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Reportable IN THE SUPREME COURT OF INDIA

CIVIL APELLATE JURISDICTION

CIVIL APPEAL NO. 4197 OF 2009 (Arising out of SLP [C] No.15980 of 2008)

M/s. Sayeed Ahmed & Co. … Appellant

Vs.

State of U P & Ors. … Respondents

J U D G M E N T

R. V. Raveendran J.  

Leave  granted.  The  issue  in  this  appeal  is  whether  the  Arbitrator  can  

award  interest  for  pre-reference  period  and  pendente  lite,  when  the  contract  

prohibits the employer from entertaining any claim for interest.  

2. The  respondents  entrusted  a  construction  work  to  appellant  under  an  

agreement  dated  30.3.1990.  The  work  was  completed  by  the  appellant  on  

31.3.1996. Disputes arose between the parties by reason by rejection of claims  

of  appellant  and they  were  referred  to  Arbitration  on  13.3.1997.  Before  the  

Arbitrator, the appellant made 11 claims aggregating to Rs.133.43 lakhs. The

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Arbitrator made an award dated 31.7.2001 directing the respondents to pay to  

the appellant the following:-

(i) Rs.24,18,586/-  with  interest  at  18%  PA  from  1.4.1996  till  date  of  payment.

(ii) The  amount  if  any,  due  to  appellant  on  finalizing  the  final  bill  with  interest at 14% PA from 1.5.1996 till date of payment; and

(iii) The security deposit amount due with interest at 12% PA from 1.10.1996  till date of payment.  

3. The civil court by its judgment dated 7.12.2005 dismissed the application  

to  set  aside  the  award,  filed  by  the  respondents  under  section  34  of  the  

Arbitration and Conciliation Act, 1996 ('Act' for short). The appeal filed by the  

respondents was allowed in part by the High Court by impugned judgment dated  

27.2.2008. The High Court held that having regard to the bar contained in clause  

G  1.09  of  the  contract,  the  arbitrator  had  no  power  to  award  interest  and  

consequently, set aside that part of the award granting interest till date of award.  

The High Court however granted interest at 6% PA from the date of award till  

the date of payment. Aggrieved by the deletion of interest upto the date of award  

and reduction of interest from the date of award to 6% per annum, the appellant  

has filed this appeal.

4. At the outset, it is necessary to refer to an erroneous assumption made by  

the High Court in para 31 of the impugned judgment. It has proceeded on the

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basis  that  the  sum of  Rs.24,18,586/-  awarded  by the  Arbitrator  includes  the  

amount due in regard to the final bill as also the amount of security deposit and  

that interest has been awarded from different dates, on different parts of the said  

sum of Rs.24,18,586/-.   But the award of Rs.24,18,586/-  did not  include the  

amount due in regard to the final bill or security deposit . In fact the arbitrator  

did not quantify the amount due in regard to the final bill or the security deposit,  

but  directed  the  respondents  to  calculate  and  pay  the  same  with  interest  as  

indicated in the award. We give below the break up of Rs.24,18,586/- awarded  

by the arbitrator, to show that the said amount did not include the final bill dues  

or security deposit :

Sl. No. Claim No. Description of claim Amount awarded

(i) (1) For non-availability of site Rs.6,30,130/-

(ii) (2) For non-payment for 20,000 cubic meters of earth work Rs.3,90,000/-

(iii) (3) For non-availability of drawings & design Rs.  20,000/-

(iv) (4) For variations in quantity  of different items of work Rs.1,03,500/-

(v) (5) For extra items Rs.  72,956/-

(vi) (8) For stoppage of work Rs.  31,500/-

(vii) (9) For non-availability of cement Rs.  84,000/-

(viii) (10) For delay in completion of    work Rs. 1,55,000/-

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Re : Interest from the date of cause of action to date of award  

6. The  issue  regarding  interest  as  noticed  above  revolves  around  clause  

G1.09 of Technical Provisions forming part of the contract extracted below :

“G  1.09  No  claim  for  interest  or  damages  will  be  entertained  by  the  Government with respect to any money or balance which may be lying with  the Government or any become due owing to any dispute,  difference or  misunderstanding between the Engineer-in-Charge on the one hand and the  contractor on the other hand or with respect to any delay on the part of the  Engineer-in-charge  in  making  periodical  or  final  payment  or  any  other  respect whatsoever.”

7. Sub-section (i) of Section 3 of the Interest Act 1978 provides that a court  

(as  also  an  arbitrator)  can  in  any  proceedings  for  recovery  of  any  debt  or  

damages, allow interest to the person entitled to the debt or damages at a rate not  

exceeding the current  rate of interest,  for the whole or  part  of the following  

period that is to say : (a) if the proceedings related 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 proceedings; (b) if the proceedings did 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 proceedings.  

Sub-section (3) of section 3 provides that nothing in section 3 shall apply to any  

debt or  damages upon which interest  is  payable as of right  by virtue of any

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agreement; or to any debt or damages upon which payment of interest is barred   

by virtue of an express agreement.   

8. The Arbitration Act, 1940 did not contain any specific provision relating  

to  power  of  Arbitrator  to  award interest.  That  led to  considerable  confusion  

about the power of Arbitrators in regard of award of interest from the date of  

cause of action to date of award, that is pre-reference period (from the date of  

cause of action upto the date of reference) and pendente lite (from the date of  

reference  to  date  of  award).  Ultimately,  this  Court  made  it  clear  that  the  

Arbitrator  had  the  jurisdiction  and  authority  to  award  interest  for  the  three  

periods namely pre-reference period, pendente lite and future period (from the  

date of award) if there was no express bar in the contract regarding award of  

interest – vide Secretary, Irrigation Department, Govt. of Orissa vs. G.C. Roy –  

1992 (1) SCC 508,  Executive Engineer, Dhenkanal Minor Irrigation Division  

vs.  N.C.  Budharaj –  2001  (2)  SCC  721  as  also  the  decision  in  Bhagawati   

Oxygen Ltd. vs. Hindustan Copper Ltd. - 2005 (6) SCC 462.

9. Two more  decisions  dealing  with  cases  arising  under  Arbitration  Act,  

1940 requires to be noticed. In Superintending Engineer v. Subba Reddy [1999  

(4)  SCC  423]  this  Court  held  that  interest  for  pre-reference  period  can  be  

awarded only if there was an agreement to that effect or if it  was allowable  

under the  Interest  Act,  1978.  Therefore,   claim for  interest  for pre-reference

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period, which is barred as per the agreement or under the Interest  Act,  1978  

could not be allowed. This Court however held that Arbitrator can award interest  

pendente  lite  and  future  interest.  The  principles  relating  to  interest  were  

summarized by this court in State of Rajasthan v. Ferro Concrete Construction  

Pvt. Ltd. (CA No.2764 of 2009 decided on 22.4.2009) thus:

(a) where  a  provision  for  interest  is  made  on  any  debt  or  damages,  in  any  agreement, interest shall be paid in accordance with the such agreement.

(b) Where payment  of  interest  on any debt  or  damages  is  barred by express  provision in the contract, no interest shall be awarded.

(c) Where there is no express bar in the contract  and where there is also no  provision for payment of interest then the principles of section 3 of Interest  Act will apply and consequently interest will be payable:

(i) where  the  proceedings  relate  to  a  debt  (ascertained  sum)  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;  

(ii) where the proceedings is for recovery of damages or for recovery of a  debt which is not payable at a certain time, then from the date mentioned  in a written notice given by the person making a claim to the person liable  for the claim that interest will be claimed.  

(d) Payment of interest pendente lite and future interest shall not be governed by  provisions of Interest Act, 1978, but by provisions of section 34 of Code of  Civil Procedure 1908 or the provisions of law governing Arbitration as the  case may be.

10. 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

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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 :   

“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.

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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.  

11. Clause G-1.09 makes it clear that no interest or damages will be paid by  

Government, in regard to : (i) any money or balance which may be lying with  

the Government; (ii) any money which may become due owing to any dispute,  

difference or misunderstanding between the Engineer-in-charge on the one hand  

and the contractor on the other hand; (iii) any delay on the part of the Engineer-

in-Charge  in  making  periodical  or  final  payment;  or  (iv)  any  other  respect  

whatsoever. The clause is comprehensive and bars interest under any head in  

clear and categorical terms. In view of clause (a) of sub-section (7) of section 31  

of the Act, it is clear that the Arbitrator could not have awarded interest upto the  

date  of  the  award,  as  the  agreement  between  the  parties  barred  payment  of  

interest. The bar against award of interest would operate not only during the pre-

reference period that is up to 13.3.1997 but also during the pendente lite period  

that is from 14.3.1997 to 31.7.2001.

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12. The appellant strongly relied upon the decision of this Court in  State of  

U.P. v. Harish Chandra & Co. [1999 (1) SCC 63], to contend that clause 1.09 of  

the contract did not bar the award  of interest. The clause barring interest that  

fell for consideration in that decision was as under :

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

This Court held that the said clause did not bar award of interest on any claim  

for damages or for claim for payment for work done. We extract below the  

reasoning for such decision :  

“A  mere  look  at  the  clause  shows  that  the  claim  for  interest  by  way  of  damages was not to be entertained against the Government with respect to  only a specified type of amount, namely, any moneys or balances which may  be lying with the Government owing to any dispute, difference between the  Engineer-in-Charge  and  the  contractor;  or  misunderstanding  between  the  Engineer-in-Charge  and  the  contractor  in  marking  periodical  or  finally  payments  or  in  any other  respect  whatsoever.  The  words  ‘or  in  any other  respect whatsoever” also referred to the dispute pertaining to the moneys or  balances which may be lying with the Government pursuant to the agreement  meaning  thereby security  deposit  or  retention  money  or  any other  amount  which might have been with the Government and refund of which might have  been  withheld  by  the  Government.  The  claim  for  damages  or  claim  for  payment for the work done and which was not paid for would not obviously   cover  any  money  which  may  be  said  to  be  lying  with  the  Government.   Consequently, on the express language of this clause, there is no prohibition  which could be culled out against the respondent-contractor that he could not  raise the claim for interest by way of damages before the arbitrator on the  relevant items placed for adjudication.”

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In  Harish Chandra (supra)  a different version of clause 1.09 was considered.  

Having regard to the restrictive wording of that clause, this Court held that it did  

not bar award of interest on a claim for damages or a claim for payments for  

work done and which was not paid. This Court held that the said clause barred  

award of interest only on amounts which may be lying with the Government by  

way of security deposit/retention money or any other amount refund of which  

was withheld by the government. But in this case, clause G-1.09 is significantly  

different. It specifically provides that no interest shall be payable in respect of  

any  money  that  may  become  due  owing  to  any  dispute,  difference  or  

misunderstanding  between  the  Engineer-in-Charge  and  contractor  or with  

respect to any delay on the part of the Engineer-in-Charge in making periodical  

or final payment or in respect of any other respect whatsoever. The bar under  

clause G-1.09 in this case being absolute, the decision in Harish Chandra will  

not assist the appellant in any manner.  

13. The appellant  next  relied  upon the  judgment  of  this  Court  in  State  of  

Orissa vs. B.N. Agarwalla [1997 (2) SCC 469]. In that case, this Court held that  

Arbitrator  has  jurisdiction  to  award  (i)  interest  for  pre-reference  period,  (ii)  

interest for  pendente lite  and (iii) future interest. This Court also held that the  

following part of clause (4) of the contract dealing with “Rates, materials and

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workmanship” did not bar award of interest by the arbitrator on the claims of the  

contractor :  

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

Interpreting the said clause (which provided that interest was not payable on the  

amount which was withheld), this Court held that it referred only to the amount  

withheld by the employer State towards retention money for the defect liability  

period. This Court in fact clarified that the position that if the terms of contract  

expressly stipulated that no interest would be payable, then arbitrator would not  

get  the  jurisdiction  to  award  interest.  As  clause  G-1.09  in  the  present  case  

contains  an  express  bar  and is  different  from the  clause  considered  in  B.N.  

Agarwalla (supra), the said decision is also of no assistance.  

14. The learned counsel for the appellant submitted that even though the bar  

in clause G-1.09 may prohibit the employer from paying interest, it does not bar  

the  Arbitrator  from  awarding  interest.  For  this  purpose,  he  relied  upon  the  

decision of this Court in Board of Trustees for Port of Calcutta vs. Engineers-

De-Space-Age  [1996  (1)  SCC  516].  In  that  case,  this  Court  considered  the  

validity of award of interest pendente lite by the Arbitrator notwithstanding the  

prohibition  contained  in  the  contract  against  payment  of  interest  on  delayed  

payments. The following clause fell for consideration of this Court in that case :

“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

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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.”

After referring to the Constitution Bench decision in   G. C. Roy (supra)  this  

Court held :

“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 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.”

This Court held that the bar in the contract operated only for the pre-reference  

period and that  the Arbitrator  had the power and authority  to award interest  

pendente lite at his discretion, without reference to the bar in the contract. 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

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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.

15. 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,

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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.  

Re : interest from the date of award

18. The  arbitrator  awarded  interest  at  the  rate  of  18%  per  annum  on  

Rs.24,18,586/-, 14% per annum on amount found due on finalisation the final  

bill and 12% per annum on the security  deposit amount if any that has to be  

refunded. As noticed above, clause (b) of sub-section (7) of section 31 of the Act  

provides that if the award does not otherwise direct, the amount awarded shall  

carry interest as directed by the award and in the absence of any provision of  

18% per annum. Any provision in the contract barring interest,  will therefore  

operate only till the date of award and not thereafter. The arbitrator has awarded  

interest at three different rates on three different amounts which are all less than  

18% per annum. The said award of interest by the arbitrator is not contrary to  

section  31(7)(b)  of  the  Act.  Unless  the  award  of  interest  is  found  to  be  

unwarranted for reasons to be recorded, the court should not alter the rate of  

interest awarded by the Arbitrator. The High Court has not assigned any reasons  

for reducing the rate of interest  to 6% per annum. Therefore, such reduction  

cannot be sustained.

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19. In  view  of  the  above,  we  allow  this  appeal  in  part  and  modify  the  

judgment of the High Court as follows :

(a) The Judgment of the High Court setting aside the award of interest upto  the date of award is affirmed.  

(b) The decision of the High Court reducing the rate of interest to 6% per  annum from the date of award is set aside. The rate of interest on the amounts  due and payable under the award, from the date of award till date of payment  shall be in terms of the award of the Arbitrator.  

(c) Parties to bear their respective costs.    

………………………J. (R V Raveendran)

New Delhi; ……………………..J. July 9, 2009. (P. Sathasivam)