REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2005  OF 2007

Union of India                       .... Appellant (s)

Versus

M/s Krafters Engineering & Leasing (P) Ltd.     .... Respondent(s)

J U D G M E N T  

P. Sathasivam, J.

1) This appeal by Union of India arises out of the final  

judgment and order dated 24.04.2006 passed by the High  

Court of Judicature at Bombay in Appeal No. 219 of 2006  

in  Arbitration  Petition  No.  274  of  2005  whereby  the  

Division Bench of the High Court dismissed their appeal.

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2) Brief facts:

(a) On 16.05.1988, the respondent was awarded with a  

contract  for  the  work  of  Provision  of  Signaling  

Arrangements at “C” Class Stations on Igatpuri-Bhusawal  

Section and 2 “C” Stations on Bhusawal-Badnera Section  

of  Bhusawal  Division  of  Central  Railway  at  the  cost  of  

Rs.18,10,400/-.   On  completion  of  the  contract,  the  

respondent  raised certain  disputes/claims by filing  Suit  

No. 2822 of 1993 before the High Court and demanded for  

adjudication through arbitration.  The High Court directed  

the General Manager of the Central Railway to appoint an  

arbitrator and refer the disputes for adjudication.    Since  

the Arbitrator appointed could not deliberate the matter  

within  the  time  limit,  the  respondent  invoked  the  

jurisdiction of the Umpire.  The Umpire, by order dated  

26.04.2005, gave award for Claim Nos. 1, 3, 6, 8, 9, 10,  

11, 12 & 13 and rejected Claim Nos. 2, 5, 7 & 14 and  

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mentioned that a bank guarantee towards security deposit  

against claim No. 4 is to be returned.     

(b) Challenging the award given by the Umpire for Claim  

Nos.  11  &  13,  the  appellant  herein  filed  Arbitration  

Petition  No.  274  of  2005  before  the  High  Court.   The  

learned Single Judge of the High Court, vide order dated  

06.12.2005 dismissed their petition.   

(c) Aggrieved by the order passed by the learned single  

Judge,  the  appellant  herein  filed  an  appeal  being  

Arbitration  Appeal  No.  219  of  2006  before  the  Division  

Bench  of  the  High  Court.   The  Division  Bench,  by  

impugned order dated 24.04.2006, dismissed the appeal.  

Challenging the said order, the Union of India preferred  

this appeal by way of special leave before this Court.

3) Heard  Mr.  A.  S.  Chandhiok,  learned  Additional  

Solicitor General for the Union of India and Mr. Ramesh  

Babu M.R., learned counsel for the respondent.

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4) Before  the  High  Court  as  well  as  before  us,  the  

appellant projected their case only with regard to interest  

that was granted by the arbitrator and confirmed by the  

High Court.  Therefore, the only point for consideration in  

this  appeal  is  whether  an arbitrator  has  jurisdiction  to  

grant interest despite the agreement prohibiting the same?  

5) Though the appellant has challenged the award of the  

Umpire  in  respect  of  Claim  Nos.  11  and  13,  they  are  

mainly concerned about grant of interest; hence there is  

no  need  to  traverse  all  the  factual  details  except  the  

required one which we have adverted to.  According to Mr.  

A.S. Chandhiok, learned ASG, in view of clause 1.15 of the  

General Conditions of the Contract between the parties,  

the arbitrator does not have the power to award interest  

pendente lite.  The said clause reads as under:  

“1.15  Interest on Amounts -  No interest will be payable  upon  the  Earnest  Money  or  the  Security  Deposit  or  amounts payable to the Contractor under the Contract  but Government Securities deposited in terms of clause  1.14.4 will be repayable with interest accrued thereon.”  

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According  to  the  learned  ASG,  in  view  of  the  above-

mentioned clause, no interest is payable on the amount  

payable  to  the  Contractor  under  the  contract.   On  the  

other  hand,  Mr.  Ramesh  Babu  M.R.,  learned  counsel  

appearing for the respondent submitted that irrespective  

of the bar in the contract arbitrator has power to award  

interest for which he strongly relied on the decision of this  

Court in Board of Trustees for the Port of Calcutta vs.  

Engineers-De-Space-Age,  (1996)  1  SCC  516  and  

Madnani Construction Corporation Private Limited vs.  

Union of India and Others, (2010) 1 SCC 549.  

6) We  have  already  extracted  the  relevant  clause  

wherein  the  words  “amounts  payable  to  the  Contractor  

under the contract” are of paramount importance.  If there  

is no prohibition in the arbitration agreement to exclude  

the jurisdiction of the arbitrator to entertain a claim for  

interest  on  the  amount  due  under  the  contract,  the  

arbitrator is free to consider and award interest in respect  

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of the period.  If there is a prohibition in the agreement to  

pay the interest, in that event, the arbitrator cannot grant  

the interest.  Clause 1.15 prohibits payment of interest on  

the amount payable to the contractor under the contract.  

7) It  is  not  in  dispute  that  the  provisions  of  the  

Arbitration Act, 1940 alone are applicable to the case on  

hand.  Now, let us consider various decisions of this Court  

dealing with similar prohibition in the agreement for grant  

of  interest.   In  Secretary,  Irrigation  Department,  

Government of Orissa and Others vs. G.C. Roy, (1992) 1  

SCC 508, the Constitution Bench had considered Section  

29 of the Arbitration Act, 1940 which deals with interest  

pendente lite.  After analyzing the scheme of the Act and  

various  earlier  decisions,  the  Constitution  Bench  

considered  the  very  same  issue,  namely,  whether  an  

arbitrator has power to award interest pendente lite and, if  

so,  on  what  principle.     The  relevant  paragraphs  are  

extracted hereunder:-   

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

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

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

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

(iv) Over the years, the English and Indian courts have  acted on the assumption that where the agreement does not  prohibit  and a  party  to  the  reference  makes  a  claim  for  interest,  the  arbitrator  must  have  the  power  to  award  interest pendente lite.  Thawardas has not been followed in  the later decisions of this Court. It has been explained and  distinguished on the basis that in that case there was no  claim for interest but only a claim for unliquidated damages.  It  has  been  said  repeatedly  that  observations  in  the  said  judgment were not intended to lay down any such absolute  

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or universal rule as they appear to, on first impression. Until  Jena case almost all the courts in the country had upheld  the power of the arbitrator to award interest pendente lite.  Continuity and certainty is a highly desirable feature of law.

(v) Interest pendente lite is not a matter of substantive  law,  like  interest  for  the period anterior  to  reference  (pre- reference  period).  For  doing  complete  justice  between  the  parties, such power has always been inferred.

44. Having regard to the above consideration, we think that  the  following  is  the  correct  principle  which  should  be  followed in this behalf:

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

8) In  Executive  Engineer,  Dhenkanal  Minor  

Irrigation  Division,  Orissa  and  Others vs.  N.C  

Budharaj (deceased) by LRs and Others, (2001) 2 SCC  

721, another Constitution Bench considered payment of  

interest for pre-reference period in respect of cases arising  

when  Interest  Act,  1839  was  in  force.   The  following  

conclusion in para 26 is relevant which reads thus:

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“26.  For  all  the  reasons  stated  above,  we  answer  the  reference  by holding that  the arbitrator  appointed with or  without  the  intervention  of  the  court,  has  jurisdiction  to  award interest, on the sums found due and payable, for the  pre-reference  period,  in  the  absence  of  any  specific  stipulation or prohibition in the contract to claim or grant  any such interest. The decision in Jena case taking a contra  view  does  not  lay  down  the  correct  position  and  stands  overruled,  prospectively,  which  means  that  this  decision  shall not entitle any party nor shall it empower any court to  reopen proceedings  which have  already  become final,  and  apply only to any pending proceedings. No costs.”  

    (Emphasis supplied).

9) In the earlier  paras,  we have referred to the stand  

taken  by  the  learned  counsel  for  the  respondent  and  

reliance  based  on  the  decision  reported  in  Board  of  

Trustees for the Port of Calcutta (supra).   It is true  

that in that decision, this Court has held that arbitrator  

has jurisdiction to  interpret  the  clauses of  the  contract  

and  to  decide  whether  interest  pendente  lite could  be  

awarded by him.  The short question that arose in that  

case  was  that  the  arbitrator  had  awarded  interest  

pendente lite notwithstanding the prohibition contained in  

the contract  against the payment of  interest  on delayed  

payments.  Ultimately, the two-Judge Bench of this Court  

has  concluded  that  irrespective  of  the  terms  of  the  

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contract, the arbitrator was well within his jurisdiction in  

awarding interest  pendente lite.  It is useful to point out  

that  the  ratio  in  that  decision  was  considered  by  this  

Court  in  Sayeed  Ahmed  and  Company vs.  State  of  

Uttar Pradesh and Others,  (2009)  12 SCC 26.   While  

considering  the  very  same  issue,  particularly,  specific  

clause in the agreement prohibiting interest pendente lite,  

this Court considered the very same decision i.e. Board of  

Trustees  for  the  Port  of  Calcutta  (supra).  After  

adverting to the clause in the Board of Trustees for the  

Port of Calcutta (supra)  and the Constitution Bench in  

G.C. Roy’s case (supra), this Court concluded as under:

“23. The  observation  in  Engineers-De-Space-Age 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  the  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 the arbitrator from awarding  

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interest.  The observations  made in the  context  of  interest  pendente lite cannot be used out of contract.

24. The learned counsel for the appellant next contended on  the basis of the above observations in  Engineers-De-Space- Age, that even if Clause G1.09 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 with by the High Court. In view of the  Constitution Bench decisions in G.C. Roy and N.C. Budharaj  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  the  Arbitration Act, 1940 that the 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 the arbitrator.”

10) Considering the specific prohibition in the agreement  

as discussed and interpreted by the Constitution Bench,  

we are in respectful agreement with the view expressed in  

Sayeed  Ahmed and Company  (supra) and  we  cannot  

possibly agree with the observation in Board of Trustees  

for the Port of Calcutta (supra) in a case arising under  

the Arbitration Act, 1940 that the arbitrator could award  

interest  pendente  lite ignoring  the  express  bar  in  the  

contract.   

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11) In  Union of India vs.  Saraswat Trading Agency  

and Others, (2009) 16 SCC 504, though it was under the  

Arbitration  and  Conciliation  Act,  1996,  this  Court  has  

considered elaborately about the legal position in regard to  

interest  after  adverting  to  all  the  earlier  decisions  and  

basing reliance on clause 31 of the agreement held:  

“33. In  the  case  in  hand  Clause  31  of  the  agreement  is  materially different. It bars payment of any interest or damage  to the contractor for any reason whatsoever. We are, therefore,  clearly of the view that no pre-reference or pendente lite interest  was payable to the respondent on the amount under Item 3 and  the arbitrator's award allowing pre-reference and pendente lite  interest on that amount was plainly in breach of the express  terms of the agreement. The order of the High Court insofar as  pre-reference and pendente lite interest on the amount under  Item 3 is concerned is, therefore, unsustainable.”

12) At the end of the argument, learned counsel for the  

respondent  heavily  relied  on the  recent  decision of  this  

Court  in  Madnani  Construction  Corporation  Private  

Limited (supra) which arose under the Arbitration Act,  

1940.  There also,  Clause 30 of  SCC and Clause 52 of  

GCC prohibits  payment  of  interest.   Though the Bench  

relied on all the earlier decisions and considered the very  

same clause as to which we are now discussing, upheld  

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the order awarding interest by the arbitrator  de hors to  

specific bar in the agreement.  It is relevant to point out  

that the decision of Madnani Construction Corporation  

Private Limited (supra) was cited before another Bench  

of this Court in  Sree Kamatchi Amman Constructions  

vs.  Divisional Railway Manager (Works), Palghat and  

Others, (2010)  8  SCC  767,  wherein  the  decision  in  

Madnani  Construction  Corporation  Private  Limited  

(supra) was very much discussed and considered.  After  

adverting  to  all  the  earlier  decisions  including  the  

Constitution  Bench judgments,  this  Court  has analyzed  

the effect of Madnani Construction Corporation Private  

Limited (supra).  The following discussion and ultimate  

conclusion are relevant:  

“17. In  Madnani the  arbitrator  had  awarded  interest  pendente  lite,  that  is,  from  the  date  of  appointment  of  arbitrator  to  the  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:  (Madnani case, SCC pp. 560-61, para 39)

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“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.”

18. 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 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:  (SCC p. 36, paras 23-24)

“23.  The observation  in  Engineers-De-Space-Age 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  the  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 the 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  the  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 with  by  the  High  Court.  In  view  of  the  Constitution  Bench  decisions in G.C. Roy and N.C. Budharaj 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 the Arbitration Act, 1940 that the 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  the  arbitrator.” The same reasoning applies to the decision in Madnani also  as that also relates to a case under the old Act and did not  independently consider the issue but merely relied upon the  decision in Engineers-De-Space-Age.

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.

20. 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 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  the  instant  case  the  Arbitral  Tribunal  has  refused to award interest for the pendente lite period. Where  the Arbitral Tribunal has exercised its discretion and refused  

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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…”

13) Inasmuch as we have already expressed similar view  

as mentioned above and conveyed our inability to apply  

the  reasoning  in  Madnani  Construction  Corporation  

Private  Limited  (supra),  we  fully  endorse  the  view  

expressed  in  Sree  Kamatchi  Amman  Constructions  

(supra).

14) In  the  light  of  the  above  discussion,  following  

conclusion emerge:

Reliance based on the ratio in Board of Trustees for  

the Port of Calcutta (supra) is unacceptable since the  

said  view  has  been  overruled  in  Sayeed  Ahmed  and  

Company (supra) and insofar as the ratio  in  Madnani  

Construction  Corporation  Private  Limited  (supra)  

which is also unacceptable for the reasons mentioned in  

the earlier paras, we reject the stand taken by the counsel  

for the respondent.  On the other hand, we fully accept the  

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stand of the Union of India as rightly projected by Mr. A.S.  

Chandhiok,  learned  ASG.   We  reiterate  that  where  the  

parties had agreed that no interest shall be payable, the  

arbitrator cannot award interest for the amounts payable  

to  the  contractor  under  the  contract.   Where  the  

agreement between the parties does not prohibit grant of  

interest and where a party claims interest and the said  

dispute  is  referred  to  the  arbitrator,  he  shall  have  the  

power to award interest pendent elite.  As observed by the  

Constitution Bench in G.C. Roy’s case (supra), in such a  

case, it  must be presumed that interest was an implied  

term of the agreement between the parties.  However, this  

does not mean that in every case, the arbitrator should  

necessarily  award  interest  pendente  lite.   In  the  

subsequent decision of the Constitution Bench, i.e.,  N.C.  

Budharaj’s  case (supra),  it  has been reiterated that  in  

the absence of  any specific  stipulation or prohibition in  

the  contract  to  claim  or  grant  any  such  interest,  the  

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arbitrator is free to award interest.   

15) In the light of the above principle and in view of the  

specific prohibition of contract contained in Clause 1.15,  

the arbitrator ceases to have the power to grant interest.  

We also  clarify  that  the  Arbitration  Act,  1940 does  not  

contain  any  specific  provision  relating  to  the  power  of  

arbitrator to award interest.  However, in the Arbitration &  

Conciliation Act, 1996, there is a specific provision with  

regard  to  award  of  interest  by  the  arbitrator.   The  bar  

under  clause  1.15  is  absolute  and  interest  cannot  be  

awarded without rewriting the contract.      

16) For the aforesaid reasons, we set aside the award of  

the arbitrator granting interest in respect of the amount  

payable to the contractor under the contract as well as the  

order of the learned Single Judge and the Division Bench  

of the High Court confirming the same.  

17) Consequently,  the  appeal  is  allowed  to  the  extent  

pointed out above with no order as to costs.             

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...…………………………………J.                   (P. SATHASIVAM)  

...…………………………………J.           (A.K. PATNAIK)  

NEW DELHI; JULY 12, 2011.   

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