REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.8385 OF 2004

M/s. Madnani Construction Corporation  (P) Ltd. ...Appellant(s)

Vs.

Union of India & Others ...Respondent(s)

J U D G M E N T

GANGULY, J.

1. The subject matter of challenge in this appeal is  

the judgment and order dated 29.04.2003 passed by  

the  High  Court  of  judicature  at  Allahabad  in  

F.A.F.O. No. 40 of 1993, in a matter arising from  

the order dated 1.12.1992 of the learned Senior  

Civil Judge, making the Award a Rule of the Court,  

and whereby the High Court had partly allowed the  

Appeal filed by the respondent.  

1

2. The  appellant,  a  private  limited  company,  is  

carrying  on,  inter  alia,  various  construction  

works for both the State and Central Government  

and  their  undertakings.  The  appellant’s  case  is  

that  an  agreement  dated  03.11.1981  was  entered  

between  the  appellant  and  the  North  Eastern  

Railway for the construction of bridge island nos.  

13 and 14 over the Kosi river. There were certain  

special conditions of the contract (hereinafter,  

SCC)  and  they  stipulate  that  the  General  

Conditions  of  Contract  (hereinafter,  GCC)  and  

standard  specifications  of  the  North  Eastern  

Railways  shall  form  part  of  the  aforesaid  

contract.  In  terms  of  the  contract,  the  

construction  was  to  be  completed  by  15.02.1982.  

Certain payments were made to the appellant after  

completion of the contract but they were received  

by them “under protest”. Thus, disputes cropped-up  

between the parties.  The appellant is said to  

have  served  a  notice  dated  16.11.1983  for  the  

appointment  of  an  arbitrator  to  settle  the  

2

disputes. The General Manager of the respondent-

Railways by an order dated 24.03.1986 rejected the  

appellant’s  prayer  for  appointment  of  an  

arbitrator on the ground that the disputes were  

not  arbitrable,  as  they  fell  under  ‘expected  

matter’ in the contract.

3. On  or  about  18.08.1987,  the  appellant  filed  an  

application  under  Section  20  of  the  Arbitration  

Act, 1940 (hereinafter, the Act) before the Court  

of Addl. Civil Judge, Gorakhpur for appointment of  

an  arbitrator  which  was  transferred  on  21st  

February, 1990, to the Court of Judge of Small  

Causes /Additional Civil Judge (hereinafter, the  

Court below). The Court below passed an order on  

2.3.1990 that ‘file received, put up on the date  

fixed’.  Then  by  an  order  dated  31.05.1991  the  

learned  Civil  Judge  appointed  one  Mr.  B.  N.  

Shukla,  the  Sole  Arbitrator,  to  adjudicate  the  

disputes  arising  out  of  the  agreement  dated  

03.11.1981.  Against  the  order  of  appointment  of  

arbitrator the responder approached the High Court  

3

by filing F.A.F.O. No. 534 of 1991 (the earlier  

F.A.F.O.), but the same was dismissed vide order  

dated 27.08.1991.

4. The learned Arbitrator gave his award on 13.4.1992  

holding that the Railways should pay an amount of  

Rs.4,48,873.22  along  with  compoundable  bank  

interest prevalent at that time from 16.11.1983 to  

21.3.1992.  In  passing  the  award  the  Arbitrator  

relied on the Level book No. I, the Graph Sheets,  

the Log Book No. IA and the Log Book No. 4. The  

Arbitrator  found  that  there  were  subsequent  

alterations and over writing in the entries made  

in the Log Book No.IA and the same were without  

any initials by the concerned authority on behalf  

of  the  respondent  Railways.  From  such  materials  

the  Arbitrator  held  that  all  the  

manipulations/alterations/overwritings  had  

resulted in reducing the quantities of the work  

done  by  the  appellant.  It  was  further  observed  

that clause 21 (iv) of the special conditions was  

not followed by the respondent Railways at all.  

4

Moreover in utter violation of the Railway rules  

and orders on the subject, the measurements were  

hardly  entered  in  the  measurement  book  directly  

and mostly entries in the measurement books were  

copied down from subsidiary records or note books.  

After recording such findings, the Arbitrator gave  

the aforesaid award.

5. Thereafter  on  08.05.1992  the  appellant  filed  an  

application  under  Section  17  of  the  Act  for  

pronouncing judgment and making decree according  

to the award.   

6. On  20.5.1992  the  respondent  Railways  filed  

application under Section 30 read with Section 33  

(Section 30/33) of the Act before the Civil Judge  

for setting aside the award. Then on 24.08.1992  

they  also  filed  their  objections  against  the  

application filed by the contractor under Section  

17 of the Act.  The following facts were recorded  

in the judgment of the High Court.

5

“The Railways filed an application before  the  District  Judge  for  transfer  of  the  application filed by the contractor under  Section 20 of the Act and under Section 24  of  the  Civil  Procedure  Code.  It  was  dismissed  on  13th  November,  1992.  The  Railways  filed  an  application  on  23rd  November, 1992, before the court below for  summoning  their  application  and  under  Section 30/33 of the Act from the Court  where it was filed. This was objected to  by  the  Contractor  on  the  same  date.  However, the Court below summoned it and  not  only  rejected  it  but  also  rejected  their  objections  against  the  application  under  Section  17  of  the  Act.  The  Court  below  by  its  order  dated  1.12.1992  also  pronounced judgment according to the award  and decreed interest at the rate given by  the Bank from the date of the award till  actual payment".

7.  On  1st December  1992,  the  Senior  Civil  Judge,  

Gorakhpur  of  the  Court  of  Judge,  Small  Causes  

Gorakhpur  made  the  award  a  Rule  of  Court  and  

directed that a decree be prepared accordingly and  

directed that from the date of the award to the  

date of payment the rate of interest on the Bank  

loan is to be paid.

8.  Challenging  the  aforesaid  order  of  the  Civil  

Judge,  the  Railways  filed  an  appeal  before  the  

High Court. 6

9.  Before the High Court, 7 issues were framed. The  

appeal was partly allowed by the High Court and in  

doing so the High Court came to the conclusion  

that  the  court  below  had  the  jurisdiction  to  

entertain the application under Section 17 of the  

Act.  

10.  On the application of the Railways under Section  

30/33 of the Act, the High Court held that the  

case is not required to be remanded as the court  

below decided the case correctly on merits.   

11. Referring to the decision of the General Manager  

dated 24.03.1986 rejecting request for appointment  

of  Arbitrator  on  the  ground  that  dispute  fell  

under excepted matters, the High Court concluded  

that there is difference of opinion between the  

parties whether the dispute falls under excepted  

matters or not and the decision of the General  

Manager  regarding  excepted  matters  is  not  final  

between  the  parties.  The  General  Manager  by  

7

wrongly deciding this question could not exclude  

the jurisdiction of the Court.  

12. On the issue as to whether the respondent Railways  

are  entitled  to  raise  objections  regarding  the  

excepted matters at the stage of Section 20, the  

High Court concluded that the trial Court did not  

say  a  word  about  it  and  the  High  Court  merely  

affirmed the order passed by the trial court. As  

such  the  issue  was  left  to  be  decided  by  the  

Arbitrator who has held that none of the claims of  

the contractor were excepted matters. It was held  

that  as  the  question  was  not  decided  in  the  

earlier  litigation,  it  cannot  be  said  that  the  

Railways are precluded from raising this question  

in these proceedings.

13. On the issue of excepted matters the High Court  

held  that  Item  Nos.  1  to  3  and  5  to  8  were  

excepted matters and were non-arbitrable and the  

Arbitrator  committed  an  illegality  in  allowing  

them. For the remaining items viz. item No. 9 (a)&  

8

(d) relating to supply of boats, 11 (b) relating  

to cost of wastage of labour, it was held that  

these were not covered by Clause 22 (5) or 45 (a)  

of  the  GCC,  as  such  they  do  not  fall  in  the  

category  of  non-arbitrable  matters  and  are  

arbitrable.

14. On the award of interest it was contended that  

clause 16 (1) read with 16 (2) of GCC prohibits  

payment  of  interest  on  amounts  payable  to  the  

appellant under the contract except the Government  

securities mentioned therein.  In this regard, the  

High Court considered Clause 30 of SCC and Clause  

52 of GCC and found them to be similar and these  

clauses, according to High Court, bar interest and  

damages  in  respect  of  withholding  or  retention  

under the lien. Further by placing reliance on the  

case of Executive Engineer, D.M.I. Division v. N.  

C. Budhraj, AIR 2001 SC 628 High Court held that  

interest  could  not  be  awarded  since  there  was  

specific  prohibition  in  the  contract  regarding  

awarding of interest.

9

15. On  the  award  of  interest  High  Court’s  specific  

conclusions are:

“(f) The  contract  prohibited  payment  of  interest.  Item 10 is award for interest;  it  could  not  be  awarded.   Similarly  no  interest could be awarded under clause 3  of the Award.

(g) There  is  no  illegality  in  awarding  interest payable at the bank rate, but it  could  only  be  awarded  from  the  date  of  decree and not from the date of award.”

16. Appellant also filed a review petition before the  

High Court but the same was dismissed vide order  

dated 15.05.2003.

17. This Court finds that the High Court’s conclusion  

that Item Nos. 1 to 3 and 5 to 8 of the award are  

‘excepted  matters’  and  non-arbitrable  is  not  

correct for the reasons discussed below.   

18. In coming to the aforesaid finding, the High Court  

relied on Clause 45 (a) of GCC. Clause 45(a) of  

the GCC is set out below:

10

"45(a): It shall be open to the Contractor  to take specific objection to any recorded  measurement  or  classification  on  any  ground within seven days of the date of  such  measurements.  Any  re-measurements  taken  by  the  Engineer  or  the  Engineer’s  Representative  in  the  presence  of  the  Contractor  or  in  his  absence  after  due  notice  has  been  given  to  him  in  consequence  of  objection  made  by  the  Contractor shall be final and binding on  the  Contractor  and  no  claim  whatsoever  shall thereafter be entertained regarding  the  accuracy  and  classification  of  the  measurements.”

19. A plain reading of Clause 45(a) of the GCC makes  

it clear that re-measurement are to be made by the  

Engineer or the Engineer’s representative  in the  

presence of the Contractor. It may be done in the  

absence of the contractor but that has to be done  

only after due notice.  On a proper construction  

of  Clause  45(a)  it  appears  that  it  gives  the  

contractor, (a) an opportunity to take a specific  

objection to any recorded measurement within seven  

days  of  such  measurements;  (b)  Then  any  re-

measurements is to be taken by the Engineer or the  

Engineer’s representative in the presence of the  

contractor or in his absence after due notice; if  

11

the steps under (a) and (b) are strictly followed,  

(c) no claim whatsoever by the contractor shall be  

entertained  about  the  classification  or  the  

accuracy of the measurement.

20. Under Clause 62 of the GCC it is provided that  

matters  for  which  provisions  have  been  made  in  

Clause 45(a) shall be excepted matters.  

21. The arbitrator in his award after perusal of the  

level Book No.1, Graph-Sheets, Logbook No. 1A and  

Logbook No.4 came to a clear finding that there  

were  manipulations/alterations/over  writings  by  

the railways and as a result of which the volume  

of work done by the contactor has been reduced.

22. It  is  well  settled  that  the  arbitrator  is  the  

master of facts. When the arbitrator on the basis  

of record and materials which are placed before  

him by the railways came to such specific findings  

and which have not been stigmatized as perverse by  

the High Court, the High Court in reaching its  

conclusions cannot ignore those findings.

12

23. But it appears that in the instant case, the High  

Court has come to the aforesaid finding that the  

items  mentioned  above  are  excepted  matters  and  

non-arbitrable by completely ignoring the factual  

finding by the arbitrator and without holding that  

those findings are perverse.

24. It goes without saying that in order to deny the  

claims of the contractor as covered under excepted  

matters,  the  procedure  prescribed  for  bringing  

those  claims  under  excepted  matters  must  be  

scrupulously  followed.  The  clear  finding  of  the  

arbitrator is that it has not been followed and  

the High Court has not expressed any dis-agreement  

on that. Therefore, the finding of the High Court  

that  those  items  are  non-arbitrable  cannot  be  

sustained.

25. On  the  question  of  grant  of  interest  by  the  

arbitrator, the High Court held that Clause 16(2)  

13

of the GCC contains a provision against grant of  

interest. Clause 16(2)of the GCC is set out below:

“16(2): No interest will be payable upon  the earnest money or the security deposit  or amounts payable to the contractor under  the  contract  but  government  securities  deposited in terms of such clause (1) of  this  clause  will  be  repayable  with  interest accrued thereto.”

26. The High Court has also relied on Clause 30 of the  

SCC and Clause 52 of the GCC to hold that payment  

of interest has been barred. The relevant portion  

of Clause 30 of the SCC relating to interest is  

set out below:

“…That the contractor will have no claim  for interest and damage whatsoever on any  account in respect of such with-holding or  retention under the lien referred to supra  and  duly  notified  as  such  to  the  Contractor.”

27. The High Court has held that Clause 30 of the SCC  

is similar to Clause 52 of the GCC.

28. Before  discussing  the  implication  of  these  

clauses, it may be noted that the Arbitration Act,  

14

1940 does not contain any provision enabling the  

arbitrator to give interest.

29. Section  29  of  the  Arbitration  Act  enables  the  

Court  to  award  interest  from  the  date  of  the  

decree  and  at  such  rate  as  the  Court  deems  

reasonable.

30. The  present  Act  of  1996  (the  Arbitration  and  

Conciliation  Act,  1996),  however,  empowers  the  

Arbitrator under Section 31(7)(a) and (b) to grant  

interest. Admittedly, in this case the 1996 Act is  

not attracted. Therefore, the provisions of 1940  

Act will govern. The arbitrator’s power to grant  

interest  is  governed  by  the  various  judicial  

pronouncements and the provisions of Interest Act  

of 1978.

31. It goes without saying that in the instant case,  

the  provision  of  the  Interest  Act,  1978  is  

attracted. Under the Interest Act, 1978, Section  

15

2(a) defines “Court” to include both a tribunal  

and an arbitrator.

32. Under  the  Interest  Act,  Section  3  empowers  the  

Court to allow interest.  But sub-Section (3) of  

Section 3 contains a proviso, namely, Section 3,  

sub-Section (3), Clause (a) (ii), to the following  

effect:-

“3. (3) Nothing in this section, -  

(a) shall apply in relation to -  

(i) xxx xxx

(ii) any  debt  or  damages  upon  which  payment of interest is barred, by  virtue of an express agreement’”

33. In the context of the aforesaid provision in the  

Interest Act, the Clauses in the agreement quoted  

hereinabove assume importance.   

34. Normally  there  are  three  periods  for  which  

interests are awarded - (a) pre-reference period  

i.e.  from  the  date  of  the  cause  of  action  for  

going to arbitration and to the date of reference;  16

(b) the pendente lite period i.e. from the date of  

reference to the date of award; and (c) the post-

reference period i.e. from the date of the award  

to the date of realization.   

35. Initially there was a judgment of this Court in  

the  case  of  Executive  Engineer  (Irrigation),  Balimela and Others Vs.  Abhaduta Jena and Others  [1988 (1) SCC 418] which held, the arbitrator has  

no  power  to  award  interests  in  the  absence  of  

contract or any substantive law.  

36. Construing  the  provision  of  the  1940  Act,  the  

Court held:-

“..in cases arising after the commencement  of Interest Act of 1978 an arbitrator has  the  same  power  as  the  court  to  award  interest up to 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.” (Para 4)

37. The  decision  in  Abhaduta  Jena (supra),  however,  was overruled by the Constitution Bench of this  

Court  in  Secretary,  Irrigation  Department,  17

Government  of  Orissa  and  Others  Vs.  G.C.  Roy,  [1992 (1) SCC 508].

38. The  Constitution  Bench  in  G.C.  Roy (supra)  discussed several aspects of the Act of 1940 and  

also the provisions of Section 34 of the Civil  

Procedure Code and also those of the Interest Act.  

After  discussing  those  provisions,  the  

Constitution Bench formulated the question which  

arose in that case as follows:-

“……In the context of these provisions the  question arises whether an arbitrator to  whom reference is made by the parties has  jurisdiction  or  authority  to  award  interest pendente lite. If the arbitration  agreement or the contract itself provides  for award of interest on the amount found  due  from  one  party  to  the  other,  no  question  regarding  the  absence  of  arbitrator’s  jurisdiction  to  award  the  interest could arise as in that case the  arbitrator  has  power  to  award  interest  pendente  lite  as  well.  Similarly,  where  the agreement expressly provides that no  interest pendente lite shall be payable on  the  amount  due,  the  arbitrator  has  no  power to award pendente lite interest. But  where  the  agreement  does  not  provide  either for grant or denial of interest on  the amount found due, the question arises  whether  in  such  an  event  the  arbitrator  has power and authority to grant pendente  lite interest.

18

39. After  formulating  the  above  question  and  

discussing various decisions and legal issues, the  

Constitution  Bench  in  paragraph  43  at  page  532  

further held:

“The  question  still  remains  whether  arbitrator has the power to award interest  pendente  lite,  and  if  so  on  what  principle. We must reiterate that we are  dealing  with  the  situation  where  the  agreement  does  not  provide  for  grant  of  such  interest  nor  does  it  prohibit  such  grant. In other words, we are dealing with  a case where the agreement is silent as to  award of interest….”

40. After  posing  the  question  as  above,  the  

Constitution  Bench  laid  down  the  following  

principles in paragraph 43 at page 532 to 533:

“(i) A person deprived of the use of money  to which he is legitimately entitled has a  right  to  be  compensated  for  the  deprivation, call it by any name. It may  be  called  interest,  compensation  or  damages.  This  basic  consideration  is  as  valid  for  the  period  the  dispute  is  pending before the arbitrator as it is for  the  period  prior  to  the  arbitrator  entering upon the reference. This is the  principle of Section 34, Civil Procedure  Code and there is no reason or principle  to  hold  otherwise  in  the  case  of  arbitrator.

(ii) An arbitrator is an alternative form  (sic forum)  for  resolution  of  disputes  arising  between  the  parties.  If  so,  he  

19

must  have  the  power  to  decide  all  the  disputes  or  differences  arising  between  the  parties.  If  the  arbitrator  has  no  power to award interest pendente lite, the  party claiming it would have to approach  the court for that purpose, even though he  may have obtained satisfaction in respect  of other claims from the arbitrator. This  would lead to multiplicity of proceedings.

(iii) An arbitrator is the creature of an  agreement. It is open to the parties to  confer upon him such powers and prescribe  such procedure for him to follow, as they  think fit, so long as they are not opposed  to  law.  (The  proviso  to  Section  41  and  Section  3  of  Arbitration  Act  illustrate  this point). All the same, the agreement  must  be  in  conformity  with  law.  The  arbitrator  must  also  act  and  make  his  award in accordance with the general law  of the land and the agreement.

(iv)  Over  the  years,  the  English  and  Indian courts have acted on the assumption  that where the agreement does not prohibit  and a party to the reference makes a claim  for interest, the arbitrator must have the  power  to  award  interest  pendente  lite.  Thawardas has  not  been  followed  in  the  later decisions of this Court. It has been  explained and distinguished on the basis  that in that case there was no claim for  interest but only a claim for unliquidated  damages. It has been said repeatedly that  observations in the said judgment were not  intended to lay down any such absolute or  universal rule as they appear to, on first  impression. Until Jena case almost all the  courts in the country had upheld the power  of  the  arbitrator  to  award  interest  pendente lite. Continuity and certainty is  a highly desirable feature of law.

(v) Interest pendente lite is not a matter  of substantive law, like interest for the  period  anterior  to  reference  (pre- reference  period).  For  doing  complete  

20

justice  between  the  parties,  such  power  has always been inferred.”

41. Ultimately in paragraphs 44 and 45 at page 533 to  

534 of the report the Constitution Bench held as  

follows:

“Where the agreement between the parties  does  not  prohibit  grant  of  interest  and  where  a  party  claims  interest  and  that  dispute  (along  with  the  claim  for  principal  amount  or  independently)  is  referred to the arbitrator, he shall have  the power to award interest pendente lite.  This is for the reason that in such a case  it must be presumed that interest was an  implied term of the agreement between the  parties  and  therefore  when  the  parties  refer all their disputes — or refer the  dispute as to interest as such — to the  arbitrator,  he  shall  have  the  power  to  award interest. This does not mean that in  every  case  the  arbitrator  should  necessarily award interest pendente lite.  It is a matter within his discretion to be  exercised in the light of all the facts  and circumstances of the case, keeping the  ends of justice in view.

45. For the reasons aforesaid we must hold  that the decision in  Jena, insofar as it  runs counter to the above proposition, did  not lay down correct law.”

42. Following the Constitution Bench ratio in G.C. Roy  (supra), another three-Judge Bench in the case of  

Hindustan Construction Company Limited vs.  State  21

of Jammu and Kashmir – (1992) 4 SCC 217, while  referring to the ratio in  G.C. Roy (supra), held  in paragraph 5 at page 220:

“……Though the said decision deals with the  power of the arbitrator to award interest  pendente  lite,  the  principle  of  the  decision  makes  it  clear  that  the  arbitrator is competent to award interest  for the period commencing with the date of  award to the date of decree or date of  realisation, whichever is earlier. This is  also  quite  logical  for,  while  award  of  interest  for  the  period  prior  to  an  arbitrator entering upon the reference is  a matter of substantive law, the grant of  interest  for  the  post-award  period  is  a  matter of procedure. Section 34 of Code of  Civil Procedure provides both for awarding  of interest  pendente lite as well as for  the post-decree period and the principle  of Section 34 has been held applicable to  proceedings before the arbitrator, though  the section as such may not apply…….”

43.  Subsequently, in the case of State of Orissa v.  B.N. Agarwalla – (1997) 2 SCC 469, before another  three-Judge Bench a similar question came up for  

consideration and this Bench following the ratio  

in  G.C.  Roy (supra)  and  Hindustan  Construction  (supra)  considered  the  question  of  payment  of  

interest. After discussing the ratio in  Abhaduta  Jena (supra)  and  G.C.  Roy (supra)  and  various  other cases, the learned Judges in paragraph 18 at  

22

page  477  of  the  report  came  to  the  conclusion  

that; (a) it is well settled that the arbitrator  

has a jurisdiction to award pre-reference interest  

in cases which arose after the Interest Act, 1978  

had become applicable. It is no doubt that in this  

case arbitration proceedings were initiated after  

the 1978 Act became applicable; (b) for the period  

in which the arbitration proceedings are pending  

the arbitrator has the power to award interest;  

(c)  the  Court  also  held  that  the  power  of  the  

arbitrator  to  award  interest  for  the  post-award  

period also exists.  

44. In G.C. Roy (supra) this Court made it clear that  the arbitration clause was silent on the payment  

of  interest  but  in  B.N.  Agarwalla (supra)  the  Court  considered  Clause  (4)  which  had  the  

following stipulation on interest:

“……No  interest  is  payable  on  amounts  withheld under the item of the agreement……. ”

23

45. Considering  the  said  Clause  (4),  the  learned  

Judges held that the claim which was made before  

the  arbitrator  was  for  non-payment  of  the  full  

amount  as  per  the  final  bill  submitted  by  the  

claimant  and  the  arbitrator  awarded  interest  on  

that.  The interest so awarded, according to the  

learned Judges, is not prohibited under Clause (4)  

of the Contract.  Therefore, the three Judge Bench  

clearly  held  that  just  a  stipulation  in  the  

contract  purporting  to  indicate  non-payment  of  

interest cannot denude the arbitrator of his right  

to pay interest.   

46. In a subsequent decision of three-Judge Bench in  

the case of  State of U.P. v.  Harish Chandra and  Company – (1999) 1 SCC 63, there was stipulation  in  the  arbitration  agreement  against  grant  of  

interest.  The relevant clause namely Clause 1.9  

to the aforesaid effect is set out below:

“1.9  No claim for delayed payment due to  dispute  etc.—No  claim  for  interest  or  damages  will  be  entertained  by  the  Government with respect to any moneys or  balances  which  may  be  lying  with  the  Government  owing  to  any  dispute,  

24

difference;  or  misunderstanding  between  the  Engineer-in-Charge  in  marking  periodical  or  final  payments  or  in  any  other respect whatsoever.”

47.  Considering the said clause, the Court held that  

the  prohibition  in  the  said  clause  does  not  

prevent the contractor from raising the claim of  

interest by way of damages before the arbitrator  

on  the  relevant  items  placed  for  adjudication.  

(see  paragraph  10  page  67).  In  saying  so,  the  

learned Judges relied on the ratio in the case of  

B.N. Agarwalla (supra) and G.C. Roy (supra).

48. In Board of Trustees for the Port of Calcutta v.  Engineers-De-Space-Age, (1996) 1 SCC 516, a two- judge  Bench  of  this  Court  considered  the  same  

question.  That was a case under the 1940 Act.  In  

Engineers (supra),  the  so-called  prohibition  in  the contract relating to payment of interest was  

in Clause 13(g), which is set out below:-

“13(g) 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  

25

on  the  part  of  the  Commissioners  in  making  interim or final payment or otherwise.”

49. Relying  on  the  said  clause,  the  appellant  in  

Engineers (supra) argued that there was absolute  prohibition  against  payment  of  interest.  The  

learned Judges however, relying on the ratio in  

G.C.  Roy  (supra)  held  that  Clause  13(g)  merely  prohibits the Commissioner from entertaining any  

claim for interest but it does not prohibit the  

arbitrator  from  awarding  interest.   The  learned  

Judges  held  that  such  clauses  must  be  strictly  

construed in view of the ratio of the Constitution  

Bench in G.C. Roy (supra).  The reasoning given by  the  learned  Judges  in  favour  of  strict  

construction runs as follows:-

“...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 term of  the contract merely prohibits the Commissioner  from  paying  interest  to  the  contractor  for  delayed payment but once the matter goes to  

26

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.” (Para 4, page 520)

50.  It was argued before us by the learned counsel  

for  the  respondent  that  a  subsequent  Division  

Bench of this Court in the case of Union of India  v.  Saraswat Trading Agency & others, JT 2009 (9)  SC 648, has taken a view different from the ratio  

in Engineers (supra).  We do not think so.

51.  In  Saraswat Trading (supra) the Clause which was  construed by the Court as clamping a prohibition  

on the grant of interest was Clause 31 and which  

is quoted in paragraph 15 of the judgment at page  

656 of the report and runs 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  the  bills  or  other  amount  due  to  the  contractor within a reasonable time.”

27

52. The learned Judges in Saraswat Trading (supra) in  paragraph 16 held that Clause 31 is different from  

Clause  13(g)  which  was  considered  in  Engineers  (supra).  The ratio in  Engineers  (supra) was not  questioned.   

53. In  the  instant  case  also  the  relevant  clauses,  

which have been quoted above, namely, Clause 16(2)  

of GCC and Clause 30 of the 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  (supra), find that the said clauses do  not impose any bar on the arbitrator in granting  

interest.   

54. Reference  in  this  connection  may  be  made  to  

another Constitution Bench judgment of this Court  

in the case of Executive Engineer, Dhenkanal Minor  

28

Irrigation  Division,  Orissa  and  others v.  N.C.  Budharaj (deceased) by Lrs. and others, (2001) 2  SCC 721.

55. In N.C. Budharaj  (supra), Justice Raju, speaking  for the majority, considered the question of the  

arbitrator’s jurisdiction and authority to grant  

interest in great detail and also considered both  

Indian  and  English  cases  and  the  ratio  of  the  

Constitution  Bench  of  this  Court  in  G.C.  Roy  (supra).  

56. In paragraph 25 of the judgment the learned Judge  

summed up the position as follows:-

“...By agreeing to settle all the disputes and  claims  arising  out  of  or  relating  to  the  contract  between  the  parties  through  arbitration instead of having recourse to civil  court  to  vindicate  their  rights  the  party  concerned  cannot  be  considered  to  have  frittered away and given up any claim which  otherwise it could have successfully asserted  before courts and obtained relief. By agreeing  to  have  settlement  of  disputes  through  arbitration,  the  party  concerned  must  be  understood to have only opted for a different  forum  of  adjudication  with  less  cumbersome  procedure, delay and expense and not to abandon  all or any of its substantive rights under the  various laws in force, according to which only  even the arbitrator is obliged to adjudicate  the claims referred to him. As long as there is  

29

nothing in the arbitration agreement to exclude  the jurisdiction of the arbitrator to entertain  a claim for interest on the amounts due under  the  contract,  or  any  prohibition  to  claim  interest on the amounts due and become payable  under  the  contract,  the  jurisdiction  of  the  arbitrator to consider and award interest in  respect of all periods subject only to Section  29 of the Arbitration Act, 1940 and that too  the powers of the court thereunder, has to be  upheld.”  (Emphasis supplied)

57. We are constrained to note that Hon’ble High Court  

unfortunately erred in appreciating the ratio of  

N.C.  Budharaj  (supra)  in  passing  the  impugned  judgment and order.

58. In view of such consistent views taken by both the  

Constitution Bench judgments, in G.C. Roy (supra)  and N.C. Budharaj (supra), we are of the view that  in  the  facts  of  this  case,  no  interference  is  

called  for  with  the  award  passed  by  the  

arbitrator.  The judgment of the High Court is,  

therefore, set aside and the award is upheld. The  

appeal is allowed.

59. There will be no order as to costs.   

30

.......................J. (MARKANDEY KATJU)

.......................J. New Delhi (ASOK KUMAR GANGULY) December 07, 2009    

31