest for the post-reference period and

clause 13(g), the relevant clause in the agreement, was as follows:

“No claim for interest will be entertained by the Commissioners with respect to any money or balance which may be in their hands owing to any dispute between themselves and the Contractor or with respect to any delay on the part of the Commissioners in making interim or final payment or otherwise.”

In that context this court held that clause 13(g) of the agreement merely

prohibited the Commissioners from entertaining any claim for interest and

did not affect the arbitrator’s powers to award interest.

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 No.3 and the arbitrator’s award allowing pre-reference and pendente

lite interest on that amount was plainly in breach of the express term of the

agreement. The order of the High Court insofar as pre-reference and

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pendente lite interest on the amount under Item No.3 is concerned is,

therefore, unsustainable.

The position with regard to the claim under Item No.4 is quite

different. That relates to the period after the termination of the agreement

and hence, the bar of clause 31 would not apply to it in the same way as it

would apply to Item No.3. We, therefore, find no infirmity in grant of pre-

reference and pendente lite interest on the amount under Item No.4.

In light of the discussions made above, the respondent shall be entitled

to interest only on the sum of Rs.10, 79,456=80, the amount determined

under Item No.4, at the rate of 16% per annum for the period November 1,

1994 to September 9, 2000. The final amount under the award shall be

accordingly worked out. The consolidated amount of the award after being

re-calculated shall carry, as provided in the award, interest at the rate of 18%

from the date of the award till the date of payment. In working out the

amount of interest for the post-award period, the period(s) for which the

operation of the award was stayed by the court would be excluded.

In the result the appeal is allowed to the limited extent indicated

above. There shall be no order as to costs.

………………………………J.

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[Tarun Chatterjee]

……………………………..J. [Aftab Alam]

New Delhi, July 16, 2009.

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UNION OF INDIA Vs SARASWAT TRADING AGENCY .

UNION OF INDIA Vs SARASWAT TRADING AGENCY .