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

Vs.

The Divisional Railway Manager (Works),  Palghat & Ors. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

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  

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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 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,  the  

contractor was not entitled to it. 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  

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dismissed the appeal by the appellant- 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  

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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 :

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“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  

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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  

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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.”

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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  

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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.”

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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.

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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   

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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)

New Delhi; ……………………………..J. August 20, 2010. (H L Gokhale)                 

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