U.P. COOPERATIVE FEDERATION LTD. v.

M/S. THREE CIRCLES (Civil Appeal No. 2732 of 2001)

SEPTEMBER 10, 2009 [TARUN CHATTERJEE AND HARJIT SINGH BEDI, JJ.]

[2009] 14 (ADDL.) S.C.R. 310

The Judgment of the Court was delivered by

TARUN CHATTERJEE, J. 1. On or about 14th of December,  1983,  a tender  was floated by the U.P.  Cooperative Federation  

Ltd. (hereinafter referred to as “the Federation”) for construction of  

4000 Metric Ton cold storage at Vashi, New Mumbai. The tender  

document mentioned the time of completion as twelve months. M/s  

Three Circles – the respondent herein, submitted a tender to get  

the contract. In the year 1984, a contract was executed with M/s  

Three Circles. Clause 10[f]  of  the Contract Agreement reads as  

follows:

“It is further agreed that all disputes or differences arising  

out  of  the  provisions  as  contained  in  the  preceding   

paragraphs,  [a]  to  [f]  of  Clause  10  shall  be  referred  to  the   

Managing Director of Employer, whose decision shall be final,   

conclusive and binding and shall not be referred to arbitration   

or to any court of law.”

Clause 11 of the contract reads as follows:

“All  disputes  and  differences  between  the  parties   

regarding the construction or interpretation of any of the terms  

and conditions herein contained or conditions of contract being  

the  integral  part  of  this  contract  [except  those  which  are

subject  matter  of  the  decision  of  Managing  Director  of  the  

Employer or/are expressly forbidden and excluded from being  

referred  to  arbitrator  under  any  clause  by  the  contract   

documents and such decision shall  be final,  conclusive and  

binding  upon  the  parties  hereto]  or  determination  of  and  

liability or any disputes of whatever nature whether during the  

course of progress or work or thereafter or after recession of   

the contract, shall be referred to the arbitration as provided in   

the condition No.51 of the Heading “scope and performance”   

in the Tender documents and shall be deemed to be reference  

within  the  relevant  provisions  of  the  Indian  Arbitration  Act,   

1940,  and  or  any  statutory  modification  of  enactment  there  

under.”

Clause 51 of the General Conditions of contract provided for  

arbitration. This clause reads as follows:

“51.  The  contractor  will  become  nominal  member  of  the  

Federation and will abide by the rules and regulation laid down  

from time to time. Except where otherwise provided for in the  

contract all questions and disputes relating to the meaning of  

the  specifications,  designs,  drawings and instructions herein  

before  mentioned  and  as  to  the  quality  of  workmanship  or  

materials used on the work or as to any other questions, claim,  

right, matter or thing whatsoever in any way arising out of or  

relating  to  the  contract,  designs,  drawings,  specifications,  

estimates, instructions, order or these conditions or otherwise  

concerning the works, or the execution or failure to execute the  

same whether arising during the progress of the work or after  

the completion or abandonment thereof shall be referred to the

sole  arbitration  of  the  Registrar  Cooperative  Societies  Uttar  

Pradesh and if the Registrar is unable to or unwilling to act, to  

the  sole  arbitration  of  some  other  person  appointed  by  the  

Managing Director, willing to act as such arbitrator. There will  

be no objection if the arbitrator so appointed is an employee of  

Federation and that he had to deal with the matters to which  

the contract relates and that in the course of his duties as such  

he had expressed views on all or any of the matters in dispute  

or difference. The arbitrator to whom the matter is originally  

referred being transferred or vacating his office or being unable  

to act for any reason, such Managing Director as aforesaid at  

the time of  such transfer  vacation of  office or  liability  to act  

shall appoint another person to act as arbitrator in accordance  

with the terms of the contract. Such person shall be entitled to  

proceed with the reference from the stage at which it was left  

by his predecessor. It  is also a term of this contract that no  

person  other  than  a  person  appointed  by  such  Managing  

Director  as aforesaid  should act  as  arbitrator  and if  for  any  

reason, that is not possible the matter is not to be referred to  

arbitration  at  all.  Cases  where  the  amount  of  the  claim  in  

dispute  is  Rs.25,000/-  [Rupees  twenty  five  thousand]  and  

above, the arbitrator shall give reasons for the award. Subject  

as aforesaid the provisions of the Arbitration Act, 1940 or any  

statutory  modification  or  reenactment  thereof  and  the  rules  

made there under and for the time being in force shall apply to  

the arbitration proceeding under this clause.

It  is  a  term  of  the  contract  that  the  party  invoking  

arbitration shall specify the dispute or disputes to be referred to

arbitration  under  this  clause  together  with  the  amount  or  

amounts claimed in respect of each such dispute.

The arbitrator[s] may from time to time with consent of the  

parties enlarge the time, for making and publishing the award.

The work under the contract shall, if reasonably possible,  

continue during the arbitration  proceedings and no payment  

due or payable to the contractor shall be withheld on account  

of such proceedings.

The Arbitrator  shall  be deemed to have entered on the  

reference on the date he issues notice to both the parties fixing  

of the date of the first hearing.

The Arbitrator shall give a separate award in respect of  

each dispute or difference referred to him.

The venue of arbitration shall be such place as may be  

fixed by the Arbitrator in his sole discretion.

The award of the Arbitrator shall be final, conclusive and  

binding on all parties to this contract.”

2. The respondent was given extension of time for execution  

and completion of the project pursuant to Clause 13 of the General  

Conditions of Contract. It may be kept on record that Clause 32  

clearly  postulates  that  the  extended  time  was  also  to  be  the  

essence of  the contract.  After  the expiry  of  stipulated period of  

time,  the  respondent  submitted  certain  claims  to  the  Managing  

Director of the appellant in terms of Clause 10 of the Contract. A  

compensation of Rs.87,000/- was awarded to the respondent. In  

this  connection,  it  may be  stated  that  the  respondent  had  also  

suspended work for some time.

3. The respondent thereafter filed a suit being Arbitration Suit  

No.3212 of 1986 before the High Court of Bombay under Section  

20  of  the  Arbitration  Act,  1940  [in  short  ”the  Act”]  praying  for  

appointment of an Arbitrator.  By an order dated 7th of January,  

1988, the High Court appointed one Shri N.N. Shrikhande as the  

sole  Arbitrator  to  decide  the  disputes  raised  by  the  parties.  

Subsequently,  the  appellant  filed  a notice  of  motion praying  for  

setting aside the order of appointment dated 7th of January, 1988  

and also prayed for stay of the arbitration proceedings. The said  

notice of motion was, however, dismissed by the High Court. The  

appellant filed an appeal which was also dismissed on the ground  

of delay.  

4.  The  appellant,  feeling  aggrieved,  filed  a  special  leave  

petition  being  SLP  [C]  No.11703  of  1988  in  which  this  Court  

granted  leave,  which  came  to  be  registered  as  Civil  Appeal  

No.3585 of  1988. By an order dated 4th of  October,  1988,  this  

Court  had set  aside  the  order  dated  7th  of  January,  1988 and  

remanded  the  matter  to  the  High  Court  for  nominating  another  

Arbitrator. Again by an order dated 2nd of November, 1988, the  

High Court appointed one Shri S.N. Mishra as the sole Arbitrator.  

On 1st  of  March,  1989 the learned Arbitrator  entered upon the  

reference. On 2nd of March, 1989, statement of claim was filed by  

the  respondent.  Various  claims  were  made,  inter  alia,  for  

escalation, purchase of additional material and transport charges.  

Reply to show cause notice was filed on 16th of March, 1989 by  

the  appellant  and  rejoinder  to  the  same  was  also  filed  by  the  

respondent. The learned Arbitrator thereafter by a reasoned award  

dated 20th of October, 1989 directed the appellant to pay a sum of  

Rs.32,68,805.80 to the respondent along with interest at the rate of

15% till the date of final payment. On or about 14th of December,  

1989, the appellant filed an application for setting aside the said  

award before the High Court. By a judgment and order dated 19th  

of October, 1994, a learned Judge of the High Court dismissed the  

said petition of the appellant, inter alia, on the following findings:

[1] The claim of the appellant that they were entitled to deduct  

certain amounts from the final payment to the respondent on  

account of his having consumed extra cement was rejected.

[2] The Arbitrator did not have any jurisdiction in rejecting the  

claim in view of Clause 10 of the agreement.

[3]  The claim of  the appellant  that  it  was entitled  to  deduct  

certain amount from the final bill on account of non utilization  

of steel was rejected.  

[4] The Arbitrator awarded escalation price to the respondent  

on account of increase in prices even after the stipulated time  

of completion.

[5]  The  Arbitrator  disallowed  the  claim  of  the  appellant  for  

deduction  of  amounts  from the  final  bill  on account  of  poor  

workmanship.

[6]  The  claim  towards  purchase  of  surplus  wood  by  the  

respondent was allowed along with the claim for filling of earth.

[7] The claim of the respondent towards transport charges for  

carrying wood was allowed despite the fact that the contract  

provided for local wood to be used.

[8] Expenses towards litigation and interest at the rate of 18%  

prior to the reference were also allowed.

5.  Feeling aggrieved,  an appeal  was  carried to  the Division  

Bench of the Bombay High Court and by a judgment and order  

dated 11th of February, 2000, the Division Bench partly allowed  

the appeal limited to the question of interest but rejected all other  

contentions of the appellant.  Feeling aggrieved by the aforesaid  

order  of  the  Division  Bench of  the  High  Court,  a  special  leave  

petition  was  filed,  which  on  grant  of  leave  was  heard  in  the  

presence of learned counsel for the parties.

6.  We  have  heard  the  learned  counsel  for  the  parties  and  

examined the impugned order of  the High Court  as well  as the  

application for  setting aside the award passed by the Arbitrator  

filed at the instance of the appellant and other materials on record.  

On behalf  of  the appellant,  Mr.  Rakesh Dwivedi,  learned senior  

counsel,  contended at the first  instance that there was an error  

apparent on the face of the award on the issue of ‘balance steel  

recovery’. Mr. Dwivedi contended that the respondent was having  

balance steel with it which was not consumed or returned and the  

respondent should, therefore, pay interest on it as per penal rates  

in terms of Clause 15[2][6] of the Contract. At this stage we may  

refer to Clause 15 [2][6] which runs as under :-

“if on completion of work, the contractor fails to return surplus  

materials  out  of  those  supplied  by  the  Federation,  then,  in   

addition to any other liability which the contractor would incur,   

the  Engineer  In-charge  may,  by  a  written  notice  to  the  

contractor,  require him to pay within a fortnight of receipt of   

notice,  for  such  unreturned  surplus  materials  at  double  the  

issue rates.”

7. On this score,  the finding of the Arbitrator was that there  

was no clear evidence put forward by either of the parties as to  

what happened to the balance steel and under that circumstances  

the claimant, namely, the respondent was directed to pay at the  

issue rates and not at the penal rates. However, though this was  

the  observation  in  the  body of  the  award,  in  Appendix  ‘C’,  the  

Arbitrator  had  given  certain  deductions  based on  balance  steel  

under  three  heads.  Mr.  Dwivedi,  therefore,  contended  that  the  

appendices were part of the award itself which is to be interpreted  

in  conjunction  with  Appendix  ‘C’  and,  therefore,  in  the  light  of  

Appendix ‘C’ where a finding of unutilized steel under three heads  

lying unutilized the Arbitrator should have awarded the respondent  

to  pay  at  penal  rates  and  by  not  doing  so  and  directing  the  

payment  at  issue rates it  was against  the express terms of  the  

contract  and  liable  to  be  interfered  with.  In  response  to  this  

argument,  the  learned  counsel  for  the  respondent,  however,  

contended that Appendix ‘C’ could not be construed to be a part of  

the award, since, in the award the observation was that there was  

no clear evidence as to the balance steel, payment at penal rates  

could not have been awarded. It was further contended by learned  

counsel for the respondent that if anyone, it was the respondent  

who should be aggrieved and at any rate, the appendix did not  

give the appellant to contend that there was a finding of unutilized  

balance steel. The Arbitrator in his award clearly stated that in the  

absence of a positive finding of the same, the penal rate cannot be  

awarded. The Court, therefore, rightly held that Appendix ‘C’ did  

not mean to be a positive finding by the Arbitrator that such steel  

was  unutilized  and  had  been  appropriated  by  the  respondent.  

Accordingly, we do not find any infirmity either in the award of the

Arbitrator or in the findings of the Division Bench as well as of the  

learned Single Judge on this ground.  

8.  It  was next  contended by the learned senior  counsel  for  the  

appellant that there was inferior quality of workmanship as a result  

of  which  it  was  entitled  to  make  deduction  from  the  bills.  The  

learned Arbitrator had refused to accept this submission from the  

side of the appellant that under the contract the respondent was  

obliged to use local materials including local bricks, that the bricks  

in the Bombay region were of inferior quality and further that all the  

bills presented had been passed by the Architect of the appellant  

without any objection, therefore, the appellant was estopped from  

raising the issue and no recovery could be allowed. We do not find  

any infirmity in the aforesaid findings of the Arbitrator as well as  

the findings arrived at by the High Court. Mr. Dwivedi had drawn  

our attention to the fact that under the contract this was an issue  

which was left to the sole discretion of the Managing Director of  

the appellant and, therefore, was not within the jurisdiction of the  

Arbitrator to arbitrate upon. In this connection, Mr. Dwivedi placed  

reliance on Clause 10[b], [c] and [f] and Clause 11 of the Articles of  

Agreement.  The  learned  Single  Judge  as  well  as  the  Division  

Bench,  after  examining  the  Clauses,  as  indicated  hereinabove,  

held that these Clauses did not include within their purview ‘bad  

workmanship’ and, therefore, it was beyond the jurisdiction of the  

Arbitrator to decide it. In respect of Clause 10 [c], the Court, in our  

view,  has  rightly  rejected  the  argument  of  the  appellant  that  

‘negligence  or  lack  of  proper  care’  was  synonymous  to  bad  

workmanship. Accordingly, we do not find any ground to interfere  

with the findings of the High Court in rejecting the submissions of  

the learned counsel for the appellant on this ground. In any view of

the matter, the Arbitrator had considered the entire materials on  

record and the rival submissions of the parties and then came to  

the conclusion of fact, which was accepted by the courts below, it  

is not open to this Court to interfere with such conclusions until and  

unless  it  is  manifest  that  such  conclusions  are  perverse  or  

arbitrary. That apart, we are of the view that this would not be a  

ground for setting aside the award under the Arbitration Act, 1940.  

9.  That  apart,  in  our  view,  the  High  Court  was  justified  in  

holding that the poor workmanship did not fall  under any of the  

sub-clauses  of  Clause  10  of  the  Articles  of  Agreement,  which  

enumerates the matters in which the Managing Director will have  

the exclusive authority to decide the dispute as per Clause 11 of  

the Agreement. Clause 10(b) provides that all special losses and  

damages suffered by the Employer, as certified by the certificate of  

the  Engineer-in-charge,  shall  be  final,  conclusive  and  binding.  

Clause  10(c)  of  the  agreement  makes  “losses  suffered  by  the  

employer or damages due to negligence or lack of proper care” on  

the part of the contractor shall be liable to be reimbursed and the  

certificate of the Engineer-in-charge as to the extent of damage  

and its value is declared to be final, conclusive and binding upon  

the contractor. Clause 11 provides that all disputes and differences  

arising  out  of  the  contract  as  contained  in  the  proceedings  in  

paragraphs  (a)  to  (f)  of  Clause  10  shall  be  referred  to  the  

Managing  Director  of  Employer  whose  decision  shall  be  final,  

conclusive and binding and shall not be referred to arbitration or to  

any Court of law. In this connection, as noted herein earlier, the  

High Court was fully justified in holding that “lack of proper care or  

negligence”  appearing in  Clause 10(c),  was not  synonymous  to  

bad workmanship by which the respondent had based its claim.

Workmanship refers to skill or talent displayed in the performance  

of a work and is not related to the care or diligence showed in the  

work  or  choosing the materials.  Accordingly,  this  submission  of  

Mr.Dwivedi, learned senior counsel appearing for the appellants is  

not worthy of consideration and, therefore, it is rejected.  

10.  We also  find  from the  impugned  judgment  of  the  High  

Court that both the parties had admitted before the Arbitrator that  

the  format  to  be  used  for  analysis  of  extra  items  shall  be  the  

CPWD  Format  and  that  both  the  parties  had  indicated  to  the  

Arbitrator  that  there  was no difference between them as to  the  

format used by them in analyzing the extra items. However, the  

parties are not at ad idem on the actual rates to be taken for labour  

and material,  referred to in the format.  It  also appears from the  

judgment of the High Court that while the appellant insisted that  

the  rates  prescribed  by  CPWD  in  respect  of  the  labour  and  

material had to be used, the respondent insisted that local rates  

would have to be used. Considering the resolution approved in a  

meeting on 6th of March, 1986, where the Architect approved extra  

items 1 to 6 at the rates that were put forward by the respondent  

and  with  regard  to  extra  items  7  and  8  the  rates  analysis  put  

forward  by  the  appellant  was  not  even  contested  by  the  

respondent. With regard to the analysis of item No.9 pertaining to  

transportation and wages,  the Arbitrator denied the claim of the  

respondent. With regard to item No.10, the rate put forward by the  

appellant was accepted by the Arbitrator. In these circumstances,  

it  is  no  longer  open  to  hold  the  contention  that  there  was  any  

requirement that the CPWD rates must be accepted and that no  

deviation  therefrom was  permissible  under  the  Contract.  In  this  

view of  the matter,  it  is  difficult  to agree that  the Arbitrator  had

acted  beyond  the  terms  and  conditions  of  the  contract  while  

coming to the findings of fact relating to the extra items on rates  

other than the CPWD rates also.  

11. The next ground of attack of the impugned judgment rests  

on payment of interest. From the impugned judgment, it appears  

that three limbs of the argument of the parties were dealt with by  

the Division Bench of the High Court. It is not in dispute that the  

learned  Arbitrator  entered  upon the  reference on 1st  of  March,  

1989. The Arbitrator having found that the appellant was liable to  

pay  a  total  sum of  Rs.32,68,805.80  p.  directed  that  if  the  said  

amount is not paid by the appellant to the respondent on or before  

15th of December, 1989, the same would carry interest @ 15% per  

annum  till  the  payment  was  made.  The  total  sum  of  

Rs.32,68,805.80 as found by the learned Arbitrator included the  

following three claims :-

Claim No.1 : Rs.17,36,994.97

Claim No.2 : Rs.2,40,615.96

Claim No.8 : Rs.2,68,000.000

So far as Claim No.1 was concerned, the Arbitrator found that  

what was due was Rs.13,62,349/- to which he added interest from  

January  1987  to  October,  1989  @  15%  which  worked  out  to  

Rs.3,74,645.97. Thus the total amount in respect of Claim No.1 as  

mentioned  above  worked  out  to  Rs.17,36,645.97  (there  is  an  

apparent  inconsistency in  the  figures  of  claim No.1  reproduced  

with this figure), but the thing remains that the learned Arbitrator  

calculated interest  @ 15% for  the period from January 1987 to  

October,  1989 and added it  to make up the claim No.1. Similar  

was the exercise carried out by the learned Arbitrator in regard to

claim No.2 in which the Arbitrator having found that a total sum of  

Rs.1,88,718.40  p.  was  due,  added  interest  for  the  period  from  

January 1987 to October, 1989 again @ 15% which amounted to  

Rs.51,897.56  making  the  total  under  the  head  of  CPWD  as  

Rs.2,40,615.96  p.  So  far  as  Claim  No.8  as  mentioned  by  the  

learned  Arbitrator  is  concerned,  it  appears  that  the  learned  

Arbitrator  re-calculated  the  amount  of  interest  and  awarded  

Rs.2,68,000/- as interest on delayed payment. It is not in dispute  

that the learned Arbitrator in his final analysis had allowed interest  

@ 15% per annum. So far as the payment of interest is concerned,  

the Division Bench of the High Court after analyzing the decisions  

of this Court, namely,  Executive Engineer, (Irrigation) Balimela &  

Ors.  vs.  Abhaduta Jena & Ors. [1988 (1)  SCC 418],  Secretary,   

Irrigation Department, Government of Orissa & Ors. vs. G. C. Roy  

[1992 (1) SCC 508] came to the conclusion of law which was that  

the Arbitrator has power to award pendente lite interest and where  

the contract was silent as to the awarding of interest, the Arbitrator  

has  the  power  to  award interest  for  the  pre-reference  period  if  

there is a substantive law which empowers him to do so or if there  

is a usage of trade for payment which has the force of law. In our  

view,  the  High  Court  was  perfectly  justified  in  holding  that  the  

Arbitrator  has the power to  award interest  for  the pre-reference  

period. It needs to be repeated at this juncture that the arbitration  

in question was governed not by the present Act of 1996 but by the  

provisions  of  Arbitration  Act,  1940.  However,  as  this  power  

emanates from Section 3 of the Interest Act, 1978, the High Court  

noted that the rate of interest cannot be more than ‘the current rate  

of interest’ as stipulated by the said Section. Accordingly the High  

Court  had  reduced  the  rate  of  interest  for  pre-reference  period

from  18%  to  15%.  It  was,  however,  argued  on  behalf  of  the  

appellant that the High Court was not justified in awarding interest  

for pre-reference period in view of Section 3 of the Interest Act,  

1978 which was pursuant to a special clause in the Contract. As in  

the present case there was no such clause in the agreement and  

hence it  was not  within the power of  the Arbitrator  to make an  

award with respect to interest.  

12. In our view, this argument lacks substance. The position of  

law,  as  found  by  the  High  Court  in  its  impugned  judgment  on  

consideration  of  various  other  judgments  of  this  Court,  would  

clearly show that in those judgments the High Court relied on also  

did not stipulate any express agreement with respect to interest as  

a precondition to the authority of the Arbitrator to award interest for  

the pre-reference period. The matter would have a different issue  

altogether if there had been a specific provision prohibiting grant of  

interest which was, of course, not the case of the appellant.  

13.  In  the  case  of  State  of  Rajasthan  and  Anr  v.  Ferro  

Concrete Construction Pvt. Ltd,  [2009 (8) SCALE 753], the same  

work was advanced in which this Court observed:  

“But this Court has held that in the absence of an express bar,  

the  arbitrator  has  the  jurisdiction  and  authority  to  award  

interest for all the three periods - pre reference, pendente lite  

and future (vide decisions of Constitution Bench in Secretary,   

Irrigation Department, Government of Orissa vs. G. C. Roy  -  

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

Irrigation Division vs. N. C. Budharaj - 2001 (2) SCC 721 and  

the subsequent decision in  Bhagawati Oxygen vs. Hindustan  

Copper Ltd -2005 (6) SCC 462). In this case as there was no

express bar in the contract in regard to interest, the Arbitrator  

could award interest.”

14. In view of the above decision in law now settled by this  

Court, we are unable to hold that the Arbitrator was not entitled to  

award interest on the pre-reference period because there was no  

clause  in  the  agreement  prohibiting  such  awarding  of  interest.  

However, the High Court had reduced the rate of interest to the  

‘current  rate  of  interest’  and,  therefore,  it  is  not  open for  us  to  

interfere  with  such  rate  of  interest  at  this  stage  in  this  appeal.  

Therefore, there is no substance in this argument, accordingly it is  

rejected.

15. Now the question comes which is related to awarding of  

‘interest on interest’. According to the appellant, they have to pay  

interest  on  an  amount  which  was  inclusive  of  interest  and  the  

principal amount and, therefore, this amounts to a liability to pay  

‘interest on interest. This question is no longer res integra at the  

present point of time. This Court in McDermott International Inc. v.   

Burn Standard Co. Ltd, & Ors. [2006 (11) SCC 181] has settled  

this question in which it had observed as follows :

“The Arbitrator has awarded the principal amount and interest  

thereon upto the date of award and future interest thereupon  

which  do  not  amount  to  award  on  interest  on  interest  as  

interest  awarded  on  the  principal  amount  upto  the  date  of  

award became the  principal  amount  which is  permissible  in  

law.”

16. The High Court on this question has also rightly relied on a  

decision  of  this  Court  in  the  case  of Oil  and  Natural  Gas  Commission  vs.  M/s.  M .C.  Clelland  Engineers  S.A.  [1999  AIR

SCW 1224].  That being the position,  we are unable to find any  

ground to set aside the judgment of the Division Bench of the High  

Court while considering the ground of ‘interest on interest’. So far  

as  the  ground  relating  to  the  power  of  the  Arbitrator  to  award  

interest on the cost of arbitration is concerned, we are of the view  

that we do not find any infirmity in the said findings of the High  

Court relating to that ground. Since the legislature by way of an  

amendment in the year 1956 deleted Section 35(3) of the Code of  

Civil Procedure which empowered the court to award interest, the  

Arbitrator, on analogy, cannot have the power to award interest on  

costs. Therefore, the High Court has failed to justify in holding that  

the powers of the Arbitrator are not effected by changes made to  

the Code of Civil  Procedure. The power of the Arbitrator, if any,  

shall  be located from the act itself.  We may note that awarding  

costs is a matter of discretion of the Arbitrator under the 1940 Act.  

Sir Mohd. Akbar Khan vs. S.Attar Singh (deceased) [AIR 1945 PC  

170] is an answer to the aforesaid ground. Paragraph 8 of the First  

Schedule  to  the  Arbitration  Act,  1940  which  contains  “Implied  

Conditions of Arbitration Agreements” lays down that –  

“the costs of the reference and award shall be in the discretion  

of the arbitrators or umpire who may direct to, and by, whom,  

and in what manner, such costs or any part thereof shall be  

paid, and may tax or settle the amount of costs to be so paid or  

any part thereof and may award costs to be paid as between  

legal practitioner and client.”

17. A plain reading of this paragraph would show that there is  

a provision in  this  clause which does not  permit  or  prohibit  the  

imposition of interest on costs of arbitration.

18.  The  High  Court  has  also  observed  in  the  impugned  

judgment that the principles in relation to payment of interest on  

interest  will  apply  in  this  context  as  well  and  that  there  is  no  

principle or precedent prohibiting award of interest on cost. It may  

be  noted  that  the  Law Commission  of  India  in  its  55th  Report  

submitted in 1973 discussed the rationale behind grant of interest  

on interest and on costs. Though the Commission found it fit not to  

disturb  the  position  of  law  that  emerged  after  the  deletion  of  

Section 35(3) of the Code of Civil Procedure, but Law Commission  

had expressed its opinion in favour of grant of interest on costs.  

The logic behind it was that the cost incurred in the litigation were  

actually and rightfully incurred by the successful litigant which he  

would  have  invested  but  for  the  lengthy  litigation  proceedings.  

Interest,  which is damages for  wrongful  retention of  money that  

rightfully belonged to one, thus can be paid on costs as well. This  

may  also  be  considered  that  costs  of  arbitration  are  actually  

incurred by the respondent and it is only that it becomes payable  

only with the award in its favour. Accordingly, we do not find any  

infirmity in the judgment of the Division Bench except in that we  

are  of  the  view  that  the  rate  of  interest  from  15%  should  be  

reduced  to  7%.  In  McDermott  International  vs.  Burn  Standards  

(supra), it had summarized the practice of this Court on this issue  

in the following words :-

“The  1996  Act  provides  for  award  of  18%  interest.  The  

arbitrator in his wisdom has granted 10% interest both for the  

principal  amount  as  also  for  the  interim.  By  reason  of  the  

award,  interest  was  awarded  on  the  principal  amount.  An  

interest thereon was upto the date of award as also the future  

interest at the rate of 18% per annum.

However, in some cases, this Court was resorted to exercise  

its jurisdiction under Article 142 in order to do complete justice  

between the parties.  

In  pure  Helium India  (P)  Ltd. [2003  8  SCC 593]  this  Court  

upheld  the  arbitration  award  for  payment  of  money  with  

interest at the rate of 18% p.a. by the respondent to appellant.  

However,  having  regard  to  long  lapse  of  time,  if  award  is  

satisfied  in  entirety,  respondent  would  have  to  pay  a  huge  

amount by way of interest. With a view to do complete justice  

to the parties, in exercise of jurisdiction under Article 142 of the  

Constitution  of  India,  it  was  directed  that  award  shall  carry  

interest at the rate of 6% p.a. instead and in place of 18% p.a.

Similarly in Mukand Ltd. vs. Hindustan Petroleum Corpn. [2006  

(4) SCALE 453], while this Court confirmed the decision of the  

division  bench  upholding  the  modified  award  made  by  the  

learned single Judge, the court reduced the interest awarded  

by the  learned  single  judge subsequent  to  the  decree from  

11%  per  annum  to  7%  per  annum  observing  that  7%  per  

annum would be the reasonable rate of interest that could be  

directed to be paid by the appellant to the respondent for the  

period subsequent to the decree.  

In  this  case,  given  the  long  lapse  of  time,  it  will  be  in  

furtherance of justice to reduce the rate of interest to 7%.”  

19. Following the aforesaid decision and considering the fact  

that there was a long lapse of time and for the ends of justice, we  

are, therefore, of the view that the judgment of the Division Bench  

can be modified only to the extent that the rate of interest should  

be reduced from 15% to 7%. As we also find in this case that such

reduction of interest is warranted because the award was passed  

on 20th of October, 1989, now 20 years have passed since then.  

20.  This  Court  in  Mcdermott  International  Inc.  vs.  Burn  

Standard  Co.Ltd.  &  Ors.  (supra)  S.B.Sinha,J.,  (as  His  Lordship  

then was), following the two earlier decisions of this Court in the  

case of Pure Helium India (P) Ltd. vs. ONGC [(2003) 8 SCC 593]  

and  Mukand Ltd. vs. Hindustan Petroleum Corpn. Ltd.  [(2006) 9  

SCC 383] and considering the fact that due to long lapse of time if  

the entire award is satisfied, the appellant would have to pay a  

huge sum of money by way of interest. Therefore, in that decision,  

this  court  directed  reduction  of  rate  of  interest  in  order  to  do  

complete  justice  between  the  parties  in  the  exercise  of  its  

jurisdiction under Article 142 of the Constitution of India and that is  

the reason we also reduce the rate of interest from 15% to 7%.

21.  Before  parting  with  this  judgment,  we  may refer  to  two  

decisions of this Court which were cited at the bar in the case of  

T.N.  Electricity  Board  vs.  Bridge  Tunnel  Constructions  &  Ors.   

[1997  4  SCC  121]  and  Trustees  of  the  Port  of  Madras  vs.   

Engineering Constructions Corpn. Ltd. [1995 5 SCC 531]. So far  

as the case of T.N. Electricity  Board is concerned, we have no  

quarrel  with the principle laid down in the aforesaid decision. In  

that decision, it was held that one of the question that was decided  

was that the Arbitrator cannot clothe himself conclusively with the  

jurisdiction  to  decide  or  omit  to  decide  the  arbitrability  of  a  

particular item or the claim made by the parties. It was held that  

when a specific reference has been made to the Arbitrator and the  

parties  raise  the  dispute  of  arbitrability,  with  the  leave  of  the  

court/by a direction of the court in a proceeding under Section 33,

he is to decide the arbitrability of the dispute and make a decision  

while giving reasons in support thereof. It was further held that the  

decision of the Arbitrator in granting a particular sum by a non-

speaking  award,  therefore,  hinges  upon  the  arbitrability  of  a  

dispute arising under the contract or upon a particular item claimed  

thereunder. It was further observed that he was required to give  

the decision thereon. Therefore, it  was held that the question of  

decision  by  implication  does  not  arise  since  his  jurisdiction  to  

decide the dispute on merits hinges upon his jurisdiction to decide  

the arbitrability of the dispute.  

22. The aforesaid decision of this Court, therefore, in our view  

cannot come to help the appellant.  

23. So far as the decision in the case of Trustees of the Port of   

Madras  vs.  Engineering  Constructions  Corpn.  Ltd. (supra)  is  

concerned, this case also has no application in the facts of this  

case. In that case, the principles have been laid down in the case  

of a reasoned award and the court  can interfere if  the award is  

passed upon a proposition of law which is unsound in law. The  

error apparent on the face of the award contemplated by Section  

16(1)( c) as well as Section 30 (c ) of the Arbitration Act is an error  

of law apparent on the face of the award and not an error of fact.  

Therefore,  this  decision,  in  our  view,  is  also  of  no  help.  The  

Arbitrator has passed his award on the basis of the conditions of  

the clauses in the agreement and passed an award and nothing  

could be shown from which it could be held that the court could  

interfere  with  the  award  if  the  same  was  passed  upon  the  

proposition of law which is unsound in law.

24. For the reasons aforesaid and subject to the modification as noted  

hereinabove, this appeal has no merit and the same is hereby dismissed.  

There will be no order as to costs.