Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO2950-2951 OF 2014 (Arising out of SLP (C) Nos. 5384-5385 of 2013)

Union of India                                               …Appellant

VERSUS

M/s. Concrete Products & Const. Co. Etc.    ...Respondents

J U D G M E N T

SURINDER SINGH NIJJAR, J.

1. Leave granted.

2. These appeals impugn the final judgment and decree dated

21st March, 2012 passed by the High Court of Judicature at

Madras in OSA No. 44 & 45 of 2012 and M.P. No. 1 of 2012,

whereby the  letters  patent  appeals  of  the  Union of  India

were dismissed. The appellant had entered into agreements

with  the  respondents  on  30th January,  1983  and  30th

March, 1984 for supply of mono block concrete sleepers (in

short “Sleepers”).  The agreements were renewed from time

to  time  under  which  the  Union  of  India  agreed  to  pay

1

Page 2

specified  rates  for  supply  of  each  sleeper.   The

agreements/contracts also provided that the rates payable

shall  be based on certain standard rates of principal raw

materials, such as cement, High Tensile Steel (HTS) wires,

molded  steel,  etc.  The  contracts  further  provided  that

whenever the cost of the principal raw materials increased

or  decreased,  the  contract  price  for  sleepers  shall  also

correspondingly be increased or decreased with effect from

the  date  of  such  increase  or  decrease.   The

agreements/contracts also provided for escalation, subject

to  certain  conditions  prescribed  under  Clause  11  of  the

Contract.  The contracts/agreements further provided that

the  respondents  must  exercise  utmost  economy  in  the

purchase of raw materials and that the escalation will be

admitted on the basis of actual price paid for the respective

raw material.  This was subject to the ceiling on the price.

As per Clause 12.2(c), ceiling was fixed “in the case of raw

materials  not  covered  by  either  of  the  above,  the  lowest

price  (for  destination)  arrived  at  on the  basis  of  at  least

three quotations obtained by the Contractor for each supply

from various established sources of supply of the respective 2

Page 3

raw materials”.  

3. The  respondents/contractors  purchased  HTS  wires  from

established sources in terms of the various clauses of the

contract.   The  material  was  used  in  the  manufacture  of

sleepers.   Payment  for  the  sleepers  was  made  by  the

contractors at the lowest price quoted by the suppliers.  The

quotation  was  also  scrutinized  alongwith  the  supporting

documents.  The Railway authorities release the payment to

the  respondent  contractors  only  upon  their  satisfaction,

upon scrutiny of all the relevant documents.  

4. A new contract was entered into between the parties in May,

1997. The railway administration changed the policy and

allowed the respondents/contractors to purchase the HTS

wires,  subject  to  escalation  as  noticed  above.   By  letter

dated 12th July, 1997, the railways administration informed

the  respondents  that  the  Railway  Board  had  found  that

excess  payments  had  been  made  between  1989  and

3

Page 4

November, 1994 under escalation clause for HTS wires.  It

was stated that the amounts paid to the contractors were

more than the prevalent market price.  Therefore, a sum of

Rs.  1,80,92,462/-  was  recoverable  from  M/s  Concrete

Products  and Construction Company,  respondent  in  C.A.

No. ____________ (arising out of  SLP(C) No. 5384 of 2013)

and a sum of Rs.1,78,09,789/- was recoverable from M/s.

Kottukulam Engineers Private Limited, respondent in C.A.

No. ______ (arising out of SLP(C) No. 5385 of 2013). It was

also  pointed  out  that  the  aforesaid  sums  would  be

recoverable from the sums due and payable to them in the

current/running contracts.   

5. The  contractors  (respondents  herein)  challenged  the

aforesaid  recovery  by  filing  Writ  Petition  No.  11805  and

10814  of  1999,  before  the  High  Court  of  Madras.  The

railway administration took up the  preliminary  objection,

pleading that the writ petition is not maintainable as the

dispute has to be referred to arbitration.  The objection of

the appellant was accepted.  The High Court appointed a

4

Page 5

Former Judge of the Madras High Court as the arbitrator to

adjudicate  the  dispute.   The  contractors/respondents

herein challenged the aforesaid order of the learned Single

Judge by filing                               Writ Appeal Nos. 251

and 252 of 2000, on the plea that the arbitrator had to be

appointed in terms of the agreement.  By order dated 22nd

March, 2000, the writ appeals were allowed, and the order

of the learned Single Judge was set aside.  The matter was

remanded back to the Single Judge for disposal in terms of

the agreement.   

On remand, the learned Single Judge, instead of referring

matter  to  arbitration  in  terms  of  the  contract  between  the

parties  allowed  the  writ  petitions  filed  by  the  respondents

herein and directed the railway authorities to refund the sum

of Rs.1,69,78,883/- and Rs.1,78,09,789/- to the respondent

firms,  respectively  with  interest  thereon  from  the  date  of

withholding till the date the same is refunded. The order was

directed to be complied within a period of 4 week from the date

of the receipt of the order.  This order was again challenged by

the railway administration by filing,  first of  all,  Writ  Appeal

5

Page 6

Nos.  2822  and  2823  of  2001.  Subsequently,  writ  appeal

miscellaneous petition No. 21103 and 21104 of 2001 were also

filed  in  the  aforesaid  two  writ  appeals,  seeking  stay  of  the

judgments  under  appeal.  On  30th April,  2004,  the  Division

Bench dismissed the writ appeals as well as the miscellaneous

petitions.  

6. The railway administration challenged the aforesaid order of

the  Division  Bench,  before  this  Court  by  filing  SLP  No.

18244 and 18245 of 2004.  Special leave was granted in

both  the  special  leave  petitions  and  the  same  were

converted to Civil Appeal Nos. 2999 and 3000 of 2005.  By a

short order passed on 2nd May, 2005, the disputes between

the parties were referred by this court for adjudication by

an Arbitration Tribunal consisting solely of Mr. Justice K.

Venkataswami, a former Judge of this Court.  This order

was passed without going into the merits of  the disputes

and the submissions made by the learned Solicitor General

on  behalf  of  the  railways,  that  in  view  of  the  specific 6

Page 7

condition contained in the contract, the dispute cannot be

referred to an arbitrator other than the authority referred to

in the contract.  This Court directed that the matter shall be

referred  to  Mr.  Justice  Venkataswami.   It  was,  however,

made  clear  that  the  order  shall  not  be  treated  as  a

precedent. Pursuant to the aforesaid order of this Court, the

matter ultimately reached the arbitrator.  At the conclusion

of the arbitral proceedings, the final award was rendered on

24th June, 2006.  The sole arbitrator directed the appellants

to refund the amount awarded as follows:-

“In the result I direct the Respondents to refund a sum  of  Rs.1,78,09,789/-  recovered  from  the Claimants and interest  of  Rs.2,38,28,960/-  and subsequent interest at  18% P.A from 1.9.2005 on Rs.  1,78,09,789/-  till  date  of  payment  in Kottukulam Engineers Pvt. Ltd. matter.  Ana a sum of  Rs.1,69,78,883/-  and  interest  of Rs.2,25,25,513/- and subsequent  interest  at  18% P.A  from  1.09.2005  till  date  of  payment  in  m/s Concrete  Product  &  Construction  Company Trivalam.”

The  counter  claims  made  by  the  appellants  were

dismissed.   The  railway  administration  challenged  the

common arbitration  award  in  O.P.  No.  142 & 143 of  2007

7

Page 8

under Section 33 of the Arbitration and Conciliation Act, 1996

before  High  Court  of  Madras.   The  learned  Single  Judge

dismissed  the  arbitration  petitions  filed  by  the  railway

administration  by  its  order  dated  30th November,  2010.

Thereafter  the contractors filed applications before the High

Court for direction to the railways to make payments of the

amount.  Thereafter Application  Nos. 780 & 781 of 2011 were

filed in the O.P. Nos. 142 & 143 of 2007 by the contractors

seeking a direction from the Court directing that the amounts

awarded  by  the  learned  Sole  Arbitrator  be  paid  from  the

amount deposited by the railway administration with the High

Court  along  with  the  accrued  interest  as  on  date  on  the

aforesaid amount.  These applications were allowed by order

dated 24th February, 2011.  The High Court directed that the

awarded amount deposited by the railways in the Court for

satisfying  the  outcome  of  the  original  petitions  which  was

subsequently  converted  into  fixed  deposit  receipts,  be

dispersed to the respondent contractors.   

7. Again the railway administration filed intra court appeals

8

Page 9

challenging the order of the learned Single Judge principally

on the ground that the railway administration was not liable

to pay any interest for the period subsequent to the deposit

of the principal amount into Court.  The appeals filed by the

railway administration were dismissed by the High Court by

the  impugned  order  dated  21st March,  2012.   The  High

Court held that railway administration had not questioned

the power of the sole arbitrator to award interest.  The issue

with  regard to  the  award of  interest  was also  not  raised

before the learned Single Judge.  For the first time before

the  Division Bench,  a  plea was raised that  the  award of

interest  was  contrary  to  Clause  No.  2401  of  the  Indian

Railways  Standard  Conditions  of  Contract.   The  Division

Bench of the High Court came to the conclusion that the

aforesaid clause has no application at all as it applies only

to amounts,  which have been withheld or retained under

lien.  The amounts having already been paid were sought to

be  illegally  recovered  from  the  contractors.   The  sole

arbitrator  found  that  such  order  of  recovery  can  not  be

sustained in law and the recoveries affected were illegal. The

High  Court,  however,  concluded  that  Clause  No.  2401 9

Page 10

would have application only in respect of  amounts which

had  not  been  paid  to  the  contractors.   The  railway

administration  can  not  exercise  lien  over  the  amounts

already paid  to  the  contractors.   Therefore,  award of  the

arbitrator did not suffer from any error apparent.  It was

further held that the learned Single Judge having upheld

the award, the appeals deserve to be dismissed.  

8. The appeals having been dismissed, the Union of India has

approached this Court in these Civil Appeals.  

9. We have heard Mr. Mohan Jain, learned Additional Solicitor

General, appearing for the appellants.   

10. It  is submitted that the only question which arises for

consideration of this Court is whether the contractors are

entitled  to  interest  for  the  amount  withheld  and if  so  at

1

Page 11

what rate.  The contractors had claimed interest @18 per

cent  from  the  date  of  recovery  till  payment.    Mr.  Jain

submitted that the High Court has wrongly held that the

appellant had no authority to exercise lien on the current

payments in relation to the amount already released to the

contractors.  It is submitted by Mr. Jain that the arbitrator

had no authority to award interest in view of the prohibition

contained under Section 31(7) of the Arbitration Act, 1996.

Learned Additional  Solicitor  General  pointed out  that  the

contract entered into between the parties did not provide for

any payment of  interest.   Mr.  Jain also pointed out  that

under Clause 2403, the railway administration has a lien

on  all  the  amounts  of  money  that  may  be  due  to  the

contractors,  in praesenti or  in the futuro.  Therefore, when

the contractors were paid in excess of the amounts actually

due,  the  appellants  were  fully  justified  in  recovering  the

amount from the respondents by exercising the lien over the

future bills in terms of               Clause No. 2403.  He

submits that the sole arbitrator was wholly unjustified in

awarding  interest,  as  under  Clause  No.  2403(b),  it  is

specifically  provided  that  the  contractors  shall  have  no 11

Page 12

claim for interest or damages whatsoever, for the amount so

retained even in case the  arbitration award or  any other

legal proceeding subsequently holds that the amount was

withheld illegally.  Mr. Jain submits that the learned Single

Judge erred in holding that the award did not suffer from

an error apparent on this short ground.  In support of the

submission, he relies on judgment of this Court in the case

of  Himachal  Pradesh Housing and Urban Development

Authority & Anr. Vs. Ranjit Singh Rana.1    

11. Mr.  Jain  further  submitted  that  the  principal  amount

awarded was deposited in Court in 2007.  This amount was

released to the contractors on 24th April, 2011 alongwith

the  interest,  but  30  per  cent  of  the  amount  was  duly

withheld.  This was in agreement with the respondents.  He

also pointed out that in fact the recovery of the amount was

deferred after discussions with the respondents.  In view of

the  agreements,  the  respondents  had  no  justification  for

claiming any interest  and the  award granting  such relief

1(2012) 4 SCC 505  

1

Page 13

suffer  from an  error  apparent  as  it  was  contrary  to  the

contract.  In  support  of  this  submission,  he  relies  on

judgment  of  this  Court  in  Sree  Kamatchi  Amman

Construction Vs.  Divisional  Railway  Manager  (Works),

Palghat  &  Ors.  2  He  also  relied  on  Sayeed  Ahmed  &

Company Vs. State of Uttar Pradesh & Ors.  3  and Union

of  India Vs.  Krafters  Engineering  and  Leasign Private

Limited  4  .  

12. Mr. C.S. Vaidyanathan, learned senior counsel appearing

for the respondents, on the other hand, submitted that the

payments have been made to the contractors from 1989 till

November,  1994.   The  High  Court  judgment  in  the  writ

petitions challenging the recovery notice were set aside by

the  High  Court.   The  respondents  had  agreed  to  the

deduction  of  30  per  cent  only  because  the  contractors

required  the  money  for  execution  of  further  works.   He

submitted that the appellants can not possibly be permitted

to claim that the respondents had agreed to the deduction 2 (2010) 8 SCC 767 3 (2009) 12 SCC 26 4 (2011) 7 SCC 279

1

Page 14

of 30 per cent of the amount due.  He pointed out that the

recovery  was made against  the  supplies  made under  the

agreements                        of 9 th December, 1991 in relation

to the  contracts  which were being performed in the  year

1996.   In  such  circumstances,  the  appellants  had  no

authority to exercise lien on the amounts that accrued due

to the works performed subsequent to                 9 th

December,  1991  under  Clause(s)  2401  or  2403  of  the

Contract.  Mr. Vaidyanathan emphasized that such recovery

of the time barred claims is clearly without any justification.

The appellants having failed to notify that 30 per cent of the

amount due had been withheld,  the invocation of  Clause

No. 2401 or 2403 would be wholly illegal.  Learned senior

counsel further submitted that the appellant can not justify

the recovery on the basis of the letter dated 22nd October,

1997 as it was written without prejudice to the rights of the

contractors.   The  counter  claims  made  by  the  appellant

were clearly time barred and hence, disallowed by the sole

arbitrator.   Mr.  Vaidyanathan  relied  on  a  Constitution

Bench  decision  of  this  Court  in  Executive  Engineer,

Dhenkanal Minor Irrigation Division, Orissa & Ors. Vs. 1

Page 15

N.C. Budharaj (Deceased) by LRs. & Ors.  5 Reliance was

also  placed  upon  Secretary,  Irrigation  Department,

Government of Orissa & Ors. Vs. G.C. Roy  6 in support of

the  submission  that  a  person  deprived  of  his  money  is

entitled to be compensated by way of interest, therefore, any

provision in the contract which seeks to take away such a

right has to be strictly construed.  The ratio in the aforesaid

judgment  has  been  subsequently  reiterated,  according  to

Mr. Vaidyanathan, in the case of  Sree Kamatchi Amman

Construction (supra).   Mr.  Vaidyanathan submitted that

the railway administration had no authority  either under

Clause 2401 or 2403 of the contract to recover the amounts

allegedly overpaid for the work done prior to 1991 from the

amounts  due  to  the  contractors  for  the  works  done

subsequently.   

13. We  have  considered  the  submissions  made  by  the

learned counsel for the parties.  

5 (2001) 2 SCC 721 6 (1992) 1 SCC 508

1

Page 16

14. Clause Nos. 2401 and 2403 are as under:-

“2401.     Whenever  any  claim  or  claims  for payment of a sum of money arises out of or under the contract against the Contractor, the Purchaser shall be entitled to withhold and also have a lien to retain such sum or sums in whole or in part from the security, if any, deposited by the Contractor and for  the  purpose  aforesaid,  the  Purchaser  shall  be entitled to withhold the said cash security deposit or the security, if any, furnished as the case may be and  also  have  a  lien  over  the  same  pending finalization or adjudication of any such claim. In the event of the security being insufficient to cover the claimed amount or amounts or if  no security has been taken from the Contractor, the Purchaser shall be entitled to withhold and have lien to retain to the extent  of  the  such  claimed  amount  or  amounts referred  to  supra,  from  any  sum  or  sums  found payable or which at any time-thereafter may become payable to the Contractor under the same contract or  any  other  contract  with  the  Purchaser  or  the Government pending finalization or adjudication of any such claim.

It is an agreed term of the contract that the sum of money or moneys so withheld or retained under the lien referred to above, by the Purchaser will be kept withheld or retained as such by the Purchaser till the  claim arising  out  of  or  under  the  contract  is determined  by  the  Arbitrator  (if  the  contract  is governed  by  the  arbitration  clause)  or  by  the competent court as prescribed under Clause 2703 hereinafter provided, as the case may be, and that the  Contractor  will  have  no  claim  for  interest  or damages whatsoever on any account in respect of such  withholding  or  retention  under  the  lien referred to supra and duly notified as such to the contractor.”

1

Page 17

“2403. Lien in respect of Claims in other Contracts:  

a)Any sum of money due and payable, to the Contractor  (including  the  security  deposit, returnable to him) under the contract may withhold  or  retain  by  way  of  lien  by  the Purchaser or Government against any claim of the Purchaser or Government in respect of payment of a sum of money arising out of or  under  any  other  contract  made  by  the Contractor  with  the  Purchaser  or Government.

b)It is an agreed term of the contract that the sum of money so withheld or retained under this clause by the Purchaser or Government will be kept withheld or retained as such by the Purchaser or Government till his claim arising  out  of  the  same  contract  or  any other contract is either mutually settled or determined by the arbitrator, if the contract is governed by the arbitration clause or by the  competent  court  under  Clause  2703 hereinafter  provided,  as  the  case  may  be, and that the Contractor shall have no claim for interest or damages whatsoever on this account or on any other ground in respect of any sum of money withheld or retained under this clause and duly notified as such to the Contractor.”

15. Clause 2401 provides that the railways shall be entitled

1

Page 18

to  withhold  and  also  have  a  lien  to  retain  any  amount

deposited as security by the contractor to satisfy any claims

arising out of or in the contract.  In such circumstances,

the  railways  can  withhold  the  amount  deposited  by  the

contractors as security and also have lien over the same

pending finalization or adjudication of the claim.  In case,

the security deposit is insufficient to cover the claim of the

railways,  it  is  entitled  to  withhold  and  have  lien  to  the

extent of the amount claimed from any sum payable for any

works  done  by  the  contractor  thereafter  under  the  same

contract  or  any  other  contract.   This  withholding  of  the

money and the exercise of the lien is pending finalization or

adjudication of any claim.  This clause further provided that

the  amount  withheld  by  the  railways  over  which  it  is

exercising lien will  not entitle the contractor to claim any

interest or damages for such withholding or retention under

lien by the railways.  

16. Clause 2403 again provides that any sum of money due

and payable to the contractor under the contract may be

1

Page 19

withheld  or  retained  by  way  of  lien  by  the  railway

authorities or the Government in respect of payment of a

sum of  money  arising  out  of  or  under  any  other  contract

made by the contractor with the railway authority or  the

Government.   

17. Clause 2403(b) further provides that it is an agreed term

of the contract that against the sum of money withheld or

retained under lien, the contractor shall have no claim for

interest or damages whatsoever provided the claim has been

duly notified to the contractor.  

18. We are of the opinion that the sole arbitrator in awarding

interest to the contractors has failed to take into account

the provisions contained in the aforesaid two clauses.  We

find merit  in the submission made by learned Additional

Solicitor  General  that  award of  interest  at-least  from the

date when the amount was deposited in Court was wholly

1

Page 20

unwarranted.   Therefore,  the  High  Court  as  well  as  the

arbitrator,  in  our  opinion,  have  committed  an  error  of

jurisdiction  in  this  respect.   This  view  of  ours  will  find

support  from the  judgment  of  this  Court  in  the  case  of

Sayeed Ahmed & Company (supra),  wherein it has been

held as follows:-

“16. 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 up to 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.”

19. This  view  has  been  reiterated  by  this  Court  in  Sree

Kamatchi  Amman Construction (supra),  wherein  it  has

been held as follows:-

“19. 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 the date of award. Therefore, where the parties had agreed that  no  interest  shall  be  payable,  the  Arbitral Tribunal  cannot  award  interest  between  the  date when  the  cause  of  action  arose  to  the  date  of award.”

2

Page 21

20. From  the  aforesaid  it  becomes  apparent  that  the

arbitrator  could  not  have  awarded  any  interest  from the

date when the recovery was made till the award was made.

However,  interest would have been payable from the date

when the award was made till the money was deposited in

the  High Court  and  thereafter  converted  to  fixed  deposit

receipts.   Upon the  amount  being  deposited  in  the  High

Court, no further interest could be paid to the respondents.

21. In view of the aforesaid, the appeals are allowed and it is

directed that the respondents shall not be entitled to any

interest  on  the  amount  which  was  recovered  by  the

appellant,  till the date of award and thereafter till the date

when the amount awarded was deposited in the High Court,

i.e. from 12th July, 1997.

22. The appeals are allowed in the aforesaid terms.

2

Page 22

 ...………………….….….J. [Surinder Singh Nijjar]

………….……….……………………….J. [Fakkir Mohamed Ibrahim Kalifulla]

New Delhi; March 3, 2014.

2

Page 23

2